IRS Modernization
Continued Progress Necessary for Improving Service to Taxpayers and Ensuring Compliance Gao ID: GAO-03-796T May 20, 2003Congress passed the IRS Restructuring and Reform Act of 1998 in response to frustration with the Internal Revenue Service's (IRS) inability to effectively carry out its mission. IRS's inability to deliver new computer systems that worked, allegations of abuse of taxpayers by IRS employees, and taxpayers greeted by busy signals when calling IRS for assistance all fed the frustration. The act set two goals for IRS--improve service to taxpayers while continuing to enforce compliance with the tax laws. The act also mandated annual joint congressional oversight hearings, of which this is the fifth and final.
IRS's accomplishments in the 5 years since the act was passed are significant. IRS has increased its capacity to manage with, for example, more effective controls over information system acquisition and better performance measures. In addition, the improvements have had a noticeable impact on service to taxpayers. Taxpayers have an easier time reaching IRS by telephone and are increasingly using IRS's Web site to download tax forms and publications and check the status of their refunds. Nevertheless, IRS is only part of the way to where taxpayers and Congress expect it to be. Compliance is perhaps IRS's greatest challenge looking forward. Although IRS lacks current data about the level of voluntary compliance, what is known is that there have been significant and pervasive declines in many of IRS's key compliance and collections programs. As a result of these declines, taxpayers have less incentive to voluntarily comply, thereby potentially undermining the integrity of the tax system and risking revenue collections. Reversing this decline will be a challenge. Another challenge will be closing the gap between the level and quality of taxpayer services that IRS provides and what Congress and taxpayers want and expect. Despite improvements, almost one-third of callers receive busy signals or hang up without receiving service, and almost 20 percent get incorrect answers to tax law questions. The means for realizing IRS's goals is continued progress modernizing, but this will be a challenge. The scope and complexity of the business systems modernization is growing, but management capacity is still maturing. Long-standing computer security weaknesses continue to threaten the confidentiality, integrity, and availability of sensitive systems and taxpayer data. Performance, financial, and human capital management all need further improvement. IRS is also challenged to realize the increased staffing levels for service and compliance called for in recent IRS budget requests.
GAO-03-796T, IRS Modernization: Continued Progress Necessary for Improving Service to Taxpayers and Ensuring Compliance
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United States General Accounting Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Tuesday, May 20, 2003:
IRS Modernization:
Continued Progress Necessary for Improving Service to Taxpayers and
Ensuring Compliance:
Statement of James R. White
Director, Strategic Issues:
Robert F. Dacey
Director, Information Technology Systems Issues:
Steven J. Sebastian:
Director, Financial Management and Assurance:
GAO-03-796T:
GAO Highlights:
Highlights of GAO-03-796T, a report to Congressional Committees
Why GAO Did This Study:
Congress passed the IRS Restructuring and Reform Act of 1998 in
response to frustration with the Internal Revenue Service‘s (IRS)
inability to effectively carry out its mission. IRS‘s inability to
deliver new computer systems that worked, allegations of abuse of
taxpayers by IRS employees, and taxpayers greeted by busy signals when
calling IRS for assistance all fed the frustration. The act set two
goals for IRS”improve service to taxpayers while continuing to enforce
compliance with the tax laws. The act also mandated annual joint
congressional oversight hearings, of which this is the fifth and
final.
What GAO Found:
IRS‘s accomplishments in the 5 years since the act was passed are
significant. IRS has increased its capacity to manage with, for
example, more effective controls over information system acquisition
and better performance measures. In addition, the improvements have
had a noticeable impact on service to taxpayers. Taxpayers have an
easier time reaching IRS by telephone and are increasingly using IRS‘s
Web site to download tax forms and publications and check the status
of their refunds. Nevertheless, IRS is only part of the way to where
taxpayers and Congress expect it to be.
Compliance is perhaps IRS‘s greatest challenge looking forward.
Although IRS lacks current data about the level of voluntary
compliance, what is known is that there have been significant and
pervasive declines in many of IRS‘s key compliance and collections
programs. As a result of these declines, taxpayers have less
incentive to voluntarily comply, thereby potentially undermining the
integrity of the tax system and risking revenue collections.
Reversing this decline will be a challenge. Another challenge will be
closing the gap between the level and quality of taxpayer services
that IRS provides and what Congress and taxpayers want and expect.
Despite improvements, almost one-third of callers receive busy signals
or hang up without receiving service, and almost 20 percent get
incorrect answers to tax law questions.
The means for realizing IRS‘s goals is continued progress modernizing,
but this will be a challenge. The scope and complexity of the business
systems modernization is growing, but management capacity is still
maturing. Long-standing computer security weaknesses continue to
threaten the confidentiality, integrity, and availability of sensitive
systems and taxpayer data. Performance, financial, and human capital
management all need further improvement. IRS is also challenged to
realize the increased staffing levels for service and compliance
called for in recent IRS budget requests.
what GAO Recommends:
GAO is not making any new recommendations. However, numerous
recommendations made in previous GAO reports about how to deal with
the challenges facing IRS are cited.
www.gao.gov/cgi-bin/getrpt?GAO-03-796T.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact James R. White at (202) 512-9110 or
whitej@gao.gov.
[End of section]
Mr. Chairman and Members of the Committees:
We are pleased to be here today to contribute to this joint oversight
hearing on the Internal Revenue Service (IRS). Five years ago, Congress
passed the IRS Reform and Restructuring Act of 1998[Footnote 1]
(Restructuring Act), as part of an effort to modernize IRS and provide
taxpayers with additional rights and protections. In this hearing, the
fifth and final one mandated by the Restructuring Act, we will report
on IRS's accomplishments over recent years and the challenges ahead.
Throughout the 1990s, Congress grew increasingly frustrated with IRS's
inability to effectively carry out its mission. IRS's inability to
deliver new computer systems that worked, allegations of abuse of
taxpayers by IRS employees, and taxpayers greeted by busy signals when
calling IRS for assistance all fed the frustration. In response,
Congress established the National Commission on Restructuring IRS in
1995 and passed the Restructuring Act in 1998, which increased
Congress's oversight of the agency. In passing the act, Congress set
two basic goals for IRS: improve service to taxpayers while continuing
to enforce compliance with the tax laws.
