This is the accessible text file for GAO report number GAO-05-566 entitled 'Internal Revenue Service: Assessment of the Fiscal Year 2006 Budget Request' which was released on April 27, 2005. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Statement for the Record For the Subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development, and Related Agencies, Committee on Appropriations, U.S. Senate: For Release on Wednesday, April 27, 2005: Internal Revenue Service: Assessment of the Fiscal Year 2006 Budget Request: Statement for the record by James R. White: Director: Strategic Issues: Statement for the record by David A. Powner: Director: Information Technology Management Issues: GAO-05-566: GAO Highlights: Highlights of GAO-05-566, a statement for the record for the Subcommittee on Transportation, Treasury, the Judiciary, Housing and Urban Development, and Related Agencies, Committee on Appropriations. Why GAO Did This Study: The Internal Revenue Service (IRS) has been shifting its priorities from taxpayer service to enforcement and its management of Business Systems Modernization (BSM) from contractors to IRS staff. Although there are sound reasons for these adjustments, they also involve risks. With respect to the fiscal year 2006 budget request, GAO assessed (1) how IRS proposes to balance its resources between taxpayer service and enforcement programs and the potential impact on taxpayers, (2) status of IRS's efforts to develop and implement the BSM program, and (3) the progress IRS has made in implementing best practices in developing its Information Technology (IT) operations and maintenance budget. What GAO Found: IRS’s fiscal year 2006 budget request of $10.9 billion is an increase of 3.7 percent over last year’s enacted levels. This includes an 8 percent increase for enforcement, and a 1 percent and 2 percent decrease for taxpayer service and BSM. However, the potential impact of these changes on taxpayers in either the short-or long-term is unclear, because IRS has not provided details of proposed taxpayer service reductions, and although it is developing long-term goals, they are not yet finalized. Because of the proposed reductions and new and improved taxpayer services in recent years, this is an opportune time to examine the menu of services IRS provides. It may be possible to maintain the overall level of service to taxpayers by offsetting reductions in some areas with new and improved service in other areas such as on IRS’s Web site. Taxpayers and IRS are seeing some payoff from the BSM program, with the deployment of initial phases of several modernized systems in 2004. Nevertheless, the BSM program continues to be high-risk, in part, because projects have incurred significant cost increases and schedule delays and the program faces major challenges in areas such as human capital and requirements management. As a result of budget reductions and other factors, IRS has made major adjustments. It is too early to tell what effect these adjustments will have on the program, but they are not without risk and could potentially impact future budgets. Further, the BSM program is based on strategies developed years ago, which, coupled with the delays and changes brought on by budget reductions, indicates that it is time for IRS to revisit its long-term goals, strategy, and plans for BSM. Because of these challenges, IRS is redefining and refocusing the BSM program. Likewise, IRS has made progress in implementing best practices that would improve its budget development and support for its IT operations and maintenance request. In particular, the recent release of a modernized financial management system included a cost module. However, at this time, historical data is not yet available for IRS to use this module in formulating its IT operations and maintenance request. Figure: IRS Budget Summary for Key Activities, Fiscal Years 2004-2006. [See PDF for Image] [End of Figure] What GAO Recommends: In a related statement (GAO-05-416T), GAO recommended that the Commissioner of Internal Revenue supplement the 2006 budget request with more detailed information on how proposed service reductions would impact taxpayers. GAO has recommendations still outstanding related to BSM management controls and IT budget justification. [End of Section] Mr. Chairman and Members of the Subcommittee: We are pleased to present this statement for the record regarding the Internal Revenue Service's (IRS) fiscal year 2006 budget request and in support of your April 7, 2005 hearing on IRS's appropriations. IRS is in the midst of making significant adjustments to its modernization strategy to better serve taxpayers and ensure their compliance with the nation's tax laws. It is now seven years since the passage of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98)[Footnote 1] and IRS is shifting its priorities from improving taxpayer service to strengthening tax law enforcement efforts. IRS is also adjusting its strategy for managing its Business Systems Modernization (BSM) effort by shifting significant program management responsibilities from contractor to IRS staff. Although there are sound reasons for these adjustments, they also involve risk. We have reported that IRS has made progress improving taxpayer service since the passage of RRA 98.[Footnote 2] For example, IRS's telephone assistance is now more accessible and accurate. Further, IRS is more efficient at processing tax returns, in part, because of the growth of electronic filing, and has cut processing staff. IRS has also implemented some modernized information systems and increased its capacity to manage large systems acquisition and development programs. However, progress has not been uniform. We have reported on large and pervasive declines in IRS's tax law enforcement programs after 1998. We have also reported that a number of systems modernization projects were over budget and behind schedule.[Footnote 3] As noted, IRS is shifting its priorities to better address these problems. The risk, as IRS shifts its priorities towards enforcement, is that some of the gains in the quality of taxpayer service could be surrendered. There are analogous risks associated with moving more of the management of BSM in-house. With these risks in mind, our statement for the record discusses IRS's fiscal year 2006 budget request. To address your request to provide this statement, we assessed (1) how IRS proposes to balance its resources between taxpayer service and enforcement programs and the potential impact on taxpayers, (2) the status of IRS's efforts to develop and implement the BSM program, and (3) the progress IRS has made in implementing best practices for developing its information technology (IT) operations and maintenance budget. Our assessment of the budget request and BSM is based on a comparative analysis of IRS's fiscal year 2002 through 2006 budget requests, funding, expenditures, other documentation, and interviews with IRS officials. For this assessment, we used historical budget and performance data from reports and budget requests used by IRS, Department of Treasury, and Office of Management and Budget (OMB). In past work, we assessed IRS's budget and performance data.[Footnote 4] Since the data sources and procedures for producing this year's budget data have not significantly changed from prior years, we determined that the data were sufficiently reliable for the purposes of this report although for fiscal years 2005 and 2006 subject to change. Regarding our analysis of IRS's BSM program, we primarily used the agency's BSM expenditure plans to determine the status of the program. To assess the reliability of the cost and schedule information contained in these plans, we interviewed applicable IRS officials to gain an understanding of the data and discuss our use of that data. In addition, we checked that information in the plans was consistent with information contained in IRS internal briefings. Accordingly, we determined that the data in the plans were sufficiently reliable for purposes of this statement. We performed our work in Washington, D.C. and Atlanta, Georgia from December 2004 through March 2005, in accordance with generally accepted government auditing standards. In summary, our assessment shows that: * IRS's 2006 fiscal year budget request reflects a continuing shift in priorities from improving taxpayer service to strengthening enforcement efforts, but the potential impact of these changes on taxpayers in both the short-and long-term is unclear. IRS is requesting $10.9 billion, an increase of 3.7 percent over fiscal year 2005 enacted levels. This includes an 8 percent increase for enforcement, and a 1 percent and 2 percent decrease for taxpayer service and BSM, respectively. IRS has not finalized the details on where reductions in taxpayer service would occur. In addition, IRS is developing, but currently lacks, long-term goals that can help IRS inform stakeholders, including the Congress, and aid them in assessing performance and making budget decisions. In light of the