IRS requests funding by  appropriation accounts, which align broadly with its strategic goals, which  are to (1) deliver high quality and timely service to reduce taxpayer  burden and encourage voluntary compliance; and (2) effectively enforce  the law to ensure compliance with tax responsibilities and combat fraud. The President’s fiscal year 2016 budget request  includes $3.24 billion for IRS IT investments. Funding Declined for Most IRS Business Units and Tradeoffs to Manage Reductions May Affect Some Programs’ Effectiveness and Increase Risk

		Fifteen of Eighteen Business Units Decreased Spending

IRS’s total appropriations declined from a high of $12.1 billion in fiscal  year 2010 to $11.3 billion in fiscal year 2014, a reduction of about 7  percent. For  example, SB/SE, which was the largest business unit in fiscal year 2010,  experienced a 14 percent decrease in obligations—from $2.6 billion to  $2.3 billion—from fiscal year 2010 to fiscal year 2014. Selected Business Units Scaled Back Activities, Potentially Reducing Program Effectiveness or Increasing Risk to IRS and the Federal Government

Each business unit we examined—HCO, Office of Chief Counsel, and  SB/SE—took actions to absorb budget reductions. According to IRS officials,  statutorily mandated activities—such as tax litigation in the Office of Chief  Counsel—remained a priority. Examples of Programs and Services Reduced or Eliminated

Non-filer investigations. Examples of Deferred Programs or Acquisitions

Software acquisitions. Background reinvestigations. For fiscal year 2016, the President’s  Budget requests $3.5 million and 11 FTEs for IRS to implement  federal investigative standards, which includes reinvestigations of  employees. IRS Is Using Its Budgeting Flexibility and Taking Steps to Improve Agency-Wide Coordination of Budget Decisions

		IRS Has Flexibility in Spending User Fee Revenue

In fiscal year 2015, IRS plans to allocate less user fee revenue to the  taxpayer services account than in previous years ($49 million, compared  to around $180 million in fiscal years 2012, 2013, and 2014). IRS  transferred $416 million of that money to its appropriation accounts which  accounted for 3.4 percent of IRS’s total available resources. Ultimately, IRS’s budget  decreased $346 million from fiscal year 2014 to fiscal year 2015, a 3.1  percent decline. IRS Is Working to Increase Agency-Wide Coordination in Budget Decisions in Response to Constrained Budget Environment

Recently, IRS launched two efforts to increase management coordination  in budget formulation and execution decisions. IRS Reported on Major IT Investments in Its Fiscal Year 2016 Congressional Justification, but Some Information Was Inaccurate or Unclear

		IRS Provided Inaccurate Data to the Congress

In its fiscal year 2016 CJ, IRS provided detailed information about its  major IT investments, as it did in the 2014 and 2015 CJs; however, the  information provided on actual obligations to date was inaccurate, due to  potential deficiencies in some internal controls over the preparation of the  CJ. Because the CJ reports inaccurate information about amounts  obligated to date for most of the 20 listed major IT investments, Congress  does not have accurate, reliable, and current data to inform its budget  decisions or aid in its oversight. Some IT Investment Information Was Unclear Because IRS Did Not Use Standard Definitions

IRS reported information on “life-cycle cost” and “projected useful life of  the current asset” for each major IT investment in the fiscal year 2016 CJ,  but did not use standard definitions for these terms or define or explain  the terms in such a way that they could be understood and used. IRS Is Taking Steps to Implement GAO Recommendations, Including Those Related to Greater Use of Return on Investment Data and Improvements in the PPACA Cost Estimate

As of February 2015, we have 88 open recommendations and 8 matters  for congressional consideration that could have financial implications if  implemented. IRS has  made progress in response to this recommendation. We also recommended that IRS calculate actual ROI for implemented  initiatives. Updated PPACA Cost Estimate Showed Improvement and Met or Substantially Met Criteria in Three of Four Overall Categories, but Is Still Not Considered Reliable