Since passing the Restructuring Act, Congress has maintained its
increased oversight of IRS. For example, Congress has reviewed IRS's
expenditure plans for its Business Systems Modernization (BSM) program
before allowing authorized funds to be spent. Congressional committees
have also held numerous hearings on IRS's modernization progress,
including the five joint oversight hearings.
In addition to oversight, Congress has invested in IRS. In the last 5
years, Congress has appropriated $1.35 billion for BSM. Congress also
has virtually fully funded IRS's annual budget requests for each year.
Now, halfway through the 10 years that the then Commissioner projected
modernization would take, is a good time to take stock--to look back on
what has been accomplished to date. We are pleased to report that,
while still far from realizing the goals set by the Restructuring Act,
what has been accomplished is significant.
* IRS has increased its capacity to manage. While still only partway to
where it needs to be, IRS has put in place an organizational structure
and improved processes to set strategic priorities, allocate resources,
and achieve results aligned with priorities. IRS has established a
strategic planning and budgeting process, put in place many of the
management controls needed to effectively acquire and implement
modernized business information systems, reorganized around taxpayer
groups, established a balanced performance measurement system,
implemented a new employee evaluation system, and issued reliable
annual financial statements.
:
* The modernization accomplishments to date have had a noticeable
impact on service to taxpayers. For example, taxpayers are more
frequently reaching, and waiting less time to speak to, telephone
assistors and are increasingly using IRS's Internet Web site to
download forms and publications and get other types of information,
such as the status of their refund.
The service improvements mean that the congressional oversight, efforts
made by IRS managers and employees, and dollars invested in
modernization are beginning to show payoffs that American taxpayers can
see. Less apparent on the list of accomplishments is compliance. While
several significant compliance efforts have been started, few have been
completed.
With a new commissioner just confirmed, now is also a good time to list
the challenges facing IRS in the coming 5 years. Last year in this same
hearing, we said that IRS was at a critical juncture, in part, because
of the impending change of commissioners and the challenges a new
commissioner would face. With the change just completed, IRS remains at
essentially the same critical juncture. Both of IRS's goals--improving
taxpayer service and ensuring compliance--are challenges. Similarly,
the means for achieving these goals--modernization of management and
systems--is a challenge. Without continued focus by managers and
employees on modernizing, IRS would put the progress made to date at
risk and jeopardize the possibility of realizing Congress's twin goals
for modernization.
* The area where progress is least apparent--compliance--is perhaps
IRS's most significant risk and greatest challenge looking forward.
Compliance is a risk, in part, because neither IRS nor we know the
level of voluntary compliance, which compliance problems are the most
significant, and what the impact changes and IRS's compliance programs
and efforts have on the level of voluntary compliance. What is known is
that there have been significant and pervasive declines in many of
IRS's key compliance and collections programs. The declines can be seen
in measures such as cases closed, staffing levels, cases not worked,
and the inventory of uncollected tax debt. As a result of these
declines, taxpayers have less incentive to voluntarily comply, thereby
potentially undermining the integrity of the tax system and risking
revenue collections. Reversing this decline will be a challenge.
* While service to taxpayers has improved, gaps remain between the
quality of taxpayer services that IRS provides and what Congress and
taxpayers want and expect. For example, while the percentage of callers
who receive busy signals or hang up without receiving service has
fallen since 1997, it still remains at 32 percent.
* Continuing the progress that has been made in modernizing management
remains another challenge. The scope and complexity of the BSM is
growing, but management capacity is still maturing. Long-standing
computer security weaknesses continue to threaten the confidentially,
integrity, and availability of sensitive systems and taxpayer data.
Performance, financial, and human capital management all need further
improvement. Finally, realizing the increased staffing levels for
service and compliance called for in recent IRS budget requests has not
always been possible.
Our assessment of both major accomplishments and key challenges is
based primarily on recently issued GAO products and ongoing reviews.
IRS Has Improved Management and Taxpayer Service:
Over the 5 years since the Restructuring Act was passed, IRS has made
significant progress in modernizing. Figure 1 shows some of the major
accomplishments of the last 5 years. The figure includes actions that
have been implemented or completed and that represent significant steps
in the overall modernization effort. The figure is meant to illustrate
important progress--it does not show every accomplishment.
Figure 1: Selected Major IRS Accomplishments in Modernizing, 1999-2003:
[See PDF for image]
[End of figure]
Most of the accomplishments shown in figure 1 are internal management
improvements that will not be noticed by taxpayers, such as management
controls for information systems acquisition and implementation. While
such improvements do not directly affect taxpayers, they should lay a
foundation for improving service and ensuring compliance.
Figure 1 does include some accomplishments that are noticeable to
taxpayers such as the ability to check the status of their refund using
the Internet and the increase in electronically filed returns. One
accomplishment--the new software for revenue agents to help conduct
business audits--involves IRS's enforcement programs.
IRS Has Made Management Improvements:
IRS has completed a number of major modernization steps to help improve
management of its operations. While IRS still faces challenges in each
of the areas discussed below, the steps completed to date are major
accomplishments.
Modernizing Business Systems:
IRS's multibillion dollar BSM program is critical to the success of the
agency's efforts to transform its manual, paper-intensive business
operations and fulfill its obligations under the Restructuring Act. To
date, about $1.35 billion has been appropriated and released for BSM.
IRS's challenges in modernizing its business systems date back to the
mid-1990s, when we reported on a number of technical and management
weaknesses and made a series of recommendations for correcting them and
limiting modernization activities and spending until they were
corrected.[Footnote 2] It was then that we designated the modernization
program as a high-risk area.[Footnote 3] These challenges remained
virtually unchanged until 1999, as IRS made limited progress in
correcting its weaknesses and our ongoing reviews of the program
continued to identify additional weaknesses and produce additional
recommendations.
Beginning in 1999, IRS started making progress in strengthening its
modernization management controls and capabilities. For example, IRS
submitted and Congress approved the first of a series of expenditure,
or spending, plans for BSM. These plans facilitate congressional
oversight and provide a description of the expenditures, functionality,
and delivery schedule planned for each project. Other notable
accomplishments since 1999 include (1) developing and using a
modernization blueprint, commonly called an enterprise architecture, to
guide and constrain its modernization projects and (2) investing
incrementally in its projects, both of which are leading practices of
successful public and private sector organizations.