current budget environment and IRS's improvements in taxpayer service over the last several years, this is an opportune time to reconsider the menu of services it provides. It may be possible to maintain the overall level of assistance to taxpayers by changing the menu of services offered, offsetting reductions in some areas with new and improved service in other areas such as on IRS's Web site. * IRS has taken important steps forward towards implementing the BSM program by delivering the initial phases of several modernized systems in 2004 and early 2005. Nevertheless, BSM continues to be high risk because, in part, its projects have incurred significant cost increases and schedule delays, and the program continues to face major challenges. As a result of funding reductions and other factors, IRS has made major adjustments to the BSM program, including reducing the management reserve and changing the mix and roles of contractor versus federal staff used to manage the program. It is too early to tell what effect these adjustments will ultimately have on the BSM program, but they are not without risk, could potentially impact future budget requests, and will delay the implementation of certain functionality that was intended to provide benefit to IRS operations and taxpayers. Finally, the BSM program is based on visions and strategies developed years ago, which, coupled with the already significant delays the program has experienced and the changes brought on by the budget reductions, indicates that it is time for IRS to revisit its long-term goals, strategy, and plans for BSM, including an assessment of when significant future BSM functionality would be delivered. According to the Associate Chief Information Officer (CIO) for BSM, IRS is redefining and refocusing this program. * IRS has made progress toward implementing investment management best practices that would improve its budget development and support for its IT operations and maintenance funding requests. For example, the recent release of a new accounting system included an activity-based cost module, which IRS considered to be a necessary action to implement these best practices. However, Office of the Chief Financial Officer officials stated that IRS needs 3 years of actual costs to have the historical data necessary to provide a basis for future budget estimates. Accordingly, they expect that IRS will begin using the activity-based cost module in formulating the fiscal year 2008 budget and will have the requisite 3 years of historical data in time to develop the fiscal year 2010 budget. IRS's Budget Request Continues to Shift Priority from Taxpayer Service to Enforcement, but the Short-and Long-term Impacts on Taxpayers Are Unclear: IRS's fiscal year 2006 budget request reflects a continuing shift in priorities by proposing reductions in taxpayer service and increases in enforcement activities. The request does not provide details about how the reductions will impact taxpayers in the short-term. Nor does IRS have long-term goals; thus the contribution of the fiscal year 2006 budget request to achieving IRS's mission in the long-term is unclear. Because of budget constraints and the progress IRS has made improving the quality of taxpayer services, this is an opportune time to reconsider the menu of services IRS offers. IRS Is Proposing Reductions in Taxpayer Service and BSM and Increases in Enforcement: IRS is requesting $10.9 billion, which includes just over a 1 percent decrease for taxpayer service, a 2 percent decrease for BSM, and nearly an 8 percent increase for enforcement, as shown in table 1.[Footnote 5] As table 1 further shows, the changes proposed in the 2006 budget request continue a trend from 2004. In comparison to the fiscal year 2004 enacted budget, the 2006 budget request proposes almost 4 percent less for service, almost 49 percent less for BSM, and nearly 14 percent more for enforcement.[Footnote 6] Table 1: IRS Budget Summary for Key Activities, Fiscal Years 2004- 2006): Dollars in millions. Taxpayer Service; Dollars in millions: Fiscal year 2004 (enacted): $3,710; Dollars in millions: Fiscal year 2005 (enacted): $3,606; Dollars in millions: Fiscal year 2006 (requested): $3,567; Dollars in millions: Percent change: (2004-2005):-2.8%; Dollars in millions: Percent change: (2005-2006):-1.1%; Dollars in millions: Percent change: (2004-2006):-3.8%. Enforcement; Dollars in millions: Fiscal year 2004 (enacted): 6,052; Dollars in millions: Fiscal year 2005 (enacted): 6,392; Dollars in millions: Fiscal year 2006 (requested): 6,893; Dollars in millions: Percent change: (2004-2005): 5.6; Dollars in millions: Percent change: (2005-2006): 7.8; Dollars in millions: Percent change: (2004-2006): 13.9. BSM; Dollars in millions: Fiscal year 2004 (enacted): 388; Dollars in millions: Fiscal year 2005 (enacted): 203; Dollars in millions: Fiscal year 2006 (requested): 199; Dollars in millions: Percent change: (2004-2005):-47.6; Dollars in millions: Percent change: (2005-2006):-2.0; Dollars in millions: Percent change: (2004-2006):-48.7. Source: GAO analysis of IRS data. Note: Numbers may not add due to rounding. [End of table] As table 1 also shows, taxpayer service sustained a reduction of $104 million or 2.8 percent between fiscal years 2004 and 2005. According to IRS officials, the majority of this reduction was the result of consolidating paper-processing operations, shifting resources from service to enforcement, and reducing some services. IRS officials said that this reduction is not expected to adversely impact the services they provide to taxpayers but added that the agency cannot continue to absorb reductions in taxpayer service without beginning to compromise some services. For fiscal years 2005 and 2006, table 2 shows some details of changes in both dollars and full-time equivalents (FTE).[Footnote 7] Both are shown because funding changes do not translate into proportional changes in FTEs due to cost increases for salaries, rent, and other items. For example, the $39 million or 1.1 percent reduction in taxpayer service translates into a reduction of 1,385 FTEs or 3.6 percent. Similarly, the over $500 million or 7.8 percent increase in enforcement spending translates into an increase of 1,961 FTEs or 3.4 percent. Table 2: IRS Requested Changes in Funding for Taxpayer Service and Enforcement, Fiscal Years 2005 and 2006 (requested): Program activities: Assistance; Fiscal year 2005 (estimated): Dollars (in millions): $1,829; Fiscal year 2005 (estimated): Full-time equivalents: 20,798; Fiscal year 2006 (requested): Dollars (in millions): $1,806; Fiscal year 2006 (requested): Full-time equivalents: 20,160; Change fiscal year 2005-fiscal year 2006: Dollars (in millions):- $23; Change fiscal year 2005-fiscal year 2006: Full-time equivalents:- 638. Program activities: Outreach; Fiscal year 2005 (estimated): Dollars (in millions): 500; Fiscal year 2005 (estimated): Full-time equivalents: 2,473; Fiscal year 2006 (requested): Dollars (in millions): 466; Fiscal year 2006 (requested): Full-time equivalents: 1,905; Change fiscal year 2005-fiscal year 2006: Dollars (in millions):-34; Change fiscal year 2005-fiscal year 2006: Full-time equivalents:- 568. Program activities: Processing; Fiscal year 2005 (estimated): Dollars (in millions): 1,276; Fiscal year 2005 (estimated): Full-time equivalents: 15,695; Fiscal year 2006 (requested): Dollars (in millions): 1,295; Fiscal year 2006 (requested): Full-time equivalents: 15,516; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 19; Change fiscal year 2005-fiscal year 2006: Full-time equivalents:- 179. Program activities: Taxpayer service subtotal; Fiscal year 2005 (estimated): Dollars (in millions): 3,606; Fiscal year 2005 (estimated): Full-time equivalents: 38,966; Fiscal year 2006 (requested): Dollars (in millions): 3,567; Fiscal year 2006 (requested): Full-time equivalents: 37,581; Change fiscal year 2005-fiscal year 2006: Dollars (in millions):-39; Change fiscal year 2005 -fiscal year 2006: Full-time equivalents:-1,385. Program activities: Research; Fiscal year 2005 (estimated): Dollars (in millions): 154; Fiscal year 2005 (estimated): Full-time equivalents: 1,119; Fiscal year 2006 (requested): Dollars (in millions): 158; Fiscal year 2006 (requested): Full-time equivalents: 1,119; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 4; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 0. Program activities: Examination; Fiscal year 2005 (estimated): Dollars (in millions): 3,478; Fiscal year 2005 (estimated): Full-time equivalents: 31,498; Fiscal year 2006 (requested): Dollars (in millions): 3,712; Fiscal year 2006 (requested): Full-time equivalents: 32,284; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 234; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 786. Program activities: Collection; Fiscal year 2005 (estimated): Dollars (in millions): 1,826; Fiscal year 2005 (estimated): Full-time equivalents: 18,023; Fiscal year 2006 (requested): Dollars (in millions): 1,991; Fiscal year 2006 (requested): Full-time equivalents: 