Internal Revenue Service
Assessment of the Fiscal Year 2009 Budget Request Gao ID: GAO-08-620T April 16, 2008The fiscal year 2009 budget request for the Internal Revenue Service (IRS) is a road map for how IRS plans to allocate resources and achieve ambitious goals for improving enforcement, improving taxpayer service, increasing research, and continuing to invest in modernized information systems. One complicating factor in implementing IRS's plans in the immediate future is the recent passage of the Economic Stimulus Act of 2008, which creates additional, unanticipated workload for IRS. GAO was asked to (1) assess how the President's budget request for IRS allocates resources and justifies proposed initiatives; (2) determine the status of IRS's efforts to develop and implement its Business Systems Modernization (BSM) program; and (3) determine the total costs of administering the economic stimulus legislation. To meet these objectives, GAO drew upon and updated recently issued reports.
The President's fiscal year 2009 budget request for IRS is $11.4 billion, 4.3 percent more than last year's enacted amount. The request proposes to maintain taxpayer service at recent levels, in part by realizing efficiency gains from electronic filing, despite a decrease in staffing. It also proposes a 7 percent increase in enforcement spending, including spending for 21 legislative and nonlegislative initiatives. The legislative proposals are projected to cost $23 million in fiscal year 2009, funding that IRS would not need if the proposals are not enacted. Similarly, if IRS were to fall behind in its proposed enforcement hiring efforts, it would not need all $226 million of the associated funding. IRS justified its nonlegislative enforcement initiatives with return on investment (ROI) analyses, which are useful, despite limitations, for making resource allocation decisions. The budget request does not provide ROI information for activities that constitute a large part of the budget request--activities other than the proposed initiatives. The request for BSM is over $44 million lower than the fiscal year 2008 enacted amount. IRS said this funding level will allow it to continue its primary modernization projects, but it did not describe how specific projects or benefits to taxpayers would be affected. IRS has continued to make progress in implementing BSM projects and improving modernization management controls and capabilities. However, further improvements are needed. For example, the agency has yet to develop long-term plans for completing BSM and consolidating and retiring legacy systems. IRS estimated that the costs of implementing the economic stimulus legislation may be up to a total of $767 million--including a $202 million supplemental appropriation. In addition to the supplemental appropriation, IRS is reallocating hundreds of collections staff to answering taxpayer telephone calls, resulting in up to $565 million in foregone enforcement revenue. In addition, IRS expects some deterioration in telephone service because of the increased call volume. For example, IRS is expecting its assistor level of service to drop to as low as 74 percent compared to its goal of 82 percent.
GAO-08-620T, Internal Revenue Service: Assessment of the Fiscal Year 2009 Budget Request
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Testimony:
Before the Subcommittee on Financial Services and General Government,
Committee on Appropriations, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 3:00 p.m. EDT:
Wednesday, April 16, 2008:
Internal Revenue Service:
Assessment of the Fiscal Year 2009 Budget Request:
Statement of James R. White, Director:
Strategic Issues:
David A. Powner, Director:
Information Technology Management Issues:
GAO-08-620T:
GAO Highlights:
Highlights of GAO-08-620T, a testimony before the Subcommittee on
Financial Services and General Government, Committee on Appropriations,
U.S. Senate.
Why GAO Did This Study:
The fiscal year 2009 budget request for the Internal Revenue Service
(IRS) is a road map for how IRS plans to allocate resources and achieve
ambitious goals for improving enforcement, improving taxpayer service,
increasing research, and continuing to invest in modernized information
systems. One complicating factor in implementing IRS‘s plans in the
immediate future is the recent passage of the Economic Stimulus Act of
2008, which creates additional, unanticipated workload for IRS.
GAO was asked to (1) assess how the President‘s budget request for IRS
allocates resources and justifies proposed initiatives; (2) determine
the status of IRS‘s efforts to develop and implement its Business
Systems Modernization (BSM) program; and (3) determine the total costs
of administering the economic stimulus legislation. To meet these
objectives, GAO drew upon and updated recently issued reports.
What GAO Found:
The President‘s fiscal year 2009 budget request for IRS is $11.4
billion, 4.3 percent more than last year‘s enacted amount. The request
proposes to maintain taxpayer service at recent levels, in part by
realizing efficiency gains from electronic filing, despite a decrease
in staffing. It also proposes a 7 percent increase in enforcement
spending, including spending for 21 legislative and nonlegislative
initiatives. The legislative proposals are projected to cost $23
million in fiscal year 2009, funding that IRS would not need if the
proposals are not enacted. Similarly, if IRS were to fall behind in its
proposed enforcement hiring efforts, it would not need all $226 million
of the associated funding. IRS justified its nonlegislative enforcement
initiatives with ROI analyses, which are useful, despite limitations,
for making resource allocation decisions. The budget request does not
provide ROI information for activities that constitute a large part of
the budget request”activities other than the proposed initiatives.
The request for BSM is over $44 million lower than the fiscal year 2008
enacted amount. IRS said this funding level will allow it to continue
its primary modernization projects, but it did not describe how
specific projects or benefits to taxpayers would be affected. IRS has
continued to make progress in implementing BSM projects and improving
modernization management controls and capabilities. However, further
improvements are needed. For example, the agency has yet to develop
long-term plans for completing BSM and consolidating and retiring
legacy systems.
IRS estimated that the costs of implementing the economic stimulus
legislation may be up to a total of $767 million”including a $202
million supplemental appropriation. In addition to the supplemental
appropriation, IRS is reallocating hundreds of collections staff to
answering taxpayer telephone calls, resulting in up to $565 million in
foregone enforcement revenue. In addition, IRS expects some
deterioration in telephone service because of the increased call
volume. For example, IRS is expecting its assistor level of service to
drop to as low as 74 percent compared to its goal of 82 percent.
Table: The President‘s Fiscal Year 2009 Request for IRS Full-time
Equivalents (FTEs) Compared to Fiscal Year 2008 Enacted Budget FTEs:
Appropriation: Enforcement;
FY 2008 enacted: 47,349;
FY 2009 requested: 49,792;
Percentage change: 5.2.