Since 2001, IRS has progressed in establishing the infrastructure on
which future business applications will run. Establishing this
infrastructure is a necessary prerequisite for business applications
that are intended to provide benefits to taxpayers and IRS. In
addition, it has delivered three applications that are today producing
benefits. For example, the Customer Communications 2001 project
improved the telecommunications infrastructure, including telephone
call management, call routing, and customer self-service
applications.[Footnote 4]
In response to congressional direction and our previous concerns about
projects getting ahead of the agency's ability to manage them
effectively,[Footnote 5] IRS scaled back its projects, giving priority
to implementing needed management capacity. In our February 2002
report,[Footnote 6] we again recommended that the Commissioner of
Internal Revenue reconsider the scope and pace of the program to better
balance it with the agency's capacity to handle the workload. In
response, IRS took steps to better align the pace of the program with
the maturity of IRS's controls and management capacity, including
reassessing the portfolio of projects that it had planned to proceed
with during the remainder of fiscal year 2002 and reducing the planned
scope and pace of the program for fiscal year 2003.
Securing Taxpayer Information:
Information security is a critical consideration for any organization
that depends on information systems and computer networks to carry out
its mission or business. It is especially important for government
agencies, like IRS, where the public's trust is essential. The dramatic
expansion in computer interconnectivity and the rapid increase in the
use of the Internet are changing the way IRS communicates and conducts
business. Without proper safeguards they also pose enormous risks that
make it easier for individuals and groups with malicious intent to
access sensitive information, commit fraud, or disrupt operations.
Due to the nature of its mission, IRS collects and maintains a
significant amount of personal and financial data on each American
taxpayer. These data typically include the taxpayer's name, address,
Social Security number, dependents, and income. The confidentiality of
this sensitive information is important because if this information is
disclosed to unauthorized individuals, taxpayers could be exposed to a
loss of privacy and to financial loss and damages resulting from
identity theft and financial crimes.
IRS has made important progress toward improving information security
over taxpayer data and implementing a comprehensive agencywide
information security program. It has established and updated a
substantial set of information security policies, standards, and
guidelines that generally provide appropriate guidance to personnel
responsible for securing IRS information systems and data. If
effectively implemented, these would protect IRS information systems
and taxpayer data from many threats. IRS has also increased the
resources devoted to securing its systems and data--increasing, for
example, the number of specialists assigned to the office responsible
for ensuring that IRS has effective security programs in place. To help
improve the security of IRS's systems and taxpayer data, IRS has also
(1) implemented and improved control measures that limit physical
access to facilities and computing resources and (2) established a
virus protection and eradication program that helps to protect against
new malicious software threats as they emerge.
Reorganizing IRS and Managing Performance:
A major principle of IRS's modernization strategy is that understanding
the taxpayer's point of view and improving service is fundamental to
helping the majority of taxpayers who are willing to comply with the
tax laws and pay what they owe. To help realize this customer-focused
approach to providing service, in October 2000 IRS reorganized into
four divisions, each responsible for a group of taxpayers with similar
needs, such as IRS's Small Business/Self-Employed Division.
A sound organizational performance and human capital management system
is essential for assessing how well IRS meets its goals and for
identifying and making programmatic improvements. IRS has made progress
by establishing a system of balanced measures to hold managers and
frontline staff more accountable for improving performance. For
example, IRS determined that the three elements of balanced measures
were customer satisfaction, employee satisfaction, and business results
(quality and quantity measures) to ensure balance among priorities.
Similarly, in October 2001, IRS implemented its new employee evaluation
system for frontline employees. This main human capital management
system, like the one implemented earlier for executives and managers,
was designed to structurally align performance expectations for
employees with IRS's three strategic goals to encourage behaviors and
actions that support and advance those goals.
In 2000, IRS implemented a new strategic planning and budgeting process
that provides the framework for developing goals, objectives, and
measures at the operating division level. Although we have not
evaluated the effect of the process on IRS performance, the operating
divisions are identifying strategic goals intended to be tailored to
the specific characteristics and needs of their taxpayers. IRS senior
management is also using the process to reconcile competing priorities
and resource needs of the operating divisions.
Improving Financial Management:
Current and accurate financial information is critical to informed
decision making by senior management. IRS has made considerable
progress towards improving financial management, including achieving
unqualified (clean) audit opinions on financial statements.
When former Commissioner Rossotti was confirmed in November 1997, IRS
was exhibiting virtually the same pervasive financial management
weaknesses we had been reporting since we began auditing IRS's
financial statements in 1992. These weaknesses, which led GAO to add
IRS financial management to its high-risk list in 1995,[Footnote 7]
stemmed not only from IRS's reliance on obsolete and inadequate
financial management systems, but also from the serious weaknesses in
IRS's policies and procedures. In the five years that have passed since
1997, however, IRS has made considerable progress in addressing
weaknesses in its financial management systems and internal controls
by, for example, committing extensive additional resources. This and
other efforts have resulted in reducing the number of material internal
control weaknesses and attaining unqualified opinions on its financial
statements. This achievement was due in no small part to the strong
commitment made by senior IRS management.
During our audit of IRS's custodial financial statements[Footnote 8] in
fiscal year 1997, we found material weaknesses in IRS's internal
controls that had shown little improvement since our first audit in
fiscal year 1992. These weaknesses included an inadequate financial
reporting process, deficiencies in controls to properly manage unpaid
assessments, and deficiencies controls over tax refunds and computer
security. To overcome these weaknesses, IRS implemented extensive
compensating procedures that enabled it to derive reliable balances
related to its custodial activity such as taxes receivable, enabling
IRS to receive, for the first time in fiscal year 1997, an unqualified
opinion on its custodial financial statements.
During fiscal years 1998 and 1999, we were unable to issue a clean
opinion on five of IRS's six financial statements due to the continued
affects of the material weaknesses in IRS's internal controls. We were
able to continue to issue unqualified opinions on IRS's statements of
custodial activity, primarily due to IRS's extensive use of
compensating procedures.