18,815; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 165; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 792. Program activities: Investigation; Fiscal year 2005 (estimated): Dollars (in millions): 682; Fiscal year 2005 (estimated): Full-time equivalents: 4,899; Fiscal year 2006 (requested): Dollars (in millions): 767; Fiscal year 2006 (requested): Full-time equivalents: 5,250; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 85; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 351. Program activities: Regulatory; Fiscal year 2005 (estimated): Dollars (in millions): 253; Fiscal year 2005 (estimated): Full-time equivalents: 1,912; Fiscal year 2006 (requested): Dollars (in millions): 265; Fiscal year 2006 (requested): Full-time equivalents: 1,944; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 12; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 32. Program activities: Enforcement subtotal; Fiscal year 2005 (estimated): Dollars (in millions): 6,392; Fiscal year 2005 (estimated): Full-time equivalents: 57,451; Fiscal year 2006 (requested): Dollars (in millions): 6,893; Fiscal year 2006 (requested): Full-time equivalents: 59,412; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 500; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 1,961. Program activities: Taxpayer service and enforcement total; Fiscal year 2005 (estimated): Dollars (in millions): 9,998; Fiscal year 2005 (estimated): Full-time equivalents: 96,417; Fiscal year 2006 (requested): Dollars (in millions): 10,460; Fiscal year 2006 (requested): Full-time equivalents: 96,993; Change fiscal year 2005-fiscal year 2006: Dollars (in millions): 462; Change fiscal year 2005-fiscal year 2006: Full-time equivalents: 576. Source: GAO analysis of IRS data. Note: Numbers may not add due to rounding. [End of table] The difference between changes in dollars and FTEs could be even larger because of unbudgeted expenses. Unbudgeted expenses have consumed some of IRS's budget increases and internal savings increases over the last few years. Unbudgeted expenses include unfunded portions of annual salary increases, which can be substantial given IRS's large workforce, and other costs such as higher-than-budgeted rent increases. According to IRS officials, these unbudgeted expenses accounted for over $150 million in each of the last 4 years. An IRS official also told us they anticipate having to cover unbudgeted expenses in 2006. As of March 2005, IRS officials were projecting unbudgeted salary increases of at least $40 million. This projection could change since potential federal salary increases for 2006 have not been determined. IRS Is Proposing $39 Million Less for Taxpayer Service, but the Impact on Taxpayers Is Unclear: The budget request provides some detail on how IRS plans to absorb cost increases in the taxpayer service budget. IRS is proposing a gross reduction of over $134 million in taxpayer service from reexamining the budget's base and plans to use more than $95 million of it to cover annual increases such as salaries. This leaves a net reduction of nearly $39 million or 1.1 percent in the taxpayer service budget. The extent to which IRS is able to achieve the gross reductions will impact its ability to use the funds as anticipated. Decisions on how the $134 million gross reduction would be absorbed were not finalized prior to releasing the budget. According to IRS officials, some of the reductions would result from efficiency gains such as reducing printing and postage costs; however, others would result from reductions in the services provided to taxpayers such as shortening the hours of toll-free telephone service operations. The officials also said most decisions have now been made about general areas for reduction and most changes will not be readily apparent to taxpayers. Although IRS has made general decisions about the reductions, many of the details have yet to be determined. Therefore, the extent of the impact on taxpayers in the short term is unclear. For example, IRS plans to reduce dependence on field assistance, including walk-in sites, but has not reached a final decision on how to reduce services. Table 3 provides further detail on how IRS is proposing to reduce funding and resources for taxpayer service. Table 3: IRS Requested Changes in Funding and Full-time Equivalents for Taxpayer Service, Fiscal Years 2005 and 2006: Program activities: Assistance: Electronic; Fiscal year 2005 (actual): Dollars: (in millions): $1,536; Fiscal year 2005 (actual): Full-time equivalents: 17,745; Fiscal year 2006 (requested): Dollars (in millions): $1,557; Fiscal year 2006 (requested): Full-time equivalents: 17,721; Change fiscal year 2005-2006: Dollars: (in millions): $21; Change fiscal year 2005-2006: Full-time equivalents:-24. Program activities: Assistance: Field; Fiscal year 2005 (actual): Dollars: (in millions): 274; Fiscal year 2005 (actual): Full-time equivalents: 2,796; Fiscal year 2006 (requested): Dollars (in millions): 230; Fiscal year 2006 (requested): Full-time equivalents: 2,181; Change fiscal year 2005-2006: Dollars: (in millions):-44; Change fiscal year 2005-2006: Full-time equivalents:-615. Program activities: Assistance: EITC assistance; Fiscal year 2005 (actual): Dollars: (in millions): 19; Fiscal year 2005 (actual): Full-time equivalents: 258; Fiscal year 2006 (requested): Dollars (in millions): 19; Fiscal year 2006 (requested): Full-time equivalents: 258; Change fiscal year 2005-2006: Dollars: (in millions): < 1; Change fiscal year 2005-2006: Full-time equivalents: 0. Program activities: Assistance: Assistance total; Fiscal year 2005 (actual): Dollars: (in millions): 1,829; Fiscal year 2005 (actual): Full-time equivalents: 20,798; Fiscal year 2006 (requested): Dollars (in millions): 1,806; Fiscal year 2006 (requested): Full-time equivalents: 20,160; Change fiscal year 2005-2006: Dollars: (in millions):-23; Change fiscal year 2005-2006: Full-time equivalents:-638. Program activities: Outreach: Public and Media; Fiscal year 2005 (actual): Dollars: (in millions): 291; Fiscal year 2005 (actual): Full-time equivalents: 821; Fiscal year 2006 (requested): Dollars (in millions): 276; Fiscal year 2006 (requested): Full-time equivalents: 520; Change fiscal year 2005-2006: Dollars: (in millions):-15; Change fiscal year 2005-2006: Full-time equivalents:-301. Program activities: Outreach:Taxpayer Education & Communication; Fiscal year 2005 (actual): Dollars: (in millions): 203; Fiscal year 2005 (actual): Full-time equivalents: 1,592; Fiscal year 2006 (requested): Dollars (in millions): 184; Fiscal year 2006 (requested): Full-time equivalents: 1,326; Change fiscal year 2005-2006: Dollars: (in millions):-19; Change fiscal year 2005-2006: Full-time equivalents:-266. Program activities: Outreach: EITC Outreach; Fiscal year 2005 (actual): Dollars: (in millions): 7; Fiscal year 2005 (actual): Full-time equivalents: 60; Fiscal year 2006 (requested): Dollars (in millions): 7; Fiscal year 2006 (requested): Full-time equivalents: 60; Change fiscal year 2005-2006: Dollars: (in millions): < 1; Change fiscal year 2005-2006: Full-time equivalents: 0. Program activities: Outreach: Outreach total; Fiscal year 2005 (actual): Dollars: (in millions): 500; Fiscal year 2005 (actual): Full-time equivalents: 2,473; Fiscal year 2006 (requested): Dollars (in millions): 466; Fiscal year 2006 (requested): Full-time equivalents: 1,905; Change fiscal year 2005-2006: Dollars: (in millions):-34; Change fiscal year 2005-2006: Full-time equivalents:-568. Program activities: Processing; Fiscal year 2005 (actual): Dollars: (in millions): 1,276; Fiscal year 2005 (actual): Full-time equivalents: 15,695; Fiscal year 2006 (requested): Dollars (in millions): 1,295; Fiscal year 2006 (requested): Full-time equivalents: 15,516; Change fiscal year 2005-2006: Dollars: (in millions): 19; Change fiscal year 2005-2006: Full-time equivalents:-179. Program activities: Taxpayer service total; Fiscal year 2005 (actual): Dollars: (in millions): 3,606; Fiscal year 2005 (actual): Full-time equivalents: 38,966; Fiscal year 2006 (requested): Dollars (in millions): 3,568; Fiscal year 2006 (requested): Full-time equivalents: 37,581; Change fiscal year 2005-2006: Dollars: (in millions):-39; Change fiscal year 2005-2006: Full-time equivalents:-1,385. Source: GAO analysis of IRS data. Note: Numbers may not add due to rounding. [End of table] IRS Continues to Request Significant Increases for Enforcement to Build on Recent Hiring Gains: IRS's fiscal year 2006 budget request is the sixth consecutive year the agency has requested additional staffing for enforcement. However, up until last year, IRS was unable to increase enforcement staffing; unbudgeted costs and other priorities consumed the budget increase. IRS's proposal for fiscal year 2006, if implemented as planned, would return enforcement staffing in these occupations to their highest levels since 1999. Of the more than $500 million increase requested for 2006, about $265 million would fund enforcement initiatives, over $182 million would be used in part