	Background

Productivity is defined as the efficiency with which inputs are used to  produce outputs. Measuring Productivity at IRS Is Challenging because Measuring the Output of Services Is Difficult

Because IRS provides services, such as providing information to taxpayers   and enforcing the tax laws, that are intangible and complex, measuring  output—and therefore productivity—is challenging. IRS, like other service providers,  could measure output in terms of its results—its impact on taxpayers—or  in terms of activities. IRS’s activities are easier to measure than results but still present  challenges. For example, an increase in exam cases closed per FTE would not indicate  an increase in true productivity if the increase occurred because FTEs were  shifted to less complex cases or the examiner allowed the quality of the  case review to decline to close cases more quickly. However Output Is Measured, IRS Can Improve Its Current Productivity Measures by Using Alternative Methods

The appropriate method for calculating productivity depends on the  purpose for which the productivity measure is being calculated. The  alternative methods that can be used for calculating productivity range  from computing single ratios—exams closed per FTE—to using complex  statistical methods to form composite indexes that combine multiple  indicators of outputs and inputs. The single ratios may be useful for  evaluating the efficiency of a single noncomplex activity. Composite indexes can also be used  to measure productivity of resources across an entire organization, where  many different activities are being performed. On the other hand, technology  changes might improve productivity even if the management of resources  has not changed. Illustrations of Alternative Methods of Measuring Productivity

Currently available IRS data can be used to produce productivity indexes  that control for complexity and quality. For individual exams, the comparison of productivity indexes shows that  the unweighted index understates the decline in productivity. By  controlling for complexity and quality, IRS managers would have more  complete information about the true productivity of activities, such as  exams, that can differ in these dimensions. In addition, the weighted  measures can be used to measure productivity for the organization, where  many different activities are being performed. More complete productivity measures would  provide better information about the effectiveness of IRS resources, IRS’s  budget needs, and IRS’s efforts to improve efficiency. These  improved data could be integrated with the methods for calculating  productivity illustrated in this report to further improve IRS’s productivity  measurement. However, this type of productivity index allows for only a single output and  a single input.
Why GAO Did This Study

In the past, the Internal Revenue Service (IRS) has experienced declines in enforcement productivity as measured by cases closed per Full Time Equivalent. Increasing enforcement productivity through a variety of enforcement improvement projects is one strategy being pursued by IRS. Evaluating the benefits of different projects requires good measures of productivity. In addition, IRS's ability to correctly measure its productivity has important budget implications. GAO was asked to illustrate available methods to better measure productivity at IRS. Specifically, our objectives were to (1) describe challenges that IRS faces when measuring productivity, (2) describe alternative methods that IRS can use to improve its productivity measures, and (3) assess the feasibility of using these alternative methods by illustrating their use with existing IRS data.

What GAO Found

Measuring IRS's productivity, the efficiency with which inputs are used to produce outputs, is challenging. IRS's output could be measured in terms of impact on taxpayers or the activities it performs. IRS's impacts on taxpayers, such as compliance and perceptions of fairness, are intangible and costly to measure. IRS's activities, such as exams or audits conducted, are easier to count but must be adjusted for complexity and quality. An increase in exams closed per employee would not indicate an increase in productivity if IRS had shifted to less complex exams or if quality declined. IRS can improve its productivity measures by using a variety of methods for calculating productivity that adjust for complexity and quality. These methods range from ratios using a single output and input to methods that combine multiple outputs and inputs into composite indexes. Which method is appropriate depends on the purpose for which the productivity measure is being calculated. For example, a single ratio may be useful for examining the productivity of a single simple activity, while composite indexes can be used to measure the productivity of resources across an entire organization, where many different activities are being performed. Two examples show that existing data, even though they have limitations, can be used to produce a more complete picture of productivity. For individual exams, composite indexes controlling for exam complexity show a larger productivity decline than the single ratio method. On the other hand, for exams performed in the Large and Mid-Size Business (LSMB) division, the single ratio understates the productivity increase shown, after again controlling for complexity. By using alternative methods for measuring productivity, managers would be better able to isolate sources of productivity change and manage resources more effectively. More complete productivity measures would provide better information about IRS effectiveness, budget needs, and efforts to improve efficiency.