Beginning in fiscal year 2000, IRS received an unqualified opinion on
all six of its financial statements by successfully producing a single
set of financial statements that were fairly stated in all material
respects. This significant achievement was made possible by years of
strong commitment and hard work by both IRS senior management and staff
to develop and implement compensating procedures to overcome the
fundamental systems and internal control deficiencies that continued to
exist and enable IRS to report reliable financial balances at fiscal
year-end. IRS also instituted monthly reconciliations of its Fund
Balance with Treasury, a process similar to companies or individuals
reconciling their checkbooks to monthly bank statements, thereby
eliminating this issue as a material weakness.
In fiscal year 2002 IRS reported its financial results and received an
unqualified audit opinion 6 weeks after the close of the fiscal year--
about 75 days ahead of the reporting deadline required by the Office of
Management and Budget. As before, this achievement, and continued
progress in addressing its material internal control weakness, was the
culmination of years of IRS efforts to refine the compensating
procedures it has relied on to overcome material weaknesses, in its
internal controls, as well as making substantive improvements in the
way it records transactions, maintains records, and reports financial
results.
Taxpayers Have Seen Some Improvements in Service:
IRS has improved and expanded service to taxpayers, including the
accessibility of telephone assistance and increased electronic filing
and Internet services. These improvements are a significant
accomplishment, but IRS taxpayer service is not yet at the level that
taxpayers and Congress want. Also, IRS has begun to reap some rewards
from electronic filing--for example, the closing of its paper
processing operations at its Brookhaven location.
Improved Telephone Service:
Since the mid-1990s, access to telephone assistance, an important
function that affects millions of taxpayers, has improved. In 1997,
about 49 percent of calls to IRS primary assistance lines either
received a busy signal or were abandoned before being answered. This
compares to about 32 percent of calls to date in 2003. As figure 2
illustrates, other measures of access show improvement as well. The
percentage of calls where taxpayers attempted to reach an assistor and
received service increased from about 70 to 83 percent between the 2001
and 2003 filing seasons. The figure also shows that callers are waiting
less time to speak with an assistor and are hanging up less frequently
before getting through. Telephone service is important because it
affects so many taxpayers. In 2002, IRS received over 100 million phone
calls.
IRS's telephone service improvements are, in part, the results of
numerous improvement efforts sustained over time. In 1999, IRS
centralized its toll-free telephone operations and established the
Joint Operations Center to enable it to route calls to assistors across
the country based on actual availability data. Similarly, from 2000
through 2003, IRS made several business process changes and implemented
new technology. For example, in 2001, IRS shifted millions of calls to
its automated service so it could use its assistors to answer more
challenging taxpayer calls. Also, as part of its Customer
Communications Project, IRS enhanced its call routing system.
Figure 2 shows that the accuracy of tax law information provided to
taxpayers by assistors has remained relatively stable. According to IRS
officials, accuracy stayed stable despite simpler calls being routed
away from assistors to automated systems.
Figure 2: Improvements in IRS's Service and Assistor Response, 2000-
2003:
[See PDF for image]
Note: CSR level of service-of the calls that IRS estimates were from
taxpayers attempting to reach an assistor, the calls that received
service; Assistor response level-of the calls that reached an assistor,
the percentage in which the caller waited 30 seconds or less; Abandon
rate-of the calls routed to an assistor, the percentage that hung up
before speaking to an assistor; and Tax law correct response rate-of
the calls in which IRS provided tax law information, the percentage in
which the assistor provided correct answers. IRS has comparable data
only for the years shown. Accessibility data covers the period of
January through mid-April. The correct response rate covers the period
January through April and is an estimate (90-percent confidence level
+/-1 percentage point).
[End of figure]
Increased Electronic Filing and Internet Services:
Although it still represents less than half of all individual income
tax returns, electronic filing grew from almost 12 million returns in
1995 to an estimated 53 million in 2003, as shown in figure 3. The
figure also shows that the number of paper returns is declining. The
growth of electronic filing is one key to IRS's modernization strategy,
because electronic filing allows IRS to control costs and improve
customer service by reducing labor-intensive processing of paper tax
returns. As a result, IRS is phasing out its paper processing
operations in the Brookhaven location.
Figure 3: Increase in Individual Electronic Returns and Decrease in
Paper Returns, 1995-2003:
[See PDF for image]
Note: GAO estimated that, based on the number of returns received
electronically to date, IRS will receive a total of 53 million returns
filed electronically in 2003.
[End of figure]
Another indication that taxpayers are receiving payoffs from
modernization is the breadth and quality of the services provided on
IRS's Internet Web site. The services being offered to taxpayers and
tax practitioners via the Web site have grown considerably over the
last few years, and it is used more each year by taxpayers and tax
practitioners. As of March 31, 2003, about 283 million forms and
publications had been downloaded since the beginning of the filing
season.
IRS's Web site is a critical part of modernization because, according
to IRS, it is more cost-effective than other methods of providing
taxpayer assistance, such as answering telephone calls. The IRS Web
site currently provides a way for taxpayers and tax practitioners to
receive assistance without having to call or visit an IRS office. Among
other things, the site provides the potential to download hundreds of
tax forms and publications, contains current information on tax issues
and electronic filing, and, in a more recent feature, gives taxpayers
the opportunity to check the status of their refunds. The capability to
check the status of refunds is particularly important because IRS data
shows it has decreased the refund call inquiries handled by IRS's
telephone operations and has the potential to further decrease those
calls, enabling assistors to handle more complicated calls about tax
laws or customer accounts that cannot be answered through automation.
Key Challenges, Especially in Compliance, Remain:
Despite the progress modernizing and the improvements in taxpayer
service, IRS faces significant challenges looking ahead. Perhaps IRS's
most significant risks and biggest challenges are in the area of
compliance--an area wherein accomplishments have not been very
apparent. Compliance is a risk, in part, because IRS does not have
current data on how well taxpayers are complying with the tax laws and
therefore cannot appropriately target areas for improvement nor can
assess the impact changes to its compliance program have on the level
of voluntary compliance. However, the available data show declines in
many of IRS's enforcement activities, such as collections. The declines
have prompted concerns that taxpayers' willingness to voluntarily
comply could be put at risk. Meeting IRS's goal of ensuring compliance
is a challenge because of the effort and resources that will be
required to reverse these program declines.
Meeting IRS's goal of improving taxpayer service also presents a
challenge. Despite IRS's accomplishments, there remains a gap between
the quality of service that taxpayers currently receive and the service
that taxpayers and Congress want and expect.