for salary increases, and over $55 million is a proposal to transfer funding authority from the Department of Justice's Interagency Crime and Drug Enforcement. The $500 million increase would be supplemented by internal enforcement savings of $88 million. As is the case with taxpayer service savings, the extent to which IRS achieves enforcement savings will affect its ability to fund the new enforcement initiatives. The $265 million for new enforcement initiatives consist of: * $149.7 million and 920 FTEs to attack corrosive non-compliance activity driving the tax gap such as abusive trusts and shelters, including offshore credit cards and organized tax resistance; * $51.8 million and 236 FTEs to detect and deter corrosive corporate non-compliance to attack complex abusive tax avoidance transactions on a global basis and challenge those who promote their use; * $37.9 million and 417 FTEs to increase individual taxpayer compliance by identifying and implementing actions to address non-compliance with filing requirements; increasing Automated Underreporter resources to address the reporting compliance tax gap; increasing audit coverage; and expanding collection work in walk-in sites; * $14.5 million and 77 FTEs to combat abusive transactions by entities with special tax status by initiating examinations more promptly, safeguarding compliant customers from unscrupulous promoters, and increasing vigilance to ensure that the assets of tax-exempt organizations are put to their intended tax-preferred purpose and not misdirected to fund terrorism or for private gain; and: * $10.8 million and 22 FTEs to curtail fraudulent refund crimes. The $88 million in internal savings would be reinvested to perform the following activities: * $66.7 million and 585 FTEs to devote resources to front-line enforcement activities; * $14.9 million and 156 FTEs to, in part, address bankruptcy-related taxpayer questions; and: * $6.7 million and 52 FTEs to address complex, high-risk issues such as compliance among tax professionals. In the past, IRS has had trouble achieving enforcement staffing increases because other priorities, including unbudgeted expenses, have absorbed additional funds. IRS achieved some gains in 2004 and expects modest gains in 2005. Figure 1 shows that the number of revenue agents (those who audit complex returns), revenue officers (those who do field collection work), and special agents (those who perform criminal investigations) decreased over 21 percent between 1998 and 2003, but increased almost 6 percent from 2003 to 2004. Figure 1: Revenue Agents, Revenue Officers, and Special Agents, Fiscal Years 1998-2006: [See PDF for image] [A] Fiscal years 2005 and 2006 are IRS projections. [End of figure] IRS's recent gains in enforcement staffing are encouraging, as tax law enforcement continues to remain an area of high risk for the federal government because the resources IRS has dedicated to enforcing the tax laws have declined, while IRS's enforcement workload--measured by the number of taxpayer returns filed--has continually increased.[Footnote 8] Figure 2 shows the trend in field, correspondence, and total audit rates since 1995. Field audits involve face-to-face audits and correspondence audits are typically less complex involving communication through notices. IRS experienced steep declines in audit rates from 1995 to 1999, but the audit rate--the proportion of tax returns that IRS audits each year--has slowly increased since 2000. The figure shows that the increase in total audit rates of individual filers has been driven mostly by correspondence audits, while more complex field audits, continue to decline. Figure 2: Audit Rate of Individual Income Tax Returns, Fiscal Years 1995-2004: [See PDF for image] [End of figure] The link between the decline in enforcement staff and the decline in enforcement actions, such as audits, is complicated, and the real impact on taxpayers' rate of voluntary compliance is not known. This leaves open the question of whether the declines in IRS's enforcement programs are eroding taxpayers' incentives to voluntarily comply. IRS's National Research Program (NRP) recently completed a study on compliance by individual tax filers based on tax data provided on 2001 tax returns. The study estimated that the tax gap--the difference between what taxpayers owe and what they pay--is at least $312 billion per year as of 2001 and could be as large as $353 billion. This study is important for several reasons beyond measuring compliance. It is intended to help IRS better target its enforcement actions, such as audits, on non-compliant taxpayers, and minimize audits of compliant taxpayers. It should also help IRS better understand the impact of taxpayer service on compliance. IRS Is Developing Long-term Goals That Can Be Used to Assess Performance and Make Budget Decisions: IRS is developing but currently lacks long-term goals that can be used to assess performance and make budget decisions.[Footnote 9] Long-term goals and results measurement are a component of the statutory strategic planning and management framework that the Congress adopted in the Government Performance and Results Act of 1993.[Footnote 10] As a part of this comprehensive framework, long-term goals that are linked to annual performance measures can help guide agencies when considering organizational changes and making resource decisions. A recent Program Assessment Rating Tool (PART) review conducted by OMB reported that IRS lacks long-term goals.[Footnote 11] As a result, IRS has been working to identify and establish long-term goals for all aspects of its operations for over a year. IRS officials said these goals will be finalized and provided publicly as an update to the agency's strategic plan before May 2005. For IRS and its stakeholders, such as the Congress, long-term goals can be used to assess performance and progress towards these goals, and determine whether budget decisions contribute to achieving those goals. Without long-term goals, the Congress and other stakeholders are hampered in evaluating whether IRS is making satisfactory long-term progress. Further, without such goals, the extent to which IRS's 2006 budget request would help IRS achieve its mission over the long-term is unclear. This Is an Opportune Time to Review IRS's Menu of Taxpayer Services: For at least two reasons, this is an opportune time to review the menu of taxpayer services that IRS provides. First, IRS's budget for taxpayer services was reduced in 2005 and an additional reduction is proposed for 2006. As already discussed, these reductions have forced IRS to propose scaling back some services. Second, as we have reported, IRS has made significant progress in improving the quality of its taxpayer services. For example, IRS now provides many Internet services that did not exist a few years ago and has noticeably improved the quality of telephone services. This opens up the possibility of maintaining the overall level of taxpayer service but with a different menu of service choices. Cuts in selected services could be offset by the new and improved services. Generally, as indicated in the budget, the menu of taxpayer services that IRS provides covers assistance, outreach, and processing. Assistance includes answering taxpayer questions via telephone, correspondence, and face-to-face at its walk-in sites. Outreach includes educational programs and the development of partnerships. Processing includes issuing millions of tax refunds. When considering program reductions, we support a targeted approach rather than across-the-board cuts.[Footnote 12] A targeted approach helps reduce the risk that effective programs are reduced or eliminated while ineffective or lower priority programs are maintained. With the above reasons in mind for reconsidering IRS's menu of services, we have compiled a list of options for targeted reductions in taxpayer service. The options on this list are not recommendations but are intended to contribute to a dialogue about the tradeoffs faced when setting IRS's budget. The options presented meet at least one of the following criteria that we generally use to evaluate programs or budget requests.