Internal Revenue Service
Improving Adequacy of Information Systems Budget Justification Gao ID: GAO-02-704 June 28, 2002On April 9, 2002, GAO testified on the Internal Revenue Service's (IRS) fiscal year 2003 budget request. Although IRS had adequately justified its $450 million Business Systems Modernization request, it did not develop its $1.63 billion information systems operations and maintenance request in accordance with the best practices of leading private- and public-sector information technology organizations. See GAO-02-580T.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-02-704, Internal Revenue Service: Improving Adequacy of Information Systems Budget Justification
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GAO: General Accounting Office:
Report to the Commissioner of Internal Revenue:
June 2002: Internal Revenue Service: Improving Adequacy of Information
Systems Budget Justification:
GAO-02-704:
contents:
Letter:
IRS‘s Information Systems Request for Operations and Maintenance Is Not
Adequately Justified:
Recommendation for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Comments from the Internal Revenue Service:
Appendix II: GAO Contact and Staff Acknowledgements:
GAO Contacts:
Staff Acknowledgement:
Abbreviations:
IRS: Internal Revenue Service:
IS: information systems:
IT: information technology:
June 28, 2002:
The Honorable Charles O. Rossotti Commissioner of Internal Revenue:
Dear Mr. Rossotti:
On April 9, 2002, we testified before the Subcommittee on Oversight,
House Committee on Ways and Means, on the Internal Revenue Service‘s
(IRS) fiscal year 2003 budget request. [Footnote 1] In brief, we
reported that although IRS had adequately justified its $450 million
Business Systems Modernization request, it did not develop its $1.63
billion information systems (IS) operations and maintenance request in
accordance with the best practices of leading private- and public-
sector information technology (IT) organizations. This report
officially transmits both the results we reported and the
recommendation we made to you in our testimony. Before our testimony,
we discussed the results of our work with IRS officials, and they
agreed with our findings and recommendation. We performed our work from
February through April 2002, in accordance with generally accepted
government auditing standards.
IRS‘s Information Systems Request for Operations and Maintenance Is Not
Adequately Justified:
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 the Office of Management and
Budget and us. [Footnote 2] 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 very substantial operations and maintenance budget requests.
These approaches also provide a way to hold IT managers accountable for
operations and maintenance spending and the ongoing efficiency and
efficacy of existing systems.
IRS did not develop its IS request in accordance with these best
practices of leading organizations. In particular, the largest elements
of IRS‘s budget request are not projects or systems. Rather, they are
requests for staffing levels or other services. For example, IRS is
requesting $240 million for staff and equipment supporting operations
and maintenance of desktop computers agencywide, as well as $111
million for staff and equipment supporting its major computing centers‘
operations. Further, the agency is requesting $266 million for
telecommunications services contracts. Taken together, these three
initiatives constitute about 38 percent of the total $1.63 billion
being requested for operations and maintenance, but the budget request
gives no indication regarding how these initiatives are allocated to
systems. In addition, in developing these requests, IRS did not
identify and assess the relative costs, benefits, and risks of specific
projects or systems in these areas. Instead, according to IRS officials
responsible for developing the IT operations and maintenance budget,
they simply took what was spent last year in these categories and added
the money to fund cost-of-living and salary increases.
These IRS officials attributed the gap between IRS‘s practices and
those followed by leading organizations to the lack of an adequate cost
accounting system, cultural resistance to change, and a previous lack
of management priority. To better justify future budget requests, these
officials said that they have assessed the strengths and weaknesses of
IRS‘s budgeting and investment management processes against our IT
investment management framework [Footnote 3] and found significant
weaknesses in 15 critical areas. To address the weaknesses, IRS is
currently developing capital planning guidance that is based on our IT
investment management framework. This guidance is to be issued by late
summer 2002, but a schedule for implementing it had yet to be
determined. In addition, IRS had adopted and was in the process of
implementing a cost model that is to enable it to account for the full
costs of operations and maintenance projects and determine how
effectively IRS projects are achieving program goals and mission needs.
IRS plans to have the cost model in place and operational by June 30 of
this year so that it can validate its fiscal year 2003 IS appropriation
request and begin using the cost model to develop the fiscal year 2004
request.
Although IRS has initiated actions to address the previously noted
weaknesses, we are concerned about whether these actions will be
implemented in time to have meaningful impact on formulation of the
fiscal year 2004 budget request. For example, IRS had not yet developed
a plan and schedule for implementing its IT capital planning guidance.