Appropriation: Taxpayer Service;
FY 2008 enacted: 31,218;
FY 2009 requested: 30,792;
Percentage change: -1.4.
Appropriation: Operations Support;
FY 2008 enacted: 12,181;
FY 2009 requested: 11,989;
Percentage change: -1.6.
Appropriation: BSM;
FY 2008 enacted: 358;
FY 2009 requested: 333;
Percentage change: -7.0.
Appropriation: Health Insurance Tax Credit;
FY 2008 enacted: 17;
FY 2009 requested: 16;
Percentage change: -5.9.
Total;
FY 2008 enacted: 91,123;
FY 2009 requested: 92,922;
Percentage change: 2.0.
Source: GAO analysis of IRS data.
[End of table]
What GAO Recommends:
GAO is not making new recommendations, but the statement highlights
outstanding recommendations to extend the use of return on investment
(ROI) analysis to cover major enforcement programs and improve BSM
management controls and capabilities.
To view the full product, including the scope
and methodology, click on [http://www.gao.gov/cgi-bin/getrpt?GAO-08-
620T. For more information, contact James R. White at (202) 512-9110 or
whitej@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
We appreciate this opportunity to comment on the President's fiscal
year (FY) 2009 budget request for the Internal Revenue Service (IRS).
Financing of the federal government depends largely on IRS's ability to
effectively administer the tax laws. The President has requested $11.4
billion in program dollars to fund IRS's FY 2009 operations, including
$11.1 billion for service to taxpayers and tax law enforcement, plus
$223 million for the Business Systems Modernization (BSM) program,
IRS's ongoing effort to improve the agency's business and tax
processing systems.
The FY 2009 budget request is a road map for how IRS intends to
allocate resources in order to carry out ambitious plans of improving
enforcement, improving taxpayer service, increasing research, and
continuing to invest in modernized information systems. Together with
the budget request, IRS's recently published strategies spell out its
intentions for improving taxpayer service and reducing the net tax gap-
-the difference between the taxes owed and eventually paid, most
recently estimated at $290 billion for tax year 2001.[Footnote 1] The
budget request and strategies aim to build on recent IRS
accomplishments such as annually bringing in more revenue through
enforcement and making progress on modernizing IRS's business and tax
processing systems. One complicating factor for carrying out IRS's
ambitious plans in the immediate future is the recent passage of the
Economic Stimulus Act of 2008, which creates additional, unanticipated
workload for IRS this year.[Footnote 2] Passage of this act required
IRS to act quickly to deal with taxpayers' questions and begin issuing
payments.
Based on your request, our objectives were to (1) assess how the
President's budget request for IRS for FY 2009 allocates resources for
enforcement, service, research, and systems modernization primarily
compared to FY 2008 enacted levels; (2) assess the rationales for
differences between the 2 years, including the rationales for
initiatives and the extent to which those rationales have been
justified; (3) determine the status of IRS's efforts to develop and
implement its BSM program; and (4) determine the total cost of
administering the economic stimulus program.
To meet these objectives, we drew upon and updated a recently issued
report on the budget request and IRS's 2008 tax filing season, and for
our BSM work, we relied primarily on our review of the FY 2008 BSM
expenditure plan.[Footnote 3] For the first report, we compared enacted
and requested budgets for IRS; reviewed documents, including estimates
of revenues and costs from initiatives; and interviewed IRS officials.
For our BSM report, we analyzed the expenditure plan, reviewed other
documents, and interviewed IRS officials. In assessing the cost of the
economic stimulus package, we obtained performance and production data,
looking for factors that significantly affected performance, and we
interviewed IRS officials. We conducted the current performance audit
from March 2008 through April 2008 in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives. For a more detailed discussion of our scope and
methodology, see the appropriate sections in the budget and filing
season and the BSM reports.
In summary, we make the following major points:
* The President's budget request for IRS proposes to maintain taxpayer
service at recent levels and increase enforcement. Overall, it
increases spending on IRS by 4.3 percent. Spending on taxpayer service
would increase by less than 1 percent, which would result in reduced
staffing, but the level of taxpayer service would be maintained by
realizing efficiency gains, in part, through increases in electronic
filing. The budget proposes a 7 percent increase in enforcement
spending, including funds and staffing for various legislative and
nonlegislative initiatives. According to the proposal, the legislative
initiatives would raise about $36 billion in revenue over 10 years.
They are projected to cost $23 million in FY 2009, funding IRS would
not need if none of the legislative initiatives were enacted.
Similarly, if IRS were to fall behind in meeting its challenging hiring
goals for the nonlegislative initiatives, it would not need all $226
million of the associated funding for FY 2009.
* IRS included more information than past years on the initiatives in
the FY 2009 proposed budget. Of particular note, IRS included return on
investment (ROI) information for all nonlegislative initiatives.
However, beyond those initiatives, the budget request does not provide
an analytic basis for key resource allocation decisions. Such decisions
include allocating resources among a variety of enforcement programs
and taxpayer services. Analytic data such as ROI can be helpful to
IRS's management and the Congress for making these decisions as well as
decisions about the overall balance between taxpayer service and
enforcement. Although the budget request provides performance measure
data, it does not provide ROI for programs or activities that
constitute a large part of the budget request--activities other than
the proposed initiatives.
* The requested budget for BSM is over $44 million lower than the FY
2008 enacted amount of about $267 million and roughly $185 million less
than the amount the IRS Oversight Board is proposing. Modernized e-File
(MeF) is the project with the largest difference between the requested
budget and the FY 2008 enacted amount. IRS stated that the requested
BSM funding level will allow it to continue developing and delivering
its primary modernization projects but did not provide details on how
plans to deliver specific projects or benefits to taxpayers would be
affected. IRS continues to make progress in implementing BSM projects
and meeting cost and schedule commitments for most deliverables, but
three project milestones recently experienced significant cost or
schedule delays.[Footnote 4] IRS has also taken steps to address our
prior recommendations; however, work remains to fully implement them,
including developing long-term plans for completing the BSM program.
Future releases of the Customer Account Data Engine (CADE) and Account
Management Services (AMS) continue to face risks and challenges, which
IRS is working to mitigate. Finally, we recently recommended that IRS
complete a plan with specific time frames for implementing initiatives
supporting its information technology (IT) human capital strategy, and
IRS agreed.