A key to ensuring compliance and improving taxpayer service is
continuing to modernize IRS's management and systems. This includes
delivering modernized systems; ensuring computer systems security;
improving performance, financial, and human capital management; and
increasing resources for taxpayer service and compliance.
Declines in Enforcement Programs Make Ensuring Compliance a Challenge:
A visible enforcement program is considered by many as critical for our
tax system to encourage voluntary compliance with the tax laws. While
improving taxpayer service may enhance voluntary compliance, taxpayers'
willingness to voluntarily comply with the tax laws depends in part on
their having confidence that their friends, neighbors, and business
competitors are paying their fair share of taxes. To provide that
confidence, IRS operates a number of compliance and collection
programs, including computerized checks for nonfiling and underreported
income, audits, and telephone and field collections. Collecting taxes
due the government[Footnote 9] has always been a challenge for IRS, but
in recent years the challenge has grown.
Limited Information on Voluntary Compliance:
Understanding taxpayers' compliance with the nation's tax laws is
essential to IRS improving the effectiveness of its programs to enforce
and promote voluntary compliance. While IRS strives to ensure that
enforcement audits are targeted at noncompliant taxpayers, this has
become increasingly difficult to do because the information used to
identify potentially noncompliant tax returns is out of date. We remain
concerned about IRS's ability to appropriately allocate its enforcement
resources, including staff, to its various compliance and collections
activities. Without current data on voluntary compliance, IRS does not
know which is the highest priority area of noncompliance.
IRS's new effort to review compliance, the National Research Program
(NRP), should, if implemented as planned, provide IRS with the first
up-to-date information on compliance rates and sources of noncompliance
since it last measured the compliance rate using 1988 tax returns. IRS
has agreed with recommendations we made regarding implementation of NRP
and more effective use of such data in the strategic, planning,
budgeting, and performance management process.
Enforcement Program Declines:
Absent measures of voluntary compliance, the only compliance-related
data available are on IRS's enforcement programs. In recent years,
steep declines have occurred in some of IRS's compliance programs for
individual taxpayers and in programs to collect delinquent taxes. These
trends have triggered concerns that taxpayers' motivation to
voluntarily comply with their tax obligations could be adversely
affected. Since the mid-1990s, we have issued six reports on IRS
compliance and collection trends in response to congressional
concerns.[Footnote 10]
Figure 4 shows compliance program trends for various income ranges. The
audit contact rates for the highest and lowest income individuals
essentially converged at around .8 percent in fiscal years 2001 and
2002. Most of the audits of the lowest income individuals dealt with
earned income credit claims. Document matching contact rates[Footnote
11] for all three income ranges rose somewhat from 2001 through 2002.
However, rates for all three income ranges ended significantly lower in
2002 than 1993.
Figure 4: IRS Individual Audit and Document Matching Contact Rates by
Income Level, Fiscal Years 1993-2002:
[See PDF for image]
[End of figure]
Collection programs have also declined as shown in figure 5. As we
reported in May 2002, from fiscal years 1996 through 2001 trends in the
collection of delinquent taxes showed almost universal declines in
collection program performance, whether measured in terms of percentage
of workload completed,[Footnote 12] cases closed, direct staff time,
productivity, or unpaid taxes collected.[Footnote 13] From 1996 through
2002, IRS was unable to keep up with the growth in collections
workload.
Figure 5: Percentage of Collections Workload Not Completed, Fiscal
Years 1996 to 2002:
[See PDF for image]
[End of figure]
The increasing gap between collection workload and work completed led
IRS in March 1999 to start deferring collection action on billions of
dollars in delinquencies. By the end of fiscal year 2002, after the
deferral policy had been in place for about 3 and one-half years, IRS
had deferred taking collection action on about $15 billion in unpaid
taxes, interest, and penalties. As of 2002, IRS was deferring
collection action on about one out of three collection cases. As of
September 30, 2002, IRS had a total inventory of $112 billion of known
unpaid taxes with some collection potential.[Footnote 14]
Earned Income Credit Noncompliance:
There are significant compliance problems associated with the EIC that
have led us to list IRS's tax administration of the credit as a high-
risk area for the federal government.[Footnote 15] Under the code,
taxpayers who meet earned income, family size, and other requirements
are authorized to claim the EIC. The credit offsets the impact of the
Social Security taxes paid by low-income workers and is intended to
encourage low-income persons to seek work rather than welfare. For most
recipients, the credit amount exceeds the amount of their income tax
liability; in such cases, because the credit is refundable, the
taxpayers receive a refund.
IRS estimates that of the $31.3 billion in EICs claimed by taxpayers in
tax year 1999, about $8.5 billion to $9.9 billion should not have been
paid.[Footnote 16] This level of noncompliance has remained relatively
unchanged even after a 5-year effort to reduce it. IRS has to balance
its efforts to combat noncompliance with its efforts to ensure that
qualified persons claim the credit. With the data available, we were
able to estimate that for every three households that claimed the
credit, there was an additional eligible household that did
not.[Footnote 17] Because IRS has struggled to reduce the overclaim
rate and because of the magnitude of the financial risk, EIC
noncompliance has been and remains both a management challenge and a
high-risk area.
Early in 2002, the Assistant Secretary of the Treasury and the IRS
Commissioner established a joint task force to seek new approaches to
reduce EIC noncompliance. The task force sought to develop an approach
to validate EIC claimants' eligibility before refunds are made, while
minimizing claimants' burden and any impact on EIC's relatively high
participation rate. Through this initiative, administration of the EIC
program would become more like that of a social service program such as
Food Stamps or Social Security Disability, for which proof of
eligibility is required prior to receipt of any benefit. IRS's 2004
budget proposes new spending to implement this strategy and it intends
to ramp up rapidly. Planning and implementation for this initiative
will proceed simultaneously. The success of the initiative will depend
on careful planning and close management attention as IRS's
implementation progresses.
Closing the Gap between Actual and Desired Taxpayer Service Remains a
Challenge:
Despite progress, improving service to taxpayers remains a challenge
for IRS. The progress that IRS has made to date in modernizing has, as
noted, improved service but not to the level that taxpayers, Congress,
and IRS management agree is needed.