In addition, IRS officials told us they are already beginning the
process to develop the fiscal year 2004 budget. Consequently, until IRS
overcomes its obstacles, the agency‘s future IS appropriation requests,
like its fiscal year 2003 request, will not be adequately justified.
Recommendation for Executive Action:
We recommend that the Commissioner of Internal Revenue direct the
Budget Director, Modernization, Information Systems, and Security
Services, to prepare IRS‘s fiscal year 2004 IS budget request in
accordance with leading organizations‘ best practices. At a minimum,
this should include (1) adopting these best practices as an explicit
priority and (2) employing these practices in time for use in
developing the fiscal year 2004 budget request.
Agency Comments:
In commenting on a draft of this report, the Commissioner of Internal
Revenue agreed with our recommendation, adding that IRS understands its
importance and is taking actions to fully implement it. The
Commissioner described IRS‘s ongoing and planned efforts relating to
implementing best practices and addressing our recommendation,
including specifying milestones for when these initiatives will be
fully implemented. The Commissioner‘s written comments are reprinted in
appendix I.
As you know, 31 U.S.C. 720 requires the head of a federal agency to
submit a written statement of the action taken on our recommendation to
the Senate Committee on Governmental Affairs and the House Committee on
Government Reform not later than 60 days from the date of this report.
A written statement must also be submitted to the House and Senate
Committees on Appropriations with the agency‘s first request for
appropriations made more than 60 days after the date of this report.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of Senate and House committees and subcommittees that
have appropriations, authorization, and oversight responsibilities for
IRS. We are also sending copies to the Secretary of the Treasury, the
Chairman of the IRS Oversight Board, and the Director of the Office of
Management and Budget. In addition, this report will be available at no
charge on the GAO Web site at http://www.gao.gov.
Should you or your staff have questions on matters discussed in this
report, please contact me at (202) 512-3439. I can also be reached by
e-mail at hiter@gao.gov. A GAO contact and key contributors to this
report are listed in appendix II.
Sincerely yours,
Randolph C. Hite Director, Information Technology Architecture and
Systems Issues:
Signed by Randolph C. Hite.
(310237):
FOOTNOTES
[1] U.S. General Accounting Office, Internal Revenue Service:
Assessment of Budget Request for Fiscal Year 2003 and Interim Results
of 2002 Tax Filing Season, GAO-02-580T (Washington, D.C.: Apr. 9,
2002).
[2] See, for example, U.S. General Accounting Office, Information
Technology Investment Management: A Framework for Assessing and
Improving Process Maturity, Exposure Draft, GAO/AIMD-10.1.23
(Washington, D.C.: May 2000, Version 1).
[3] GAO/AIMD-10.1.23.
[End of Section]
Appendix I: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C.
20224:
COMMISSIONER:
June 13, 2002:
Mr. Joel C. Willemssen Managing Director, Information Technology
Issues:
U.S. General Accounting Office 441 G Street, N.W. Washington, D.C.
20548:
Dear Mr. Willemssen:
I am writing to comment on the General Accounting Office (GAO) Draft
Report, ’Internal Revenue Service: Improving Adequacy of Information
Systems Budget Justification (Job Code 310237).“ The GAO‘s report
recommending improvement to the analysis and justification of our
information systems budget is accurate and timely. The Modernization
Information Technology and Security (MITS) Services organization is
reorganizing and realigning people, operations, and service delivery to
IRS customers, which will help us apply financial best practices to
improve:
* Budget development:
* Investment decisions:
* Information technology resources management:
During the past six months, MITS Services has fundamentally improved
the financial management and budgeting processes for IT funding by
aligning the budget for FY 2002 - FY 2004 with:
* Responsible organizations and executives:
* Specific operational activities:
* Specific projects for investments:
We included in this process consistent budget planning and forecasting
for all IT resources and performance measures for each program area.
We also realigned the MITS Services budgetary resources to meet the IRS
business priorities within essentially flat budgets from FY 2002 - FY
2004. We prioritized significant investment projects through an agency-
wide portfolio management process that included Tiers A, B, and a
significant portion of C. For the first time, we included
infrastructure
investments in the portfolio prioritization that resulted in aggressive
targets and significant savings in operational and maintenance
activities and funding increases to modernization support, high-speed
remote access for revenue agents, and improvement projects for
operating
division to provide enhancements of installed systems.
Over the last six months, we have aggressively used best practices in
developing our FY 2004 budget request.We also used best practices to
analyze and allocate our FY 2004 plan and budget. We will continue to
fully implement the best practices for operating and maintaining
existing systems and improving our planning and budgeting procedures.