* IRS estimates that the cost of implementing the economic stimulus
legislation may be up to a total of $767 million, including a $202
million supplemental appropriation. In addition to the supplemental
appropriation, IRS is reallocating resources from enforcement to
taxpayer service by shifting hundreds of collections staff to answering
telephone calls and, as a result, may forego up to $565 million in
enforcement revenue. IRS has experienced a deterioration of telephone
access and expects a further decline. For example, IRS's assistor level
of service--which measures a taxpayer's ability to get through and
speak to an assistor--has already declined, and IRS expects access to
continue to drop to as low as 74 percent, down from the FY 2008 goal of
82 percent.
The FY 2009 Budget Request Proposes to Maintain Taxpayer Service at
Recent Levels and Increase Enforcement:
The President's budget request is proposing to maintain taxpayer
service levels with fewer staff by realizing efficiency gains; it also
proposes to increase enforcement by adding staff. The President's FY
2009 budget request of $11.4 billion for IRS is 4.3 percent more than
the FY 2008 enacted budget and represents an increase of less than 1
percent for taxpayer service and 7 percent for enforcement, as shown in
table 1.
Table 1: The President's FY 2009 Request for IRS Compared to the FY
2008 Enacted Budget:
Dollars in thousands.
Enforcement;
Dollars in thousands: FY 2008 enacted: $6,997,226;
Dollars in thousands: FY 2009 requested: $7,487,209;
Dollars in thousands: Percentage change: 7.0.
Taxpayer Service;
Dollars in thousands: FY 2008 enacted: 3,612,833;
Dollars in thousands: FY 2009 requested: 3,636,230;
Dollars in thousands: Percentage change: 0.6.
BSM;
Dollars in thousands: FY 2008 enacted: 267,090;
Dollars in thousands: FY 2009 requested: 222,664;
Dollars in thousands: Percentage change: -16.6.
Health Insurance Tax Credit;
Dollars in thousands: FY 2008 enacted: 15,235;
Dollars in thousands: FY 2009 requested: 15,406;
Dollars in thousands: Percentage change: 1.1.
Total;
Dollars in thousands: FY 2008 enacted: $10,892,384;
Dollars in thousands: FY 2009 requested: $11,361,509;
Dollars in thousands: Percentage change: 4.3.
Source: GAO analysis of IRS data.
Note: Dollar amounts include amounts for operations support.
[End of table]
The budget request increases IRS-wide staff levels, measured in full-
time equivalents (FTEs), by 2 percent, with a 1.4 percent decrease in
taxpayer service FTEs and a 5.2 percent increase in enforcement FTEs,
as shown in table 2.
Table 2: The President's FY 2009 Request for IRS FTEs Compared to FY
2008 Enacted Budget FTEs:
Appropriation: Enforcement;
FY 2008 enacted: 47,349;
FY 2009 requested: 49,792;
Percentage change: 5.2.
Appropriation: Taxpayer Service;
FY 2008 enacted: 31,218;
FY 2009 requested: 30,792;
Percentage change: -1.4.
Appropriation: Operations Support;
FY 2008 enacted: 12,181;
FY 2009 requested: 11,989;
Percentage change: -1.6.
Appropriation: BSM;
FY 2008 enacted: 358;
FY 2009 requested: 333;
Percentage change: -7.0.
Appropriation: Health Insurance Tax Credit;
FY 2008 enacted: 17;
FY 2009 requested: 16;
Percentage change: -5.9.
Appropriation: Total;
FY 2008 enacted: 91,123;
FY 2009 requested: 92,922;
Percentage change: 2.0.
Source: GAO analysis of IRS data.
Note: The decline in taxpayer services, including operations support,
reflects 91 FTEs in efficiency savings and 207 FTEs in electronic
filing savings. The increase in enforcement, including operations
support, includes an additional 1,431 revenue agents and 582 revenue
officers who will work on initiatives.
[End of table]
The President's budget proposal is consistent with longer-term trends
for IRS. Compared to actual spending in FY 2006, the proposed FY 2009
budget increases taxpayer service funding by 3.7 percent, a real
decrease after inflation, while increasing IRS's enforcement funding by
10 percent.
The budget request proposes to maintain taxpayer service at recent
levels. As an example, the key taxpayer service measures shown in table
3 are projected to remain relatively stable through FY 2009.
Table 3: Telephone Service Measures:
Measure: Telephone performance--access: Assistor level of service
(percentage of taxpayers who wanted to talk with an assistor and
actually got through and received service);
FY 2006 Actual: 82.0%;
FY 2007 Actual: 82.1%;
FY 2008 Planned: 82.0%;
FY 2009 Planned: 82.0%.
Measure: Telephone performance--accuracy: Tax law customer accuracy
(percentage of calls in which telephone assistors provided accurate
answers on tax law and took appropriate action);
FY 2006 Actual: 90.9%;
FY 2007 Actual: 91.2%;
FY 2008 Planned: 91.0%;
FY 2009 Planned: 91.0%.
Measure: Telephone performance--accuracy: Accounts customer accuracy
(percentage of calls in which telephone assistors provided accurate
answers on customer accounts and took appropriate action);
FY 2006 Actual: 93.2%;
FY 2007 Actual: 93.4%;
FY 2008 Planned: 93.5%;
FY 2009 Planned: 93.7%.
Source: GAO analysis of IRS data.
[End of table]
In order to maintain taxpayer service at recent levels despite a
decrease in real spending and staffing, IRS expects to realize
efficiency gains. For instance, IRS expects to devote 207 fewer FTEs to
the labor-intensive processing of paper returns because of expected
increases in electronic filing. These expected efficiency gains are
consistent with past trends--between 1999 and 2007, IRS reduced staff
devoted to processing paper returns by about 1,800 FTEs.
IRS's ability to maintain or improve taxpayer service beyond 2009 will
likely depend on its ability to continue to improve efficiency. To this
end, in recent reports, we made recommendations to further increase
electronic filing. We recommended that IRS determine the actions needed
to require software vendors to include bar codes on printed returns,
and we suggested that the Congress mandate electronic filing by certain
paid tax preparers.[Footnote 5] IRS agreed with our bar code
recommendation and outlined the actions it would take.