[Footnote 13] These criteria include that the activity: * duplicates other efforts that may be more effective and/or efficient; * historically does not meet performance goals or provide intended results as reported by GAO, the Treasury Inspector General for Tax Administration (TIGTA), IRS, or others; * experiences a continued decrease in demand; * lacks adequate oversight, implementation and management plans, or structures and systems to be implemented effectively; * has been the subject of actual or requested funding increases that cannot be adequately justified; or: * has the potential to make an agency more self-sustaining by charging user fees for services provided. We recognize that the options listed below involve tradeoffs. In each case, some taxpayers would lose a service they use. However, the savings could be used to help maintain the quality of other services. We also want to give IRS credit for identifying savings, including some on this list. The options include: * closing walk-in sites. Taxpayer demand for walk-in services has continued to decrease and staff answer a more limited number of tax law questions in person than staff answer via telephone. * limiting the type of telephone questions answered by IRS assistors. IRS assistors still answer some refund status questions even though IRS provides automated answers via telephone and its Web site. * mandating electronic filing for some filers such as paid preparers or businesses. As noted, efficiency gains from electronic filing have enabled IRS to consolidate paper processing operations. * charging for services. For example, IRS provides paid preparers with information on federal debts owed by taxpayers seeking refund anticipation loans. Progress in BSM Implementation, but the Program Remains High Risk and Budget Reductions Have Resulted in Significant Adjustments: Although IRS has implemented important elements of the BSM program, much work remains. In particular, the BSM program remains at high risk and has a long history of significant cost overruns and schedule delays. Furthermore, budget reductions have resulted in significant adjustments to the BSM program, although it is too early to determine their ultimate effect. IRS Has Made Progress in Implementing BSM, but Much Work Remains: IRS has long relied on obsolete automated systems for key operational and financial management functions, and its attempts to modernize these aging computer systems span several decades. IRS's current modernization program, BSM, is a highly complex, multibillion-dollar program that is the agency's latest attempt to modernize its systems. BSM is critical to supporting IRS's taxpayer service and enforcement goals. For example, BSM includes projects to allow taxpayers to file and retrieve information electronically and to provide technology solutions to help reduce the backlog of collections cases. BSM is important for another reason. It allows IRS to provide the reliable and timely financial management information needed to account for the nation's largest revenue stream and better enable the agency to justify its resource allocation decisions and congressional budgetary requests. Since our testimony before this subcommittee on last year's budget request, IRS has deployed initial phases of several modernized systems under its BSM program. The following provides examples of the systems and functionality that IRS implemented in 2004 and the beginning of 2005. * Modernized e-File (MeF). This project is intended to provide electronic filing for large corporations, small businesses, and tax- exempt organizations. The initial releases of this project were implemented in June and December 2004, and allowed for the electronic filing of forms and schedules for the form 1120 (corporate tax return) and form 990 (tax-exempt organizations' tax return). IRS reported that, during the 2004 filing season, it accepted over 53,000 of these forms and schedules using MeF. * e-Services. This project created a Web portal and provided other electronic services to promote the goal of conducting most IRS transactions with taxpayers and tax practitioners electronically. IRS implemented e-Services in May 2004. According to IRS, as of late March 2005, over 84,000 users have registered with this Web portal. * Customer Account Data Engine (CADE). CADE is intended to replace IRS's antiquated system that contains the agency's repository of taxpayer information and, therefore, is the BSM program's linchpin and highest priority project. In July 2004 and January 2005, IRS implemented the initial releases of CADE, which have been used to process filing year 2004 and 2005 1040EZ returns, respectively, for single taxpayers with refund or even-balance returns. According to IRS, as of March 16, 2005, CADE had processed over 842,000 tax returns so far this filing season. * Integrated Financial System (IFS). This system replaces aspects of IRS's core financial systems and is ultimately intended to operate as its new accounting system of record. The first release of this system became fully operational in January 2005. Although IRS is to be applauded for delivering such important functionality, the BSM program is far from complete. Future deliveries of additional functionality of deployed systems and the implementation of other BSM projects are expected to have a significant impact on IRS's taxpayer services and enforcement capability. For example, IRS has projected that CADE will process about 2 million returns in the 2005 filing season. However, the returns being processed in CADE are the most basic and constitute less than 1 percent of the total tax returns expected to be processed during the current filing season. IRS expects the full implementation of CADE to take several more years. Another BSM project--the Filing and Payment Compliance (F&PC) project- -is expected to increase (1) IRS's capacity to treat and resolve the backlog of delinquent taxpayer cases, (2) the closure of collection cases by 10 million annually by 2014, and (3) voluntary taxpayer compliance. As part of this project, IRS plans to implement an initial limited private debt collection capability in January 2006, with full implementation of this aspect of the F&PC project to be delivered by January 2008 and additional functionality to follow in later years. BSM Program Has History of Cost Increases and Schedule Delays and Is High Risk: The BSM program has a long history of significant cost increases and schedule delays, which, in part, has led us to report this program as high-risk since 1995.[Footnote 14] Appendix II provides the history of the BSM life-cycle cost and schedule variances. In January 2005 letters to congressional appropriation committees, IRS stated that it had showed a marked improvement in significantly reducing its cost variances. In particular, IRS claimed that it reduced the variance between estimated and actual costs from 33 percent in fiscal year 2002 to 4 percent in fiscal year 2004. However, we do not agree with the methodology used in the analysis supporting this claim. Specifically, (1) the analysis did not reflect actual costs, instead it reflected changes in cost estimates (i.e., budget allocations) for various BSM projects; (2) IRS aggregated all of the changes in the estimates associated with the major activities for some projects, such as CADE, which masked that monies were shifted from future activities to cover increased costs of current activities; and (3) the calculations were based on a percentage of specific fiscal year appropriations, which does not reflect that these are multiyear projects. In February 2002 we expressed concern over IRS's cost and schedule estimating and made a recommendation for improvement.[Footnote 15] IRS and its prime systems integration support (PRIME) contractor have taken action to improve their estimating practices, such as developing a cost and schedule estimation guidebook and developing a risk-adjustment model to include an analysis of uncertainty. These actions may ultimately result in more realistic cost and schedule estimates, but our analysis of IRS's expenditure plans[Footnote 16] over the last few years shows continued increases in estimated project life-cycle costs (see fig. 3). Figure 3: Life-cycle Cost Estimates for Key BSM Projects: [See PDF for image] [End of figure] The Associate CIO for BSM stated that he believes that IRS's cost and schedule estimating has improved in the past year. In particular, he pointed out that IRS met its cost and schedule goals for the implementation of the latest release of CADE, which allowed the agency to use this system to process certain 1040EZ forms in the 2005 filing season. It is too early to tell whether this signals a fundamental improvement in IRS's ability to accurately forecast project costs and schedules. The reasons for IRS's cost increases and schedule delays vary. However, we have previously reported that they are due, in part, to weaknesses in management controls and capabilities. We have previously made recommendations to improve BSM management controls, and IRS has implemented or begun to implement these recommendations. For example, in February 2002, we reported that IRS had not yet defined or implemented an IT human capital strategy, and recommended that IRS develop plans for obtaining, developing, and retaining requisite human capital resources.