IRS’s PPACA cost estimate identifies the costs of planning, developing  and implementing the IT systems needed to support its role in  implementing PPACA. Encompasses the planning, development, and  implementation of IT systems needed to support  IRS’s tax administration responsibilities associated  with the Patient Protection and Affordable Care  Act. Status  IRS’s Research, Analysis, and Statistics Division  has begun to estimate marginal direct revenues  and marginal costs attributable to specific  compliance projects within its correspondence  exam program.
Why GAO Did This Study

The financing of the federal government depends largely upon IRS's ability to collect taxes, including providing taxpayer services that make voluntary compliance easier and enforcing tax laws to ensure compliance with tax responsibilities. For fiscal year 2016, the President requested $12.9 billion in appropriations for IRS; the request is almost $2 billion (18 percent) more than IRS's fiscal year 2015 appropriation.
Because of the size of IRS's budget and the importance of its service and compliance programs for all taxpayers, GAO was asked to review the fiscal year 2016 budget request for IRS and the effects of recent budget constraints. In February 2015, GAO reported interim information on IRS's budget. This report (1) analyzes select IRS business units' budget and staffing; (2) describes how IRS is managing in a constrained budget environment; (3) assesses key data for IT investments; and (4) describes IRS progress in implementing selected GAO open recommendations. To conduct this work, GAO reviewed the fiscal year 2016 CJ, IRS and Office of Management and Budget guidance, and IRS data from fiscal years 2010 to 2014, and interviewed IRS officials.

What GAO Found

Business unit trends. Internal Revenue Service (IRS) total appropriations declined from a high of $12.1 billion in fiscal year 2010 to $11.3 billion in fiscal year 2014, a reduction of about 7 percent. GAO selected business units with large declines in obligations—both dollar amount and percent—from fiscal year 2010 to fiscal year 2014, the most current spending data available. To absorb budget cuts, the business units GAO reviewed—Human Capital Office, Office of Chief Counsel, and Small Business/Self-Employed Division—each reduced staff (full-time equivalents or FTEs) by 16 to 30 percent. According to officials, they also prioritized legally required programs, such as tax litigation, and reduced some programs or services, such as limiting non-filer investigations, postponing software acquisitions, and delaying approximately 24,000 employee background reinvestigations. Such scaled back activities potentially reduce program effectiveness or increase risk to IRS and the federal government.
Budget environment. IRS's budget decreased by an additional $346 million from fiscal year 2014 to fiscal year 2015. IRS used its flexibility to absorb this reduction by allocating user fee revenue, which comprised 3.4 percent of its budget, or $416 million, in fiscal year 2014. Additionally, to increase agency-wide coordination of budget decisions, IRS formed a new office and committee to inform budget formulation and execution decisions.
Information technology data. IRS requested $3.2 billion for information technology (IT) investments. This accounted for 23 percent of IRS's budget request for fiscal year 2016. However, IRS provided inaccurate data on actual obligations to date for major IT investments in its congressional justification (CJ) for fiscal year 2016. As a result, Congress does not have accurate, reliable, and complete data on IT investments to inform its budget decisions or aid in its oversight. Additionally, IRS did not use standard definitions for “life-cycle cost” and “projected useful life of the current asset” or explain the terms in a way that could be understood and used.
Open GAO recommendations. Eighty-eight recommendations and eight matters for congressional consideration could have financial implications if implemented. IRS made progress implementing many recommendations, including two particularly important ones. First, IRS has begun to estimate return on investment for specific compliance projects within its correspondence exam program. Second, IRS's updated cost estimate for the Patient Protection and Affordable Care Act improved from previous versions and met or substantially met the criteria in three of four overall categories, but is still not reliable because it only partially met the criteria in the overall credibility category.

What GAO Recommends

GAO recommends that IRS implement controls to ensure that information reported on major IT investments is accurate, define key terms in the CJ, and continue implementing previous recommendations. IRS agreed with the recommendations.