We understand the importance of correcting the issues you identified.
We are taking actions to resolve them. I have enclosed our response to
your recommendations. Thank you for your hard work in preparing this
comprehensive report, your support of the IRS, and your ongoing
counsel.
Sincerely,
Charles O. Rossotti:
Signed by Charles O. Rossotti:
Enclosure:
Response to the GAO Recommendations Improving Adequacy of Information
Systems Budget Justification (Job Code 310237):
The GAO report contains four recommendations based on the leading
private and public sector organizations‘ systems-centered approach to
managing new investments and their operations and maintenance of
existing systems. We are taking the following actions in response:
1. Identifying operations and maintenance projects and systems for
inclusion in budget requests. As part of the MITS Services
reorganization, the Directors of Information Technology Services (ITS),
Security, and Human Resources andTraining are now planning and
budgeting all MITS Services resources. The MITS Services Directors
identified program activities, operations, and maintenance projects
that support daily operations with the goal to reduce costs and align
resources to improve service delivery. This included reviewing and
realigning current operations and maintenance projects and systems
for the FY 2002, FY 2003, and FY 2004 budgets. To improve service
delivery and performance, we used a pilot activity-based costing
software package called the ’IT Cost-of-Services model“ to aid in
allocating labor and non-labor resources. The MITS Services Directors
spent considerable time during the first six months of FY 2002
identifying activities and cost drivers within their respective
units. We used this information and performance metrics to analyze
and project costs for the FY 2004 budget. The IT Cost-of-Services
model (still in development) includes all MITS Services activities,
and we are using it to plan, project, and report costs for business
tasks/activities funded by the IT budget (labor and non-labor). We
plan to complete the model design and pilot during the final quarter
of FY 2002.
2. Assessing these projects or systems based on costs, benefits, and
risks to the organization. The MITS Services organization uses a
business case methodology to assess proposed investments in the
Business Systems Modernization (BSM) program. In addition, we are
developing a capital planning guide to provide capital planning and
investment control, budget formulation and execution, and procurement
and acquisition processes and procedures. We are applying business case
and capital planning methodology to MITS Services‘ current operations
and maintenance activities. For the FY 2004 budget, the MITS Services
senior team is using the newly identified IT program activities and
projects to assess projected costs for security, web services, end user
support (Tier III), business systems development, and enterprise
operations. However, because we have not fully developed the process,
we are assessing the benefits and risks at a higher level than called
for by the GAO. We are designing a capital planning process to address,
in detail, prioritization and cost benefit analysis with risk
assessments. We anticipate developing a draft capital planning guide by
September 2002.
3. Analyzing these projects as a portfolio of competing funding
options. The MITS Services organization addressed program activities
and competing priorities within a flat budget for FY 2003 and FY 2004.
Specifically, we are managing MITS Services program budget as a
portfolio. Working within a known funding allocation for the
Information Systems Multi-Year (ISY) budget, the MITS Services senior
leadership team analyzed all hardware and software operations and
maintenance funding as one portfolio. This included comparing
requirements for end user support (Tier III), enterprise operations,
business systems development, web services, security requirements, and
general management. For the Tier B projects, MITS Services led a
prioritization process with the business systems staffs of the business
units to assess funding needs for Tier B projects. We realize we need
to implement a consistent process to manage our portfolio and
prioritize business requirements from the IRS business units. The
capital planning guide will include requirements for IT portfolio
management and the IRS‘s planning, budgeting, and performance
management policies, processes, and practices.
4. Using this information to develop and support budget requests. The
MITS Services organization used costs, benefits, and risk and
performance measures for planning and budgeting IT services at a high
level for the FY 2004 budget. For the FY 2004 budget, we believe we
have initiated a process to establish a robust portfolio of IT
activities for operating and maintaining the ISY $1.5 billion budget.
This process includes using the IT Cost-of-Services model to provide a
bridge between traditional budget planning and reporting and the MITS
Services operations. The model includes:
* Developing a Capital Planning Guide:
* Developing Business Case processes required for new IT funding
requests, patterned after the BSM method:
* Developing an IT project portfolio, patterned after the BSM process:
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gary N. Mountjoy, (202) 512-6367:
Staff Acknowledgments:
In addition to the individual named above, other key contributors to
this report were Bernard R. Anderson, Michael P. Fruitman, Timothy D.
Hopkins, and Ona M. Noble.
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