[Footnote 17] In September 2003, TIGTA reported that IRS had made significant progress in developing a human capital strategy but that it needed further development. In August 2004, the current Associate CIO for BSM identified the completion of a human capital strategy as a high priority. Among the activities that IRS is implementing are prioritizing its BSM staffing needs and developing a recruiting plan. IRS has also identified, and is addressing, other major management challenges in areas such as requirements, contract, and program management. For example, poorly defined requirements have been among the significant weaknesses that have been identified as contributing to project cost overruns and schedule delays. As part of addressing this problem, in March 2005, the IRS BSM office established a requirements management office, although a leader has not yet been hired. IRS Is Adjusting the BSM Program in Response to Budget Reductions: The BSM program is undergoing significant changes as it adjusts to reductions in its budget. Figure 4 illustrates the BSM program's requested and enacted budgets for fiscal years 2004 through 2006.[Footnote 18] For fiscal year 2005, IRS received about 29 percent less funding than it requested (from $285 million to $203.4 million). According to the Senate report for the fiscal year 2005 Transportation, Treasury, and General Government appropriations bill, in making its recommendation to reduce BSM funding, the Senate Appropriations Committee was concerned about the program's cost overruns and schedule delays. In addition, the committee emphasized that in providing fewer funds, it wanted IRS to focus on its highest priority projects, particularly CADE.[Footnote 19] In addition, IRS's fiscal year 2006 budget request reflects an additional reduction of about 2 percent, or about $4.4 million, from the fiscal year 2005 appropriation. Figure 4: Changes in the BSM budget (dollars in millions)A: [See PDF for image] [A] The BSM account authorizes funds to be obligated for 3 years. [End of figure] It is too early to tell what effect the budget reductions will ultimately have on the BSM program. However, the significant adjustments that IRS is making to the program to address these reductions are not without risk, could potentially impact future budget requests, and will delay the implementation of certain functionality that was intended to provide benefit to IRS operations and the taxpayer. For example: * Reductions in Management reserve/project risk adjustments. In response to the fiscal year 2005 budget reduction, IRS reduced the amount that it had allotted to program management reserve and project risk adjustments by about 62 percent (from about $49.1 million to about $18.6 million).[Footnote 20] If BSM projects have future cost overruns that cannot be covered by the depleted reserve, this reduction could result in (1) increased budget requests in future years or (2) delays in planned future activities (e.g., delays in delivering promised functionality) to use those allocated funds to cover the overruns. * Shifts of BSM management responsibility from the PRIME contractor to IRS. Due to budget reductions and IRS's assessment of the PRIME contractor's performance, IRS decided to shift significant BSM responsibilities for program management, systems engineering, and business integration from the PRIME contractor to IRS staff. For example, IRS staff are assuming responsibility for cost and schedule estimation and measurement, risk management, integration test and deployment, and transition management. There are risks associated with this decision. To successfully accomplish this transfer, IRS must have the management capability to perform this role. Although the BSM program office has been attempting to improve this capability through, for example, implementation of a new governance structure and hiring staff with specific technical and management expertise, IRS has had significant problems in the past managing this and other large development projects, and acknowledges that it has major challenges to overcome in this area. * Suspension of the Custodial Accounting Project (CAP). Although the initial release of CAP went into production in September 2004, IRS has decided not to use this system and to stop work on planned improvements due to budget constraints. According to IRS, it made this decision after it evaluated the business benefits and costs to develop and maintain CAP versus the benefits expected to be provided by other projects, such as CADE. Among the functionality that the initial releases of CAP were expected to provide were (1) critical control and reporting capabilities mandated by federal financial management laws; (2) a traceable audit trail to support financial reporting; and (3) a subsidiary ledger to accurately and promptly identify, classify, track, and report custodial revenue transactions and unpaid assessments. With the suspension of CAP, it is now unclear how IRS plans to replace the functionality this system was expected to provide, which was intended to allow the agency to make meaningful progress toward addressing long- standing financial management weaknesses. IRS is currently evaluating alternative approaches to addressing these weaknesses. * Reductions in planned functionality. According to IRS, the fiscal year 2006 funding reduction will result in delays in planned functionality for some of its BSM projects. For example, IRS no longer plans to include Form 1041 (the income tax return for estates and trusts) in the fourth release of Modernized e-File, which is expected to be implemented in fiscal year 2007. The BSM program is based on visions and strategies developed in 2000 and 2001. The age of these plans, in conjunction with the significant delays already experienced by the program and the substantive changes brought on by budget reductions, indicate that it is time for IRS to revisit its long-term goals, strategy, and plans for BSM. Such an assessment would include an evaluation of when significant future BSM functionality would be delivered. IRS's Associate CIO for BSM has recognized that it is time to recast the agency's BSM strategy because of changes that have occurred subsequent to the development of the program's initial plans. According to this official, IRS is redefining and refocusing the BSM program, and he expects this effort to be completed by the end of this fiscal year. Additional Actions Needed to Improve Budgeting for IT Operations and Maintenance: IRS has requested about $1.62 billion for IT operations and maintenance in fiscal year 2006, within its proposed new Tax Administration and Operations account. Under the prior years' budget structure, these funds were included in a separate account, for which IRS received an appropriation of about $1.59 billion in fiscal year 2005. The $1.62 billion requested in fiscal year 2006 is intended to fund the personnel costs for IT staff (including staff supporting the BSM program) and activities such as IT security, enterprise networks, and the operations and maintenance costs of its current systems. We have previously expressed concern that IRS does not employ best practices in the development of its IT operations and maintenance budget request.[Footnote 21] Although IRS has made progress in addressing our concern, more work remains. The Paperwork Reduction Act (PRA) of 1995[Footnote 22] requires federal agencies to be accountable for their IT investments and responsible for maximizing the value and managing the risks of their major information systems initiatives. The Clinger-Cohen Act of 1996[Footnote 23] establishes a more definitive framework for implementing the PRA's requirements for IT investment management. It requires federal agencies to focus more on the results they have achieved and introduces more rigor and structure into how agencies are to select and manage IT projects. In addition, leading private-and public-sector organizations have taken a project-or system-centric approach to managing not only new investments but also operations and maintenance of existing systems. As such, these organizations: * identify operations and maintenance projects and systems for inclusion in budget requests; * assess these projects or systems on the basis of expected costs, benefits, and risks to the organization; * analyze these projects as a portfolio of competing funding options; and: * use this information to develop and support budget requests. This focus on projects, their outcomes, and risks as the basic elements of analysis and decision making is incorporated in the IT investment management approach that is recommended by OMB and GAO. By using these proven investment management approaches for budget formulation, agencies have a systematic method, on the basis of risk and return on investment, to justify what are typically substantial information systems operations and maintenance budget requests. In our assessment of IRS's fiscal year 2003 budget request, we reported that the agency did not develop its information systems operations and maintenance request in accordance with the investment management approach used by leading organizations. We recommended that IRS prepare its future budget requests in accordance with these best practices.