Providing good service to taxpayers by making it as easy as possible
for them to understand and meet their tax obligations could improve
voluntary compliance--payments and tax returns filed without IRS audit
and collection action--and reduce the need for these intrusive and
costly enforcement activities. According to IRS, preventing compliance
problems by educating and informing taxpayers, or helping taxpayers
resolve problems early on, is less expensive and time-consuming for
both IRS and the taxpayer than enforcement action taken later.
Facilitating voluntary compliance is especially important because the
U.S. tax system relies on it. About 98 percent of all tax revenue
collected is paid through withholding, remittances sent with tax
returns, or other forms of payment without any IRS enforcement action.
While IRS has improved service in some areas, millions of taxpayers
still have difficulty reaching IRS by telephone, and when they do, they
may not be able to rely on the accuracy of information IRS provides.
For example, IRS data shows that 32 percent of calls to IRS either
received a busy signal or were abandoned without receiving service. In
addition, about 20 percent of callers received inaccurate information
when calling IRS with tax law questions.
Similarly, the accuracy of the assistance provided at IRS's walk-in
sites is below expectations. While it has improved in recent years, 25
percent of answers provided were incorrect so far in 2003.
Revamping taxpayer service will require that IRS simultaneously meet
the other significant management challenges discussed in this
testimony. For example, to ensure that changes result in efficient,
improved service, IRS will need to establish consistent, comparable
measures and conduct more and better program evaluations to identify
ways to improve service.
Modernization Is Key to Improving Service and Ensuring Compliance:
Modernization is the means for achieving IRS's two goals of improving
service and ensuring compliance. Figure 6 shows four key components of
modernization. Each alone is a significant challenge--in combination
they are an even greater challenge.
Figure 6: IRS's Key Modernization Challenges:
[See PDF for image]
[End of figure]
Delivering Modernized Business Systems:
IRS's modernization strategy includes reengineering efforts intended to
automate or eliminate work, improve productivity, and free up staff
time that can then be redirected to service and compliance programs.
Reengineering efforts rely heavily on IRS's BSM program.
Despite important progress in IRS's BSM program, it remains a high-risk
challenge for two reasons.[Footnote 18] First, the scope and complexity
of the program are growing. Specifically, the number of projects under
way continues to increase, and the tasks associated with those projects
that are moving beyond design and into development are by their nature
more complex and risky. Second, IRS's modernization management capacity
is still maturing. For example, IRS has yet to fully implement a
strategic approach to ensuring that it has sufficient human capital
resources. It has also yet to fully implement management controls in
such areas as estimating costs and employing performance-based
contracting methods.
The continuing challenge for IRS is to ensure that the pace of
acquiring systems does not exceed the agency's ability to manage them
effectively, a problem we have reported[Footnote 19] in the past. The
imbalance between program pace and management capacity adds significant
cost, schedule, and performance risks that escalate as a program
advances. For example, as indicated in IRS's March 2003 expenditure
plan, most of the BSM initiatives or project milestones experienced
cost increases and/or schedule delays exceeding 10 percent of the
estimated cost and duration stated in the November 2001 plan. Moreover,
these risks increase as IRS moves forward because interdependencies
among current ongoing projects and the complexity of associated
workload activities to be performed increase dramatically as more
system projects are built and deployed.
IRS has acknowledged these risks and has initiatives planned or under
way to address them. The timely implementation of these initiatives is
critical. While the lack of controls can be risky in a project's early
stages, it is essential that such controls be in place when multiple
interdependent projects are being designed, developed, and implemented.
To mitigate this added risk, IRS needs to fully implement the remaining
management controls that we have recommended. Until that time, the BSM
program remains high risk, and we will continue to monitor IRS's
progress in this area.
As the BSM program moves forward, there are several other challenges
and risks to the successful and timely implementation of future planned
modernized systems. A major issue is the ability to successfully
integrate modernized systems with the reengineered business processes
being implemented in the operating divisions. Failure to coordinate the
acceptance and operation of new systems may result in increased costs
and delayed delivery of benefits to taxpayers. Finally, a major concern
for all aspects of the program is the extent to which the program will
be consistently funded in an environment of budgetary deficits and
competing priorities. Without a consistent level of funding, IRS will
have difficulty establishing the infrastructure needed to build and
sustain additional modernized systems and expediting the replacement of
the outdated systems currently in use.
Ensuring Computer Systems Security:
Although IRS has made important progress securing its systems,
information security remains a challenge. Long-standing computer
control weaknesses continue to threaten the confidentiality, integrity,
and availability of sensitive systems and taxpayer data. IRS's
inconsistent implementation of electronic access controls at its
facilities did not effectively prevent, limit, or detect access to
computing resources. In addition, weaknesses in other information
system controls (including physical security, segregation of duties,
software change controls, and service continuity) reduced IRS's
effectiveness in protecting and controlling physical access to assets,
minimizing the risk of errors or fraud, mitigating the risk of
unauthorized or inappropriate software programs, and ensuring the
continuity of data processing operations when unexpected interruptions
occur. Further, access to key computer applications was not always
limited to authorized persons for authorized purposes. These weaknesses
increased the vulnerability of data processed by IRS's information
systems and continued to expose IRS's tax processing operations to
disruption. As a result, we continued to report information security as
a material weakness in our report on IRS's fiscal year 2002 financial
statements.[Footnote 20]
An underlying cause of these weaknesses is that, although it has made
important progress, IRS had not yet fully implemented certain elements
of its agencywide information security program. The challenges facing
IRS are to adequately (1) identify and assess information security
risks to determine needed security measures, (2) implement and comply
with its security policies and controls to meet those needs, (3)
promote awareness and provide security-related training so that
employees understand the risks and the policies and controls that
mitigate them, (4) monitor the effectiveness of established policies
and controls, and (5) mitigate known security vulnerabilities. IRS has
acknowledged the seriousness of its information security weaknesses and
has revised its approach to implementing the agencywide information
security program. Until IRS can fully implement an effective program
and adequately mitigate its information security weaknesses, it will
remain at heightened risk of access to critical hardware and software
by unauthorized individuals, who could intentionally or inadvertently
read, add, alter, or delete sensitive data or computer programs. Such
individuals could possibly obtain personal taxpayer information and use
it to commit financial crimes in the taxpayer's name (identity fraud),
such as establishing credit and incurring debt.