Some of the real spending decrease proposed for FY 2009 is because of
one-time investments made in FY 2008 or carryovers in funds from FY
2008. For instance, the budget request proposes a $31 million reduction
in funding for taxpayer assistance centers and outreach. However, IRS
officials told us that this reduction includes funding used for long-
term investments in FY 2008 that would not need to be duplicated in FY
2009. IRS officials also told us that a $7.7 million decrease in
funding for the Taxpayer Advocate offsets a funding increase in FY 2008
that is being used to lower the Advocate's outstanding caseload.
Finally, an $8 million reduction in the Volunteer Income Tax Assistance
(VITA) program reflects FY 2008 funding that was not spent and carried
over into FY 2009.[Footnote 6]
The budget request for IRS's enforcement programs includes
nonlegislative and legislative initiatives. According to the proposal,
the five nonlegislative enforcement initiatives would cost about $338
million in FY 2009 and are expected to raise about $2 billion of direct
revenue annually starting in FY 2011.[Footnote 7] In addition, the
budget request estimates that the enforcement initiatives would
generate at least another $6 billion annually in indirect revenue. The
indirect revenue results from improved voluntary compliance induced by
taxpayers' awareness of expanded IRS enforcement. The budget request
also proposes increases in examination coverage for corporations with
assets of $10 million or more from a planned 6.6 percent for FY 2008 to
6.8 percent for FY 2009. The coverage rate would increase to 7.6
percent in FY 2010 as new enforcement staff hired in FY 2009 complete
training and can audit more returns.
The budget request includes 16 legislative initiatives budgeted at $23
million for FY 2009 that it says would raise about $36 billion in
revenue over 10 years; if none were enacted, IRS would not need the $23
million. We have reported on three of the proposals. In 2006, we
suggested that the Congress consider an idea for reducing securities
capital gains noncompliance.[Footnote 8] In 1991, we supported the
notion that payments to corporations be reported on information
returns.[Footnote 9] Finally, in 2007, we described ways to mitigate
the compliance costs related to these information returns and to other
information returns associated with credit and debit card
payments.[Footnote 10]
The revenue expected from IRS's enforcement initiatives is modest
compared to the net tax gap, which was last estimated at $290 billion
for tax year 2001. As we noted in our statement to this Committee last
year, no single approach, such as IRS enforcement, is likely to fully
and effectively address noncompliance.[Footnote 11] Multiple approaches
are needed because noncompliance has multiple causes and spans
different types of taxes and taxpayers.
Hiring needed staff for the nonlegislative initiatives will be
challenging for IRS's Large and Mid-Size Business (LMSB) and Small
Business/Self-Employed (SB/SE) divisions. For instance, the initiatives
call for adding 1,431 revenue agents in addition to those who must be
replaced from attrition, a high number relative to past years. IRS
divisions have previously hired large numbers of staff in a short time
because of specific budget initiatives, but officials reported that
hiring gradually over time would reduce challenges. If IRS were to fall
behind in its hiring efforts, it would not need all $226 million of the
funding for staff for FY 2009 initiatives.
IRS Has Enhanced Its Justifications for Initiatives and Could Benefit
from Using ROI Analyses More Broadly, Even with Their Limitations:
Responding to our recommendations from last year, IRS included more
information on initiatives in the FY 2009 proposed budget, including
ROI information for all nonlegislative initiatives. Last year, we
recommended that IRS have available basic descriptive, cost, and
expected performance information on all new initiatives and include
such information in future budget submissions.[Footnote 12] This year,
the budget request has sections explicitly entitled, for instance,
"Initiative Summary," "Implementation Plan," "Expected Benefits," and
"ROI." Four of the five nonlegislative enforcement initiatives for FY
2009 were revisions of FY 2008 initiatives, but with more total funds
requested and generally more informative justifications than for FY
2008.
However, IRS's ROI calculations have limitations that reflect the
challenges of estimating ROIs. For example, the calculations do not
account for benefits that are harder to measure, such as improved
voluntary compliance. Another example showing ROI limitations is the
$51 million National Research Project (NRP) initiative for which IRS
estimates the ROI to be $0.40 per $1.00 invested. NRP funds research
audits in order to develop more effective enforcement programs. The ROI
calculation only includes direct revenue resulting from the research
audits, not the potential for increased revenue from improved
enforcement programs; nor does the calculation include the benefits of
the Department of the Treasury's use of NRP data to provide the basis
for legislative recommendations.
Although the budget request for IRS provides performance measure data,
it does not provide ROI analyses for programs or activities other than
the new initiatives. As we noted in our recent report, analytic data
such as ROI can be helpful to managers and the Congress when making
resource allocation decisions.[Footnote 13] ROI analyses, even with
their limitations, can help answer questions such as the following:
* What are the implications for IRS's resource allocation of the lower
costs per taxpayer contact for some services compared to others as
shown in table 4?
* Are there extra benefits that offset the higher costs of some
services, or could costs be reduced by promoting increased reliance on
the lower-cost options?
Table 4: Cost of Providing Taxpayer Service in FY 2005:
Service: Answering tax law questions via e-mail;
Estimated cost per contact: $52.51.
Service: Providing assistance at taxpayer assistance centers;
Estimated cost per contact: 28.73.
Service: Answering correspondence;
Estimated cost per contact: 24.97.
Service: Providing assistance by assistors via toll-free telephones;
Estimated cost per contact: 19.46.
Service: Providing assistance through VITA sites;
Estimated cost per contact: 12.01.
Service: Providing assistance by automation via toll-free telephones;
Estimated cost per contact: 0.71.
Service: Providing assistance such as downloads and searches on IRS's
Web site;
Estimated cost per contact: 0.13.
Source: GAO analysis of IRS data.
Note: IRS reported that these estimates do not fully allocate all
indirect overhead and support costs. We have reported that because of
long-standing limitations in IRS's cost accounting capability, cost
data at this detailed level have not been audited (see, for example,
GAO-07-310 and 07-247). From our perspective, it would be important to
know more about the indirect and support costs to see if they might
significantly change the cost estimates.