[Footnote 24] To address our recommendation, IRS agreed to take a variety of actions, which it has made progress in implementing. For example, IRS stated that it planned to develop an activity-based cost model to plan, project, and report costs for business tasks/ activities funded by the information systems budget. The recent release of IFS included an activity-based cost module, but IRS does not currently have historical cost data to populate this module. According to officials in the Office of the Chief Financial Officer, IRS is in the process of accumulating these data. These officials stated that IRS needs 3 years of actual costs to have the historical data that would provide a basis for future budget estimates. Accordingly, these officials expected that IRS would begin using the IFS activity-based cost module in formulating the fiscal year 2008 budget request and would have the requisite 3 years' of historical data in time to develop the fiscal year 2010 budget request. In addition, IRS planned to develop a capital planning guide to implement processes for capital planning and investment control, budget formulation and execution, business case development, and project prioritization. IRS has developed a draft guide, which is currently under review by IRS executives, and IRS expects it to become policy on October 1, 2005. Although progress has been made in implementing best practices in the development of the IT operations and maintenance budget, until these actions are completely implemented IRS will not be able to ensure that its request is adequately supported. Conclusions: As IRS shifts its priorities to enforcement and faces tight budgets for service, the agency will be challenged to maintain the gains it has made in taxpayer service. In order to avoid a "swinging pendulum," where enforcement gains are achieved at the cost of taxpayer service and vice versa, IRS and the Congress would benefit from a set of agreed- upon long-term goals. Long-term goals would provide a framework for assessing budgetary tradeoffs between taxpayer service and enforcement and whether IRS is making satisfactory progress towards achieving those goals. Similarly, long-term goals could help identify priorities within the taxpayer service and enforcement functions. For example, if the budget for taxpayer service were to be cut and efficiency gains did not offset the cut, long-term goals could help guide decisions about whether to make service cuts across the board or target selected services. To its credit, IRS has been developing a set of long-term goals, so we are not making a recommendation on goals. However, we want to underscore the importance of making the goals public in a timely fashion, as IRS has planned. The Congress would then have an opportunity to review the goals and start using them as a tool for holding IRS accountable for performance. In addition, the Congress would benefit from more information about the short-term impacts of the 2006 budget request on taxpayers. The 2006 budget request cites a need for reducing the hours of telephone service and scaling back walk-in assistance but provides little additional detail. Without more detail about how taxpayers will be affected, it is difficult to assess whether the 2006 proposed budget would allow IRS to achieve its stated intent of both maintaining a high level of taxpayer service and increasing enforcement. BSM and related initiatives such as electronic filing hold the promise of delivering further efficiency gains that could offset the need for larger budget increases to fund taxpayer service and enforcement. Today, taxpayers have seen payoffs from BSM; however, the program is still high risk and budget reductions have caused substantive program changes. IRS has recognized it is time to revisit its long-term BSM strategy and is currently refocusing the program. As we did with long- term goals above, we want to underscore the importance of timely completion of the revision of the BSM strategy. Recommendation: In a related statement [Hyperlink, http://www.gao.gov/cgi-bin/ getrpt?GAO-05-416T], GAO recommended that the Commissioner of Internal Revenue supplement the 2006 budget request with more detailed information on how proposed service reductions would impact taxpayers. [End of section] Appendix I: Description of IRS's Proposed Budget Structure: IRS's proposed new budget structure as depicted in figure 7 combines the three major appropriations that the agency has had in the past-- Processing, Assistance, and Management; Tax Law Enforcement; and Information Systems into one appropriation called Tax Administration and Operations. The Business Systems Modernization and Health Insurance Tax Credit Administration appropriations accounts remain unchanged. The Tax Administration and Operations appropriation is divided among eight critical program areas. These budget activities focus on Assistance, Outreach, Processing, Examination, Collection, Investigations, Regulatory Compliance, and Research. According to IRS, as it continues to move forward with developing and implementing this new structure, these program areas and the associated resource distributions will be refined to provide more accurate costing. IRS reported that the new budget structure has a more direct relationship to its major program areas and strategic plan. We did not evaluate IRS's proposed budget structure as part of this engagement because it was not within the scope of our review. However, we have recently completed a study on the administration's broader budget restructuring effort. In that study we say that, going forward, infusing a performance perspective into budget decisions may only be achieved when the underlying information becomes more credible and used by all major decision makers. Thus, the Congress must be considered a partner. In due course, once the goals and underlying data become more compelling and used by the Congress, budget restructuring may become a better tool to advance budget and performance integration.[Footnote 25] Figure 5: IRS's Proposed Budget Structure: [See PDF for image] [End of figure] [End of section] Appendix II: BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary: The table below shows the life-cycle variance in cost and schedule estimates for completed and ongoing Business Systems Modernization (BSM) projects, based on data contained in IRS's expenditure plans. These variances are based on a comparison of IRS's initial and revised (as of July 2004) cost and schedule estimates to complete initial operation[Footnote 26] or full deployment[Footnote 27] of the projects. Table 4: BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary: Project: Completed Projects: Security and Technology Infrastructure Release 1; Cost: variance: (in thousands): +$8,450; Reported/revised: estimated cost: (in thousands): $45,401; Schedule: variance: (in months): +5; Reported/revised: estimated: completion date: 1/31/02; (initial operation)[A]; Reported IRS/taxpayer benefits: Provides infrastructure for secure telephony and electronic interaction among IRS employees, tax practitioners, and taxpayers. Project: Completed Projects: Customer Communications 2001; Cost: variance: (in thousands): +14,562; Reported/revised: estimated cost: (in thousands): 60,762; Schedule: variance: (in months): +9; Reported/revised: estimated: completion date: 2/26/02; (full deployment); Reported IRS/taxpayer benefits: Improves telecommunications infrastructure, including telephone call management, call routing, and customer self-service applications. Project: Completed Projects: Customer Relationship Management Exam; Cost: variance: (in thousands):-721; Reported/revised: estimated cost: (in thousands): 9,245; Schedule: variance: (in months): +3; Reported/revised: estimated: completion date: 9/30/02; (full deployment); Reported IRS/taxpayer benefits: Provides commercial, off-the-shelf software to IRS revenue agents to allow them to accurately compute complex corporate transactions. Project: Completed Projects: Human Resources Connect; Release 1; Cost: variance: (in thousands): +200; Reported/revised: estimated cost: (in thousands): 10,200; Schedule: variance: (in months): 0; Reported/revised: estimated: completion date: 12/31/02; (initial operation)[A]; Reported IRS/taxpayer benefits: Allows IRS employees to access and manage their human resources information online. Project: Completed Projects: Internet Refund/Fact of Filing; Cost: variance: (in thousands): +12,923; Reported/revised: estimated cost: (in thousands): 26,432; Schedule: variance: (in months): +14; Reported/revised: estimated: completion date: 9/26/03; (full deployment); Reported IRS/taxpayer benefits: Provides instant refund status information and instructions for resolving refund problems to taxpayers with Internet access. Project: Completed Projects: Modernized; e-File Release 1; Cost: variance: (in thousands): +21,057; Reported/revised: estimated cost: (in thousands): 50,303; Schedule: variance: (in months): +6.5; Reported/revised: estimated: completion date: 5/31/04; (initial operation)[A]; Reported IRS/taxpayer benefits: Provides initial electronic filing capability for large corporations, small business, and tax-exempt organizations. Project: Ongoing Projects: Modernized; e-File Release 2; Cost: variance: (in thousands): 0; Reported/revised: estimated cost: (in thousands): 16,325; Schedule: variance: (in months): 