Improving Performance, Financial, and Human Capital Management:
Challenges remain in three important areas of management--performance,
financial, and human capital. As noted in our discussion of
accomplishments, IRS has made significant progress in these three
areas. By continuing to show progress in these areas, IRS will be
better able to improve taxpayer service and better ensure compliance.
Performance Management:
Our work over recent years shows that IRS faces challenges in managing
and judging its performance.
* First, IRS needs to ensure that its organizational performance
measures are objective and reliable, consistent through time, and
limited to key performance indicators. Such performance measures would
enable IRS managers to monitor progress over time without being
overwhelmed by too much information.
:
* Second, IRS needs to associate explicit goals with its performance
measures. Without goals, it is difficult to determine if appropriate
progress is being made.
* Third, IRS needs to conduct more and better programs evaluations.
Such evaluations could help managers and staff better understand what
they are trying to accomplish, how their actual performance compares to
their objectives, and the reasons for any gaps. This would provide a
more informed basis for determining how to improve performance.
* Finally, in keeping with the Government Performance and Results Act
of 1993,[Footnote 21] IRS should continue its efforts to better link
budget requests with program results. Such a link could allow Congress
to make more informed budget decisions and better oversee IRS's use of
resources.
Financial Management:
Financial systems and internal control weaknesses continue to preclude
IRS from providing managers current, accurate financial information
with which to make day-to-day decisions affecting IRS's operations.
These weaknesses include:
* an inadequate financial reporting process, resulting in IRS not being
able to prepare reliable financial statements without extensive
compensating procedures or not having current and reliable ongoing
information to support management decision making and to prepare cost-
based performance measures;
* weaknesses in controls over billions in unpaid tax assessments,
resulting in IRS's inability to properly manage unpaid assessments and
leading to increased taxpayer burden;
* weaknesses in controls over the identification and collection of tax
revenues due the federal government and the issuance of tax refunds,
resulting in potentially billions of dollars in improper payments and
lost revenue to the federal government; and:
* weaknesses in controls over property and equipment, resulting in
IRS's inability to have reliable and timely information on its balance
of property and equipment throughout the year and to reasonably ensure
that its property and equipment are safeguarded and used only in
accordance with management policy.
These weaknesses and the computer security control weaknesses
previously discussed render IRS incapable of reporting current,
reliable information regarding its operations to management, Congress,
and the public and adversely affect its ability to effectively fulfill
its responsibilities as the nation's primary collector of federal
revenue. IRS's financial management has been on our list of high-risk
government operations since 1995.[Footnote 22]
The future challenge for IRS will be to continue the improvements made
in recent years and develop and implement the fundamental long-term
solutions that are needed to address the internal control weaknesses we
have identified. Resolving many of IRS's most serious financial
management challenges will depend on the successful implementation of
its new financial management system, which will not occur for several
years. For example, IRS's Integrated Financial System (IFS) is intended
to provide IRS with a single general ledger that is compliant with
existing standards and integrated with its subsidiary records. However,
IFS is not scheduled to be fully functional and able to provide
reliable cost information that can be used by IRS in routine management
decision making until at least fiscal year 2005. IRS is also
implementing the Customer Account Data Engine and the Custodial
Accounting Project to replace the current primary taxpayer database and
address IRS weaknesses in management of unpaid assessments. However,
these systems are not scheduled for full implementation until at least
fiscal year 2007, at which time IRS's custodial transactions will be
fully integrated with IFS. In the interim, several serious financial
management issues will continue to exist.
In the near term, however, some problems can be addressed through the
continued efforts and commitment of IRS senior management and staff.
IRS will need to continue to refine the accounting procedures it relies
on to compensate for the deficiencies in its automated systems. More
important, IRS will need to continue its efforts to enhance the way it
processes transactions, maintains records, and reports financial
results. Other problems, which involve IRS modernizing its financial
management systems, will take years to fully achieve and require the
continued commitment of the new Commissioner if they are to be brought
to a successful conclusion.
Human Capital Management:
IRS's new human capital performance management system could be a
powerful tool in helping the agency achieve its mission. The system
could reinforce behaviors that support strategic goals by clearly
aligning employee and organizational objectives, ensuring that
managers' expectations are specific and output-or outcome-oriented, and
monitoring whether employee feedback is useful and aligned with IRS's
goals. To help ensure IRS achieves such benefits, we have made several
recommendations. For example, for telephone performance, we have called
for systems and evaluations to identify gaps in assistors' skills, meet
training needs to fill those gaps, monitor and address the causes of
attrition, and ensure that human capital management practices help IRS
achieve taxpayer service goals. Similarly, with respect to BSM, we have
recommended full implementation of its strategic approach for ensuring
sufficient human capital resources.
Increasing Resources for Service and Compliance:
Realizing increased staffing levels for taxpayer service and compliance
programs, called for in IRS's recent budget requests, has proven to be
challenging. Since 2001, IRS's budget requests have made increasing its
compliance and collection staff one of several key priorities. In its
2001 budget request, IRS asked for funding for the Staffing Tax
Administration for Balance and Equity initiative, which was designed to
provide additional staff for examination, collection, and other
enforcement activities. However, as shown in figures 7 and 8, staffing
in two key compliance and collections occupations were lower in 2002
than in 2000. This continues a general trend of declining staffing in
these occupations for a number of years.
Figure 7: Number of Revenue Agents, Fiscal Years 1996-2002:
[See PDF for image]
[End of figure]
Figure 8: Number of Revenue Officers, 1996-2002:
[See PDF for image]
[End of figure]
The declines in compliance and collection staffing occurred for several
reasons, including increased workload and unfunded costs. In September
2002, the Commissioner attributed the decline in compliance staffing to
increases in workload in other essential operations, such as processing
returns, issuing refunds, and answering taxpayer mail. In the most
recently completed fiscal year, 2002, IRS faced unbudgeted cost
increases, such as rent and pay increases, of about $106 million. As a
result, IRS had to delay hiring revenue agents and officers. IRS noted
in its 2002 budget request that any major negative changes in the
agency's financial posture, such as unfunded salary increases, will
have a negative effect on staffing levels.
IRS has also been unable to realize internal savings that would allow
it to shift staff to higher priority areas. Our review of IRS's 2004
budget request, as well as its experience thus far in fiscal year 2003,
raises questions about whether IRS will be able to achieve the proposed
internal savings. According to IRS officials, four of the seven most
significant efforts outlined in its 2004 budget request--in terms of
staff years and dollars to be saved--will not achieve all of their
projected savings because the projections were based on assumptions
that will not be realized.
