	IRS’s Request Increases Enforcement Spending and Identifies Savings, but Provides Limited Justification for Some New Spending, and Other Savings Opportunities Exist

IRS’s 2008 budget request proposes to increase spending. Figure 1 shows that this continues a trend since 2004 of shifting a greater  portion of spending toward enforcement as compared to service. In the 2008 budget submission, IRS proposes a number of new initiatives,  all of which are intended to improve taxpayer compliance—some by  increasing staffing for enforcement or making legislative changes, and  some by improving taxpayer service or infrastructure. To better  understand IRS’s initiatives and their expected benefits and costs, we  asked for supplementary documentation on selected new spending  initiatives:  Improve compliance among small businesses and self-employed (SB/SE)  taxpayers: $73.2 million; 485 FTEs    Critical upgrades to IT infrastructure: $60 million; 0 FTEs  Improve tax gap estimates, measures, and noncompliance detection:   $41.0 million; 258 FTEs  Improve compliance for large multinational businesses: $26.2 million; 158  FTEs    Research effects of taxpayer service on compliance: $5.0 million; 8 FTEs    Expand volunteer income tax assistance (VITA): $5.0 million; 46 FTEs  Our review of the justifications showed that some had descriptive, cost,  and expected performance information while others lacked such  information. Changing the menu of taxpayer services: IRS recently issued its  comprehensive strategy for improving taxpayer service, including for  telephone, walk-in, volunteer and Web site assistance. IRS Has Made Progress on Enforcement, but Enforcement Remains High Risk Because of the Tax Gap

IRS has made noticeable progress in its enforcement efforts including  increasing the amount of direct enforcement revenue collected, number of  collection activities undertaken, and enforcement staff. Nevertheless,  enforcement of the tax laws remains high risk, because of the persistence  of the tax gap and the lack of a data-based plan. IRS Has Taken Some Steps to Improve Enforcement

IRS reported that direct enforcement revenue rose from $43.1 billion in    FY 2004 to $48.7 billion in FY 2006 (a 13 percent increase). The tax gap has been a persistent problem in spite of a myriad of  congressional and IRS efforts to reduce it, as the rate at which taxpayers  voluntarily comply with our tax laws has changed little over the past three  decades. Returns Processing Is Comparable to Last Year, Despite Delays with CADE and Implementation of Tax System Changes

From January 1 through April 20, 2007, IRS processed approximately   104.6 million individual income tax returns, about the same number as last  year, and issued 88.2 million refunds for $203 billion compared to           85.2 million refunds for $190.5 billion at the same time last year. This means that millions of taxpayers did not benefit from  faster CADE processing this year. Although electronic filing continues to grow, taxpayers’ use of the Free  File program continues to decline. IRS officials reported that tax system changes have had minimal impact on  telephone operations so far this filing season. Despite progress made in implementing BSM projects and improving  modernization management controls and capabilities, significant  challenges and serious risks remain, and further program improvements  are needed, which IRS is working to address. In addition, more work remains to be  done by the agency to fully address our prior recommendation of  developing a long-term vision and strategy for completing the BSM  program, including establishing time frames for consolidating and retiring  legacy systems. For  example, delays in deploying the latest release of CADE to support the  current filing season have resulted in continued contention for key  resources and will likely impact the design and development of the next  two important releases, which are planned to be deployed later this year. Without such  information, decisions makers do not have an informed basis on whether  to approve and fund new initiatives. For example, the initiative for improving compliance  estimates provided no explanation of how the 258 FTEs were determined  or basic information on the work such as the number of examinations to  be conducted.
Why GAO Did This Study

The Internal Revenue Service's (IRS) budget request shows how IRS intends to balance spending for enforcement and taxpayer service, including spending for new initiatives and the Business Systems Modernization (BSM) program. A combination of enforcement and taxpayer service promotes compliance with the tax laws. GAO was asked to (1) compare IRS's proposed FY 2008 budget to prior years' and assess how the new spending initiatives are justified, and (2) describe IRS's enforcement, filing season, and BSM performance. GAO analyses are based on IRS's 2008 budget submission, supplementary IRS data, interviews with IRS officials, and prior GAO reports. Some of GAO's analyses have been reported earlier this year and updated here.

What GAO Found

IRS's budget proposes to increase spending by almost 5 percent to $11.6 billion. The budget proposes shifting a greater proportion of spending to enforcement, continuing a trend since 2004. IRS projects that revenue from the new initiatives will have a relatively small impact on the tax gap--less than one percent of the gap last estimated at $290 billion in 2001. The tax gap is the difference between what taxpayers owe and voluntarily pay. Justifications for the new initiatives varied with some lacking descriptive, cost, and expected performance information. For example, an initiative for improving compliance estimates provided no information on how the budget and staff needed or work to be done were determined. Without such information, decision makers do not have an informed basis for approving and funding the new initiatives. IRS has made noticeable progress in its enforcement efforts including increasing the amount of enforcement revenue collected and enforcement staffing. For example, between FY 2004 and 2006 enforcement revenue increased 13 percent to $48.7 billion. Nevertheless, enforcement remains on GAO's high-risk list. The tax gap has been a persistent problem in spite of efforts to reduce it, as the rate of taxpayers' voluntarily compliance with the tax laws has changed little over the past three decades. To better target enforcement resources, IRS has requested funding to do additional compliance research which GAO has long supported. Finally, GAO has reported on IRS's lack of a data-based plan to improve compliance. Filing season performance in 2007 improved in some areas compared to prior years', but there have been challenges. As of April 20, IRS processed about 104.6 million individual income tax returns and issued 88.2 million refunds. Electronic filing grew, telephone access is somewhat better, and Web site use continues to grow. However, fewer than 4 percent of eligible taxpayers used the Free File program. The latest release of Customer Account Data Engine (CADE), the new tax processing system, was delayed. As a result, millions of taxpayers did not benefit from CADE's faster processing of refunds. IRS recently issued its plan, the Taxpayer Assistance Blueprint, to improve taxpayer service. Despite progress in implementing BSM projects including for CADE and improving management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. IRS has more to do to address GAO's prior recommendations such as developing a long-term strategy that would include time frames for retiring legacy computer systems.