Summary

The Internal Revenue Service's (IRS) fiscal year 1995 budget request totals $7.6 billion, a 3.7 percent increase over the previous year's appropriation that is due mainly to a growth in tax systems modernization. At the same time, the budget could cut IRS' staffing level by 5.2 percent, the brunt of which would fall on IRS' enforcement programs. Apart from IRS' budget request, the President has proposed giving IRS another $405 million for several compliance initiatives that would boost IRS staffing by about 5,000 positions and reverse the decline in enforcement staff. GAO's analysis of IRS' budget request and the proposed initiatives raises questions about unfunded costs, compliance initiatives and the use of telephone collections for delinquent accounts, user fees for taxpayer photocopies and other services, tax systems modernization, and trends in return filing.

GAO found that: (1) IRS will not be able to fully utilize its fiscal year (FY) 1994 appropriation to implement compliance initiatives because it is expected to have significant budget shortfalls due to unfunded locality pay increase and other unfunded labor costs; (2) IRS expects to have a funding shortfall of $136 million in FY 1995 because of the inflation rate it used to calculate support costs, reductions in governmentwide procurement costs, and unfunded federal employee pay increases; (3) increased IRS funding should be earmarked for supporting enforcement activities and reducing the tax gap; (4) the IRS-proposed compliance initiative of hiring 1200 new full-time employees to collect delinquent taxes would not be cost-effective, and IRS should consider other enforcement activities and more modern collection processes; (5) IRS should consider alternatives to the flat use fee for installment agreements, and eliminate the direct deposit indicator; (6) IRS has not determined its business requirements and completed technical standards for FY 1995 tax systems modernization projects; and (7) for the 1994 filing season, the number of tax returns has declined, and accessibility to the IRS telephone assistance service has also declined.