Recent trends in the electronic filing program also have implications
for IRS's ability to shift resources to higher priority areas. The
increase to an estimated 53 million returns represented the smallest
percentage increase in the last 9 years. The current growth rate will
not allow IRS to achieve its goal to have 80 percent of all tax returns
filed electronically by 2007. Instead, based on current growth rates,
IRS will achieve about 61 percent of all individual returns by 2007.
This year, like every other year since the initiation of electronic
filing, IRS has taken actions to alleviate impediments to electronic
filing and encourage taxpayers to file electronically. IRS entered into
an agreement with the Free File Alliance, a consortium of 17 tax
preparation companies, to offer free on-line tax preparation and filing
services for at least 60 percent of all taxpayers. However, as of April
16, 2003, only about 2.7 million taxpayers file via the Free File
Alliance consortium, and IRS estimated that only about 1 million were
new electronic filers. Slower growth in electronic filing will reduce
IRS's ability to shift resources out of paper return processing.
Concluding Observations:
IRS has come a long way from where it was in the mid-1990s. It is easy
to lose sight of progress when it is gradual, but over the last 5
years, IRS has significantly enhanced its management capabilities and
has succeeded in improving service to taxpayers. This progress in
modernizing was achieved with a consistent, sustained focus on certain
fundamentals of good management, such as controls over systems
acquisition, financial data, and performance measures.
Looking forward, IRS will be challenged to meet the expectations of
taxpayers and Congress. The same focus on management fundamentals that
proved successful over the last 5 years should help the new
Commissioner deal with these challenges.
Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions.
FOOTNOTES
[1] Pub. L. 105-206.
[2] U.S. General Accounting Office, Tax Systems Modernization:
Management and Technical Weaknesses Must Be Corrected If Modernization
Is to Succeed, GAO/AIMD-95-156 (Washington, D.C.: July 26, 1995), and
Tax Systems Modernization: Blueprint Is a Good Start But Not Yet
Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54
(Washington, D.C.: Feb. 24, 1998).
[3] U.S. General Accounting Office, High-Risk Series: An Overview, GAO/
HR-95-1 (Washington, D.C.: February 1995).
[4] The other two are Customer Relationship Management Examination,
which provides off-the-shelf software to IRS revenue agents to allow
them to accurately compute complex corporate transactions, and Internet
Refund/Fact of Filing, which improves customer self-service by
providing taxpayers with instant refund status information and
instructions for resolving refund problems via the Internet.
[5] U.S. General Accounting Office, Business Systems Modernization:
Results of Review of IRS' March 2001 Expenditure Plan, GAO-01-716
(Washington, D.C.: June 29, 2001).
[6] U.S. General Accounting Office, Business Systems Modernization: IRS
Needs to Better Balance Management Capacity with Systems Acquisition
Workload, GAO-02-356 (Washington, D.C.: Feb. 28, 2002).
[7] GAO/HR-95-1.
[8] The Custodial Financial Statements report the assets, liabilities
and results of activities related to IRS responsibilities for
implementing federal tax legislation, including collecting federal tax
revenue, refunding overpayments of taxes, and pursuing collections of
amounts owed. IRS also has administrative activities, which include
managing costs funded by appropriations and reimbursements from other
federal agencies, state and local governments, and the public.
[9] Total unpaid taxes due the government include (1) delinquent taxes
that IRS is attempting to collect, (2) taxes that IRS knows are due but
has decided not to pursue collecting, and (3) an unknown amount of
unpaid taxes that IRS has not identified.
[10] U.S. General Accounting Office, Tax Administration: Audit Trends
and Results for Individual Taxpayers, GAO/GGD-96-91 (Washington, D.C.:
Apr. 26, 1996); Tax Administration: IRS' Audit and Criminal Enforcement
Rates for Individual Taxpayers Across the Country, GAO/GGD-99-19
(Washington, D.C.: Dec. 23, 1998); Tax Administration: Use of Nonaudit
Contacts, GAO/GGD-00-7 (Washington, D.C.: Mar. 16, 2001); IRS Audit
Rates: Rate of Individual Taxpayers Has Declined With the Effect on
Compliance Unknown, GAO-01-484 (Washington, D.C.: Apr. 25, 2001); Tax
Administration: Impact of Compliance and Collection Program Declines on
Taxpayers, GAO-02-674 (Washington, D.C.: May 22, 2002); and Tax
Administration: IRS Should Continue to Expand Reporting on Its
Enforcement Efforts, GAO-03-378 (Washington, D.C.: Jan. 31, 2003).
[11] Document matching is where IRS compares information provided by a
third party, for example a bank, against taxpayer return information to
identify discrepancies.
[12] Workload is the number of delinquent accounts assigned to field
and telephone collection. Work completed is the number of delinquent
accounts worked to closure, excluding accounts for which collection
work has been deferred.
[13] GAO-02-674.
[14] The $112 billion includes two categories of known unpaid taxes:
(1) taxes due from taxpayers for which IRS can support the existence of
a receivable with a taxpayer agreement or a favorable court ruling
(federal taxes receivable), and (2) compliance assessments in which
neither the taxpayer nor the court has affirmed that the amounts are
owed.
[15] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of the Treasury, GAO-03-109 (Washington,
D.C.: January 2003).
[16] IRS estimated that $1.2 billion would be recovered as a result of
enforcement efforts.
[17] U.S. General Accounting Office, Earned Income Tax Credit
Eligibility and Participation, GAO-02-290R (Washington, D.C.: Dec. 14,
2001).
[18] U.S. General Accounting Office, High-Risk Series: An Update,
GAO-03-119 (Washington, D.C.: January 2003).
[19] GAO-01-716 and GAO-02-356.
[20] U.S. General Accounting Office, Financial Audit: IRS's Fiscal
Years 2002 and 2001 Financial Statements, GAO-03-243 (Washington, D.C.:
Nov. 15, 2002).
[21] Pub. L. 103-62 was enacted to hold federal agencies accountable
for achieving program results.
[22] U.S. General Accounting Office, Major Management Challenges and
Program Risks: A Governmentwide Perspective, GAO-03-95 (Washington,
D.C.: January 2003).
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