IRS Used an Improved Methodology to Allocate Enforcement Revenues Between Base Programs and Initiatives, but Estimates Vary Depending on Assumptions

In reviews of past compliance initiatives, we identified several weaknesses in IRS’ methodology for computing and tracking initiative results. In preparing its fiscal year 1995 Compliance Initiatives Report, for example, IRS recognized the impact of opportunity costs, obtained revenue data from an automated system (ERIS) that was designed to track actual enforcement results, and improved the report’s usefulness to Congress by including not only the estimated results of the initiatives but also the estimated results of the base enforcement programs and explanations for variances between the results anticipated when the initiatives were approved and the estimated final results. Also, in computing the results of the fiscal year 1995 compliance initiatives, IRS adopted a rule that no FTEs, and thus no revenue, would be allocated to the initiatives until planned base staffing had been achieved. Although the methodology used for the fiscal year 1995 initiatives is an improvement over previous methodologies, the results of that methodology are estimates that are sensitive to various productivity assumptions. Because its systems do not distinguish between base and initiative activities, IRS, as part of its methodology, developed the formula we describe in appendix I to allocate the $31.4 billion in enforcement revenue between base and initiative activities. Before implementing its new methodology, IRS briefed us on the allocation formula. IRS did not clearly disclose that fact in the Compliance Initiatives Report. Caveats to Consider in Interpreting IRS’ Reported Results

In considering IRS’ estimates of the results of the fiscal year 1995 compliance initiatives, there are two other caveats that are relevant: (1) the fact that IRS collected a certain amount in fiscal year 1995 as a result of the initiatives does not necessarily mean that IRS collected more enforcement revenue in fiscal year 1995 than in fiscal year 1994 but only that IRS collected more in fiscal year 1995 than it estimated it would have without the initiatives and (2) the first year’s results from the fiscal year 1995 initiatives are not necessarily indicative of what other compliance initiatives would generate in their first year. Despite the estimated additional revenue from the initiatives, however, the amount of enforcement revenue collected in fiscal year 1995 was less than the amount collected in fiscal year 1994. If future initiatives require a greater proportion of new staff, the results could be different from those in fiscal year 1995 because new staff (1) require more training, which, under IRS’ current procedures for training new staff, increases the opportunity cost associated with moving experienced staff off-line to do the training and (2) generally can be expected to generate less revenue, at first, than experienced staff. Decisions on how to allocate staff among enforcement programs also affects initiative results. We do not have a basis for determining what the correct assumptions should be, but our sensitivity analyses showed that a change in the assumptions used could have a significant effect on the reported initiative results of $803.3 million.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) Fiscal Year (FY) 1995 Compliance Initiatives Report, focusing on: (1) the methodology IRS used to allocate staff years and revenues between the base enforcement programs and the compliance initiatives; and (2) certain caveats to consider in interpreting IRS' reported results.

What GAO Found

GAO noted that: (1) IRS could not compile actual revenue results from the FY 1995 compliance initiatives because the Enforcement Revenue Information System (ERIS) only provides information on the total amount of revenue collected as a result of enforcement activities and because other systems, such as those that track IRS staffing, also do not account separately for base enforcement activities and initiative activities; (2) therefore, IRS developed a new methodology to allocate FY 1995 enforcement revenues between base programs and the initiatives; (3) IRS' new methodology: (a) accounted for the opportunity costs associated with moving experienced staff off-line to train new staff; (b) provided that no staff or revenue would be allocated to the initiatives until planned staffing for base programs had been achieved; and (c) improved the Compliance Initiatives Report's usefulness to Congress by including total staffing and total revenue for the various enforcement programs, allocated between base and initiatives, along with explanations for variances between the results anticipated when the initiatives were approved and the estimated final results; (4) although the methodology used for the FY 1995 initiatives is an improvement over previous methodologies, the results of that methodology are estimates that are sensitive to assumptions embedded in the methodology about the productivity of new staff and more experienced staff; (5) those assumptions were based on the judgments of IRS managers rather than empirical data; (6) GAO does not know what the correct assumptions are, but GAO's sensitivity analyses showed that a change in productivity rates could have a significant effect on the reported results; (7) in considering IRS' estimates of the FY 1995 compliance initiatives, there are two other caveats that are relevant; (8) the fact that the initiatives generated a certain amount of revenue in FY 1995 does not necessarily mean that IRS collected more enforcement revenue in FY 1995 than it did in FY 1994 but only that IRS collected more enforcement revenue in FY 1995 than it had estimated it would collect without the initiatives; (9) in fact, the amount of enforcement revenue IRS reported collecting in FY 1995 was less than that reported for FY 1994; and (10) because, the estimates of revenue attributable to the compliance initiatives depended on various assumptions, including how IRS decided to allocate staff, the results in FY 1995 are not necessarily indicative of what other compliance initiatives would generate in their first year.