[End of table]
Similar questions can be asked about enforcement based on table 5:
* Is IRS appropriately allocating resources between field audits, often
conducted at a taxpayer's business, and correspondence audits, which
are simpler and conducted by mail?[Footnote 14]
* For the rows in table 5 with average recommended additional tax per
return greater for correspondence audits than for field audits, could
resources be reallocated from field audits to correspondence audits in
order to help close the tax gap?
* Are there other benefits to field audits, such as a greater impact on
voluntary compliance, that are not captured in IRS's data?
Table 5: Field and Correspondence Audits of Some Business Categories of
Taxable Individual Income Tax Returns, FYs 2006 and 2007:
Type and size of return: FY 2006: Business nonfarm returns by size of
total gross receipts (TGR): Under $25,000;
Number of returns examined: Field: 19,801;
Number of returns examined: Correspondence: 107,802;
Average recommended additional tax per return: Field: $3,918;
Average recommended additional tax per return: Correspondence: $2,614.
Type and size of return: FY 2006: Business nonfarm returns by size of
total gross receipts (TGR): $25,000 under $100,000;
Number of returns examined: Field: 38,722;
Number of returns examined: Correspondence: 42,070;
Average recommended additional tax per return: Field: 5,464;
Average recommended additional tax per return: Correspondence: 7,600.
Type and size of return: FY 2006: Business nonfarm returns by size of
total gross receipts (TGR): $100,000 or more;
Number of returns examined: Field: 54,716;
Number of returns examined: Correspondence: 34,515;
Average recommended additional tax per return: Field: 25,787;
Average recommended additional tax per return: Correspondence: 27,863.
Type and size of return: FY 2007: Business nonfarm returns without
earned income tax credit, by size of TGR: Under $25,000;
Number of returns examined: Field: 53,092;
Number of returns examined: Correspondence: 81,237;
Average recommended additional tax per return: Field: 4,836;
Average recommended additional tax per return: Correspondence: 11,048.
Type and size of return: FY 2007: Business nonfarm returns without
earned income tax credit, by size of TGR: $25,000 under $100,000;
Number of returns examined: Field: 31,363;
Number of returns examined: Correspondence: 31,513;
Average recommended additional tax per return: Field: 6,320;
Average recommended additional tax per return: Correspondence: 11,793.
Type and size of return: FY 2007: Business nonfarm returns without
earned income tax credit, by size of TGR: $100,000 under $200,000;
Number of returns examined: Field: 28,286;
Number of returns examined: Correspondence: 28,041;
Average recommended additional tax per return: Field: 24,582;
Average recommended additional tax per return: Correspondence: 32,640.
Type and size of return: FY 2007: Business nonfarm returns without
earned income tax credit, by size of TGR: $200,000 or more;
Number of returns examined: Field: 11,319;
Number of returns examined: Correspondence: 1,730;
Average recommended additional tax per return: Field: 15,959;
Average recommended additional tax per return: Correspondence: 7,017.
Type and size of return: FY 2006: Business returns with total positive
income at least $200,000 and under $1 million;
Number of returns examined: Field: 17,499;
Number of returns examined: Correspondence: 15,280;
Average recommended additional tax per return: Field: 20,880;
Average recommended additional tax per return: Correspondence: 33,406.
Source: GAO analysis of IRS data.
Note: This table does not include all categories of audits. For a
number of those categories, field audits produce a higher average
recommended additional tax per return than do correspondence audits.
[End of table]
We recognize that developing ROI estimates for IRS's ongoing programs
such as examinations and taxpayer service will be a challenge. However,
because of the potential benefits of ROI analyses, we recommended in
our previous report on the FY 2009 budget request that the Commissioner
of Internal Revenue extend the use of ROI in future budget proposals to
cover major enforcement programs. At that time, IRS officials said that
because of the short time frame for our report, they did not have time
to fully analyze its recommendations, and, therefore, were unable to
respond.[Footnote 15] We have agreed to meet with IRS to further
discuss the ROI recommendation.
Further Progress Made in Implementing BSM, but Challenges and Risks
Remain:
IRS's BSM program, initiated in 1999, involves the development and
delivery of a number of modernized tax administration, internal
management, and core infrastructure projects that are intended to
provide improved and expanded service to taxpayers as well as IRS
internal business efficiencies. Key tax administration projects include
CADE, which is intended to provide the modernized database foundation
to replace the existing Individual Master File processing system that
contains the repository of individual taxpayer information; AMS, which
is intended to enhance CADE by providing applications for IRS employees
and taxpayers to access, validate, and update accounts on demand; and
MeF, which is to provide a single standard for filing electronic tax
returns. We recently reported that while IRS has continued to make
progress in implementing BSM projects and improving modernization
management controls and capabilities, challenges and risks remain, and
further improvements are needed.[Footnote 16]
As shown in table 6, the FY 2009 budget request for the BSM program is
less than the enacted FY 2008 budget by over $44 million and about $185
million less than the amount the IRS Oversight Board is proposing. When
we asked about the impact of this reduction on its operations, IRS told
us that the proposed funding level will allow it to continue developing
and delivering its primary modernization projects but did not provide
details on how plans to deliver specific projects or benefits to
taxpayers would be affected. MeF is the project with the largest
difference between the requested budget and the FY 2008 enacted amount.
Table 6: BSM Funding Differences, FY 2008 and 2009 (in thousands):
Project: Customer Account Data Engine;
FY 2008 enacted: $58,500;
FY 2009 budget request: $58,800.
Project: Accounts Management Services;
FY 2008 enacted: 28,983;
FY 2009 budget request: 26,158.
Project: Modernized e-File;
FY 2008 enacted: 55,802;
FY 2009 budget request: 25,000.
Project: Filing & Payment Compliance;
FY 2008 enacted: 0;
FY 2009 budget request: 0.
Project: Core Infrastructure;
FY 2008 enacted: 39,150;
FY 2009 budget request: 32,000.
Project: Architecture, Integration, and Management;
FY 2008 enacted: 35,100;
FY 2009 budget request: 35,000.
Project: Management Reserve;
FY 2008 enacted: 4,310;
FY 2009 budget request: 2,300.