0; Reported/revised: estimated: completion date: 9/30/04; (initial operation); Reported IRS/taxpayer benefits: Provides additional functionality to support corporate electronic filing and other capabilities, including required public access to filed returns for tax-exempt organizations. Project: Ongoing Projects: Modernized; e-File Release 3; Cost: variance: (in thousands): +5,300; Reported/revised: estimated cost: (in thousands): 27,175; Schedule: variance: (in months): 0; Reported/revised: estimated: completion date: 3/31/05; (initial operation); Reported IRS/taxpayer benefits: Provides additional functionality to support electronic filing for tax-exempt organizations and other capabilities, including the interface with state retrieval systems. Project: Ongoing Projects: e-Services; Cost: variance: (in thousands): +102,271; Reported/revised: estimated cost: (in thousands): 148,820; Schedule: variance: (in months): +18; Reported/revised: estimated: completion date: 4/30/05; (full deployment); Reported IRS/taxpayer benefits: Provides a Web portal and other e- Services to promote the goal of conducting most IRS transactions with taxpayers and tax practitioners electronically. Project: Ongoing Projects: Customer Account Data Engine-Individual Master File Release 1; Cost: variance: (in thousands): +118,129; Reported/revised: estimated cost: (in thousands): 182,774; Schedule: variance: (in months): +30; Reported/revised: estimated: completion date: 6/30/05; (full deployment); Reported IRS/taxpayer benefits: Provides the modernized database foundation to replace the existing individual master file processing systems. Facilitates faster refund processing and more timely response to taxpayer inquiries for Form 1040EZ filers. Project: Ongoing Projects: Integrated Financial System Release 1; Cost: variance: (in thousands): +73,710; Reported/revised: estimated cost: (in thousands): 173,580; Schedule: variance: (in months): +15; Reported/revised: estimated: completion date: 6/30/05; (full deployment); Reported IRS/taxpayer benefits: Provides a single general ledger for custodial and financial data and a platform to integrate core financial data with budget, performance, and cost-accounting data. Project: Ongoing Projects: Custodial Accounting Project Release 1; Cost: variance: (in thousands): +91,789; Reported/revised: estimated cost: (in thousands): 138,950; Schedule: variance: (in months): +33; Reported/revised: estimated: completion date: 11/01/05; (full deployment); Reported IRS/taxpayer benefits: Provides integrated tax operations and internal management information to support evolving decision analytics, performance measurement, and management information needs. Source: GAO analysis of IRS data. [A] Information on the costs and schedule for the full-deployment stage of these projects was not available in the BSM expenditure plans. [End of table] [End of section] Appendix III: How IRS Allocated Expenditures FTEs in Fiscal Year 2004: Figures 6 and 7 illustrate how the Internal Revenue Service (IRS) allocated expenditures and full-time equivalents (FTEs) in fiscal year 2004. Figure 8 shows total expenditures. The percentage of expenditures devoted to contracts decreased from 9 percent in 2002 to 5 percent in 2004, because of fewer private contracts. The percentage of expenditures devoted to other non-labor costs increased from 8 percent in 2002 to 12 percent in 2004, according to IRS officials, due to of increases in miscellaneous costs. Figure 6: IRS expenditures in fiscal year 2004: [See PDF for image] Note: Numbers do not add to the total and percentages do not add to 100 percent due to rounding. [End of figure] Figure 9 shows IRS's total FTEs. Since 2002, FTEs have decreased slightly from 99,180 in 2002 to 99,055 in 2004. We previously reported that processing FTEs declined 1 percentage point between 2002 and 2003. Between 2003 and 2004, IRS's allocation of FTEs remained similar but with a 1 percent increase in enforcement activities in conducting examinations, and in management and other services. Figure 7: How IRS spent 99,055 FTEs in fiscal year 2004: [See PDF for image] [End of figure] FOOTNOTES [1] Pub. L. No. 105-206 (1998). [2] See for example, GAO-05-67, Tax Administration: IRS Improved Performance in the 2004 Filing Season, But Better Data on the Quality of Some Services Are Needed (Washington, D.C.: Nov. 15, 2004). [3] GAO, Internal Revenue Service: Assessment of Fiscal Year 2005 Budget Request and 2004 Filing Season Performance, GAO-04-560T (Washington, D.C.: Mar. 30, 2004). [4] GAO, Tax Administration: IRS Needs to Further Refine Its Tax Filing Season Performance Measures, GAO-03-143 (Washington, D.C.: Nov. 22, 2002) and GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004). [5] IRS is proposing a new budget structure beginning in fiscal year 2006. The proposal would integrate support costs and the IT appropriation into taxpayer assistance and operations appropriation with eight program areas involving both taxpayer service and enforcement. See appendix I for information on the new budget structure. [6] The Administration proposes to fully fund enforcement efforts and costs as contingent appropriations. This would be achieved by using one of two budgetary mechanisms that would allow for an adjustment to total discretionary spending for fiscal year 2006 of not more than $446 million for IRS tax enforcement. [7] According to IRS, an FTE is the equivalent of one person working full time for 1 year without overtime. [8] GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005). [9] IRS has one long-term goal set by the Congress in RRA 98 for IRS to have 80 percent of all individual income tax returns filed electronically. [10] Pub. L. No. 103-62 (1993). The Government Performance and Results Act of 1993 seeks to improve the management of federal programs, as well as their effectiveness and efficiency, by requiring executive agencies to prepare multiyear strategic plans, annual performance plans, and annual performance reports. Under the Act, strategic plans are the starting point for setting goals and measuring progress towards them. The Act requires executive agencies to develop strategic plans that include an agency's mission statement, long-term general goals, and the strategies that the agency will use to achieve these goals. The plans should also explain the key external factors that could significantly affect achievement of these goals, and describe how long- term goals will be related to annual performance goals. [11] The PART was applied during the fiscal year 2004 budget cycle to "programs" selected by OMB. The PART includes general questions in each of four broad topics to which all programs are subjected: (1) program purpose and design, (2) strategic planning, (3) program management, and (4) program results (i.e., whether a program is meeting its long-term and annual goals). OMB also makes an overall assessment on program effectiveness. [12] GAO, 21ST Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP (Washington, D.C.: February 2005). [13] We selected these criteria from a variety of sources based on generally accepted government auditing standards. [14] For our latest high-risk report, please see GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C., January 2005). [15] GAO, Business Systems Modernization: IRS Needs to Better Balance Management Capacity with Systems Acquisition Workload, GAO-02-356 (Washington, D.C.: Feb. 28, 2002). [16] BSM funds are unavailable until the IRS submits to congressional appropriations committees for approval a modernization expenditure plan that (1) meets the OMB capital planning and investment control review requirements; (2) complies with IRS's enterprise architecture; (3) conforms with IRS's enterprise life-cycle methodology; (4) is approved by IRS, the Department of the Treasury, and OMB; (5) is reviewed by GAO; and (6) complies with acquisition rules, requirements, guidelines, and systems acquisition management practices. [17] GAO-02-356. [18] IRS uses the appropriated funds to cover contractor costs related to the BSM program. IRS funds internal costs for managing BSM with another appropriation. These costs are not tracked separately for BSM- related activities. [19] U.S. Senate, Senate Report 108-342 (2004). [20] We did not include in our calculations, reductions to specific project risk adjustment amounts that were made for reasons other than the fiscal year 2005 budget reduction. [21] GAO, Internal Revenue Service: Improving Adequacy of Information Systems Budget Justification, GAO-02-704 (Washington, D.C., June 28, 2002). [22] Pub. L. No.104-13 (1995). [23] Pub. L. No. 104-106 section 5001 et. seq. (1996). [24] GAO-02-704. [25] For a more detailed discussion, see GAO, Performance Budgeting: Efforts to Restructure Budgets to Better Align Resources with Performance, GAO-05-117SP (Washington, D.C.: February 2005). [26] Initial operation refers to the point at which a project is authorized to begin enterprisewide deployment. 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