Project: Subtotal Capital Investments;
FY 2008 enacted: $221,845;
FY 2009 budget request: $179,258.
Project: BSM Labor;
FY 2008 enacted: 44,000;
FY 2009 budget request: 42,052.
Project: Subtotal Program Request;
FY 2008 enacted: $265,845;
FY 2009 budget request: $221,310.
Project: Maintaining Current Levels;
FY 2008 enacted: 1,245;
FY 2009 budget request: 1,354.
Project: Total BSM Budget Request;
FY 2008 enacted: $267,090;
FY 2009 budget request: $222,664.
Source: IRS data.
[End of table]
IRS has made progress in implementing BSM projects and meeting cost and
schedule commitments for most deliverables, but three project
milestones experienced significant cost or schedule delays.[Footnote
17] During 2007, IRS completed milestones of the Filing and Payment
Compliance (F&PC), a tax collection case analysis support system; MeF;
CADE; and AMS. Our analysis of reported project costs and completion
dates showed that 13 of the 14 associated project milestones that were
scheduled for completion during this time were completed within 10
percent of cost estimates, and 11 of the 14 milestones were completed
within 10 percent of schedule estimates. However, a milestone for CADE
exceeded its planned schedule by 66 percent and experienced a 15
percent cost increase; another milestone for the same project incurred
a 153 percent schedule delay, and a milestone for MeF experienced a 41
percent schedule delay (see fig. 1).
Figure 1: Summary of Cost and Schedule Performance for Fiscal Year 2007
Project Milestones:
This figure is a bar graph showing the summary of cost and schedule
performance for fiscal year 2007 project milestones.
Program: F&PC;
Milestone: 3.5;
Release: 1.1;
Cost variance: 6.0;
Schedule variance: 0.
Program: F&PC;
Milestone: 4b;
Release: 1.2;
Cost variance: -3.4;
Schedule variance: -5.6.
Program: F&PC;
Milestone: 5;
Release: 1.2;
Cost variance: 9.7;
Schedule variance: -0.6.
Program: MeF;
Milestone: 4-5;
Release: 4;
Cost variance: 2.8;
Schedule variance: 4.9.
Program: MeF;
Milestone: 3;
Release: 5;
Cost variance: 4.0;
Schedule variance: 41.1.
Program: CADE;
Milestone: 4;
Release: 2.2;
Cost variance: 14.7;
Schedule variance: 65.8.
Program: AMS;
Milestone: 2-3;
Release: 3;
Cost variance: 0;
Schedule variance: 152.9.
Program: CADE;
Milestone: 4;
Release: 3.1;
Cost variance: 0;
Schedule variance: -2.3.
Program: AMS;
Milestone: 2-3;
Release: 1.1;
Cost variance: 0;
Schedule variance: 0.
Program: AMS;
Milestone: 4a;
Release: 1.1;
Cost variance: 0;
Schedule variance: 4.9.
Program: AMS;
Milestone: 4b;
Release: 1.1;
Cost variance: 0;
Schedule variance: -1.0.
Program: AMS;
Milestone: 2-3;
Release: 1.2;
Cost variance: 0;
Schedule variance: 0.
Program: AMS;
Milestone: 4a;
Release: 1.2;
Cost variance: 0;
Schedule variance: -2.1.
Program: AMS;
Milestone: 2-3;
Release: 1.3;
Cost variance: 0;
Schedule variance: 0.
[See PDF for image]
Source: GAO analysis of IRS data.
[End of figure]
IRS has taken steps to address our prior recommendations to improve its
modernization management controls and capabilities. However, work
remains to fully implement them. For example, in July 2005, we
recommended that IRS fully revisit the vision and strategy for the BSM
program and develop a new set of long-term goals, strategies, and plans
consistent with the budgetary outlook and IRS's management
capabilities.[Footnote 18] We also noted that the vision and strategy
should include time frames for consolidating and retiring legacy
systems. In response, IRS has developed a Modernization Vision and
Strategy framework and supporting 5-year Enterprise Transition Plan.
However, the agency has yet to develop long-term plans for completing
BSM and consolidating and retiring legacy systems. We also recommended
in February 2007 that IRS ensure that future BSM expenditure plans
include a quantitative measure of progress in meeting scope
expectations.[Footnote 19] We further recommended that, in developing
this measure, IRS consider using earned value management since this is
a proven technique required by the Office of Management and Budget for
measuring cost, schedule, and functional performance against
plans.[Footnote 20] While IRS has developed an approach to address our
recommendation, it has not yet fully implemented it.
Future BSM project releases continue to face significant risks and
issues, which IRS is addressing. Specifically, the agency recently
identified significant risks and issues with planned system deliveries
of CADE and AMS and reported that maintaining alignment between the two
systems will be a significant challenge and source of risk for the BSM
program. IRS recognizes the potential impact of identified risks and
issues on its ability to deliver projects within cost and schedule
estimates and has developed mitigation strategies to address them.
While mitigation strategies have been developed, the risks and
challenges confronting future releases of CADE and AMS are nevertheless
significant, and we will continue to monitor them and actions to
address them.
IRS also made further progress in addressing high-priority BSM program
improvement initiatives during the past year. In September 2007, IRS
completed another cycle of initiatives and initiated a new cycle, which
was scheduled to be completed at the end of March 2008. Initiatives
that were addressed in the 6-month cycle ending in September 2007
included IT human capital, information security, and process
improvements (e.g., developing and implementing standardized earned
value management practices for major projects). IRS's program
improvement process continues to be an effective means of regularly
assessing, prioritizing, and incrementally addressing BSM issues and
challenges. However, more work remains for the agency to fully address
these issues and challenges.
Finally, we recently reported that efforts to address human capital
challenges continue, but more work remains. IRS developed an IT human
capital strategy that addresses hiring critical personnel, employee
training, leadership development, and workforce retention, and agency
officials stated that they plan to undertake a number of human capital
initiatives to support their human capital strategy, including
conducting analyses of turnover rates and continuing efforts to replace
key leaders lost to retirement. However, a specific plan with time
frames for implementing these initiatives has not been developed. We
recommended that IRS complete such a plan to help guide the agency's
efforts in addressing its IT human capital gaps and measure progress in
implementing them. IRS agreed with our recommendation and stated that
it intends to develop a plan to implement its IT human capital
strategy.
IRS Estimates the Cost of Implementing the Economic Stimulus
Legislation May Be Up to a Total of $767 Million and Expects Declines
in Some Taxpayer Services:
The Economic Stimulus Act of 2008 is resulting in a significant
workload increase not anticipated in the FY 2008 budget. As part of the
legislation, IRS received $202 million in a supplemental appropriation.
However, because IRS could not find an alternative according to
responsible officials, it has reallocated resources from enforcement to
taxpayer service and is allowing some deterioration in telephone
service.
IRS will begin sending economic stimulus payments to more than 130
million households in early May, after the current tax filing season,
and is scheduled to be done by mid-July. These include an estimated 20
million retirees and disabled veterans, and low-wage workers who
usually are exempt from filing a tax return but will be eligible for
stimulus payments. Taxpayers required to file a tax return must do so
by April 15 in order to receive a stimulus payment by mid-
July.[Footnote 21] People who are not required to file a tax return,
but are doing so to receive a stimulus payment, are required to file an
IRS Form 1040A by October 15, 2008.
As part of the legislation, IRS received a supplemental appropriation
of $202 million to help fund its costs for implementing the stimulus
package. This funding will remain available until September 30, 2009.
As shown in table 7, IRS plans to spend the bulk of the funding--$151.4
million--for Operations Support, most of it on postage for two mass
mailings and on IT support. IRS also expects to spend $50.7 million for
Taxpayer Services, including $26.2 million for staffing and overtime
for telephone assistors. IRS is expecting 2.4 million additional
telephone calls in March and April with questions for IRS assistors
about the economic stimulus legislation. These calls are in addition to
the more than 14 million calls typically answered by IRS assistors
between January and mid-April.
Table 7: IRS's Estimated Costs of Implementing the Economic Stimulus
Legislation:
Dollars in millions.
Supplemental appropriation: Operations Support: Postage;
$90.613.
Supplemental appropriation: Operations Support: IT support;
43.965.
Supplemental appropriation: Operations Support: Telecommunications;
8.370.
Supplemental appropriation: Operations Support: Printing;
6.767.
Supplemental appropriation: Operations Support: Communications plan;
1.700.
Supplemental appropriation: Operations Support: Total for Operations
Support;
151.415.
Taxpayer Services: Additional staffing/overtime;
50.720.
Total supplemental funding;
$202.135.
IRS estimates of foregone revenue from shifting Automated Collection
System (ACS) staff[A]: Wage and Investment (W&I);
$191.728.
IRS estimates of foregone revenue from shifting Automated Collection
System (ACS) staff[A]: Small Business/Self-Employed (SB/SE);
373.065.
Total foregone revenue;
Up to $564.793.
Total;
Up to $766.928.
Taxpayer service: Assistor level of service (percent);
2008 goal: 82;
Revised estimate: As low as 74;
Reduction: Down 8 percentage points.
Source: GAO analysis of IRS and Treasury data.
[A] Revised as of early April 2008.
[End of table]
To help meet the increased telephone demand, IRS is shifting about half
of its over 2,000 Automated Collection System (ACS) telephone staff
from collecting delinquent taxes to answering economic stimulus
telephone calls from March through May.[Footnote 22] To accommodate
this shift, IRS stopped sending out some ACS-generated notices, such as
notices of levy, several weeks ago.[Footnote 23] According to IRS
officials, it takes about 3 to 4 weeks before this adjustment in ACS-
generated notices affects the ACS workload. IRS originally estimated
that the revenue foregone by shifting ACS staff to be up to $681
million. However, according to IRS officials, in early April, IRS
revised its foregone revenue estimate down to $565 million, shown in
table 7, largely because of lower-than-expected demand for telephone
assistance in March.[Footnote 24]
According to IRS officials, IRS's priority is to respond to taxpayers'
questions about the stimulus program; therefore, the officials are
monitoring call volume and adjusting the number of ACS staff answering
telephones accordingly. When call volume is low, ACS staff work on
outstanding ACS collection cases. However, IRS officials stated that
this work does not produce the same revenue as the ACS-generated
notices, particularly revenue generated from notices of levy. When IRS
adjusts the volume of ACS-generated notices, it takes several weeks
before that adjustment affects ACS workload. IRS officials do not want
to resume sending ACS-generated notices until they are sure ACS
staffers are available to handle the resulting workload.
Should the lower-than-expected call volume continue, IRS may have an
opportunity to shift the ACS staff back to their most productive
collection work. This could further reduce the revenue foregone from
using ACS staff to answer stimulus-related telephone calls. To date,
IRS has not reduced its projections for future stimulus-related call
volume. If the projections are reduced, IRS may be able to resume
sending out at least some ACS-generated notices.
According to IRS officials, IRS considered alternatives to shifting ACS
staff, including contracting out, using other IRS staff, or using
Social Security Administration or other federal staff, but decided the
alternatives were not feasible. For example, contracting out was not
deemed feasible because of insufficient time to negotiate the contract
and conduct background checks and training.
Another cost--although not measured in dollars--is the decline in
telephone service shown in table 7. Because of the increased call
volume, IRS expects its assistor level of service to drop from 82
percent (the 2008 goal) to as low as 74 percent--the lowest level since
2002. IRS is already experiencing some declines in telephone service.
As of March 29, the level of service had dropped to 80 percent,
taxpayers were waiting a minute and a half longer than last year, and
they were hanging up 43 percent more often while waiting to speak to an
assistor. Between March 3 and March 29, IRS assistors answered over
572,000 stimulus-related calls.[Footnote 25] IRS expects call volume to
increase rapidly in upcoming weeks as taxpayers receive their stimulus
notices in the mail.
Because IRS is in the early stages of implementing the stimulus
legislation, IRS officials do not have much information about the
actual costs. Through March, IRS estimates that it has spent almost
$103 million, mostly for postage.
Agency Comments:
In commenting on a draft of our earlier report on the FY 2009 budget
request and 2008 tax filing season, IRS officials said that, because of
the short time frame for our report, they did not have time to fully
analyze our recommendation and, therefore, were unable to respond at
the time. They provided technical comments at that time and again for
this statement, and we made those changes where appropriate. We have
agreed to meet with IRS to further discuss the ROI recommendation.
Mr. Chairman, this concludes my prepared statement. Mr. Powner and I
would be happy to respond to questions that you or other Members of the
Subcommittee may have at this time.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact James
R. White, Director, Strategic Issues, on (202) 512-9110 or
whitej@gao.gov or David A. Powner, Director, Information Technology
Management Issues, on (202) 512-9296 or pownerd@gao.gov. Contact points
for our offices of Congressional Relations and Public Affairs may be
found on the last page of this statement. Individuals making key
contributions to this testimony include Joanna Stamatiades, Assistant
Director; Carlos E. Diz; Sarah A. Farkas; Charles R. Fox; Leon H.
Green; Carol M. Henn; Lawrence M. Korb; Paul B. Middleton; Karen V.
O'Conor; Sabine R. Paul; Cheryl M. Peterson; and Neil A. Pinney.
[End of section]
Footnotes:
[1] Internal Revenue Service, Reducing the Federal Tax Gap (Washington,
D.C.: Aug. 2, 2007); and Internal Revenue Service, The 2007 Taxpayer
Assistance Blueprint (Washington, D.C.: 2007).
[2] Pub. L. No. 110-185 (2008).
[3] GAO, Internal Revenue Service: Fiscal Year 2009 Budget Request and
Interim Performance Results of IRS's 2008 Tax Filing Season, GAO-08-567
(Washington, D.C.: Mar. 13, 2008) and GAO, Business Systems
Modernization: Internal Revenue Service's Fiscal Year 2008 Expenditure
Plan, GAO-08-420 (Washington, D.C.: Mar. 7, 2008).
[4] Milestones represent different phases in IRS's project life cycle.
[5] GAO, Tax Administration: 2007 Filing Season Continues Trend of
Improvement, but Opportunities to Reduce Costs and Increase Tax
Compliance Should Be Evaluated, GAO-08-38 (Washington, D.C.: Nov.15,
2007) and GAO, Tax Administration: Most Filing Season Services Continue
to Improve, but Opportunities Exist for Additional Savings, GAO-07-27
(Washington, D.C.: Nov. 15, 2006).
[6] The funding provided in FY 2008 was two-year funding. Since IRS was
ramping up the program being funded--providing matching grants to
volunteer preparer organizations--in 2008, additional funding was not
needed for 2009. Despite not asking for additional funding, IRS is
expecting to see large, but unquantified, growth in tax returns
prepared at VITA sites. According to IRS officials, IRS does not have a
separate line item showing how much it spent on VITA overall.
[7] These nonlegislative initiatives involve (1) reducing the tax gap
for small businesses and the self-employed; (2) reducing it for large
businesses; (3) increasing reporting compliance related to offshore
activity; (4) through research, improving tax gap estimates,
measurement, and detection of noncompliance; and (5) expanding document
matching.
[8] GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities
Cost Basis Would Improve Compliance if Related Challenges Are
Addressed, GAO-06-603 (Washington, D.C.: June 13, 2006).
[9] GAO, Tax Administration: Benefits of a Corporate Document Matching
Program Exceed the Costs, GAO/GGD-91-118 (Washington, D.C.: Sept. 27,
1991).
[10] GAO, Tax Administration: Costs and Uses of Third-Party Information
Returns, GAO-08-266 (Washington, D.C.: Nov. 20, 2007).
[11] GAO, Internal Revenue Service: Assessment of the 2008 Budget
Request and an Update of 2007 Performance, GAO-07-719T (Washington,
D.C.: May 9, 2007).
[12] GAO-07-719T.
[13] GAO-08-567.
[14] In FY 2007 correspondence audits took, on average, 1.4 hours to
conduct compared to the 30.8-hour average for field audits done at
taxpayers' locations and the 7.8-hour average for field audits done at
IRS offices.
[15] GAO-08-567.
[16] GAO-08-420.
[17] Milestones represent different phases in IRS's project life cycle.
[18] GAO, Business Systems Modernization: Internal Revenue Service's
Fiscal Year 2005 Expenditure Plan, GAO-05-774 (Washington, D.C.: July
22, 2005).
[19] GAO, Business Systems Modernization: Internal Revenue Service's
Fiscal Year 2007 Expenditure Plan, GAO-07-247 (Washington, D.C.: Feb.
15, 2007).
[20] Earned value management is a project management tool that
integrates the investment scope of work with schedule and cost elements
for investment planning and control. This method compares the value of
work accomplished during a given period with that of the work expected
in the period. Differences between accomplishments and expectations are
measured in both cost and schedule variances.
[21] Taxpayers who are unable to meet the April 15 filing deadline can
file a Form 4868, the automatic extension of time to file, which gives
them until October 15 to submit a 2007 tax return.
[22] When IRS has completed sending its initial series of notices to
tax debtors, it assigns the debts to its collections programs, such as
ACS. ACS is an automated telephone-based system designed to call tax
debtors. ACS staffers then attempt to talk with tax debtors to try to
collect outstanding tax debt. IRS estimated there are about 1,200 ACS
staff in its W&I division and about 1,100 in its SB/SE division.
[23] IRS suspended notices sent by ACS examiners, such as final notices
before enforcement, collection due process notices, and notices of
levy.
[24] IRS arrived at the estimates by taking a 3-year average of dollars
collected by closing ACS cases for both its W&I and SB/SE divisions.
IRS determined the projected foregone revenue by multiplying the
average dollars collected per ACS staff by the projected lost case
closures. IRS plans to minimize the use of SB/SE staff because the
revenue collected by SB/SE is greater than for W&I.
[25] According to IRS officials, before March 3, taxpayers with
stimulus-related calls were transferred to an automated message, which
told taxpayers that additional information would be forthcoming. IRS
estimated that the number of these calls frequently ranged from 20,000
to 60,000 per day. IRS assistors started answering stimulus-related
questions on March 3, and IRS established its dedicated telephone line
for stimulus-related calls on March 14.
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