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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

September 2013: 

IRS 2014 Budget: 

Improvements Made to Budget Request and Cost Estimate, but Further 
Actions Needed: 

GAO-13-835: 

GAO Highlights: 

Highlights of GAO-13-835, a report to congressional committees. 

Why GAO Did This Study: 

The financing of the federal government depends largely on IRS’s 
ability to administer the tax laws, which includes providing service 
to taxpayers and enforcing the law to ensure everyone pays the taxes 
they owe. For fiscal year 2014, the President requested $12.9 billion 
for IRS, an increase of 9 percent over fiscal year 2012 actual levels. 
Because of the size of IRS’s budget and the importance of its 
programs, GAO was asked to review the fiscal year 2014 budget request. 
In April and May 2013, GAO reported preliminary observations on IRS’s 
budget. Among other things, this report assesses how IRS prioritizes 
new initiatives; steps IRS has taken to improve the PPACA cost 
estimate and the reporting transparency of the related IT investment; 
and the type of information available in the budget justification 
about major IT systems. To address these objectives, GAO reviewed the 
fiscal year 2014 budget justification, compared the updated PPACA cost 
estimate to GAO’s Cost Estimating and Assessment Guide, and 
interviewed IRS Corporate Budget officials. 

What GAO Found: 

For the fiscal year 2014 budget formulation process, the Internal 
Revenue Service (IRS) implemented a new process that uses templates to 
help screen, prioritize, and select new initiatives before detailed 
business cases are developed to support funding requests. The template 
information that GAO reviewed varied in detail and scope; for some, 
IRS guidance may have contributed to incomplete submissions to senior 
leadership. According to Office of Management and Budget Circular A-
94, in order to evaluate and compare funding initiatives, decision-
makers need to be aware of benefits, costs, and strategies related to 
achieving program goals. By improving guidance on the type of data to 
include, IRS could help ensure the templates are fully completed. 

IRS significantly improved its Patient Protection and Affordable Care 
Act (PPACA) cost estimate. In particular, the December 2012 estimate 
is more comprehensive, reflecting the full life-cycle cost of the 
program—-estimated at $1.89 billion for fiscal year 2010 through 2026. 
A few areas of improvement remain, primarily regarding the accuracy 
and credibility of the cost estimate. For example, IRS showed how the 
December 2012 estimate differed from the previous estimate, but did 
not explain the factors that resulted in the variances. In addition, 
IRS did not obtain a second cost estimate that could be used to assess 
the reasonableness of the $1.89 billion estimated program costs. 

Table: Overall Assessment of PPACA Cost Estimate Alignment with Best 
Practices: 

Best practice: Comprehensive; 
October 2010 cost estimate: Partially meets; Updated December 2012 
cost estimate: Substantially meets. 

Best practice: Well documented; 
October 2010 cost estimate: Partially meets; Updated December 2012 
cost estimate: Substantially meets. 

Best practice: Accurate; 
October 2010 cost estimate: Partially meets; Updated December 2012 
cost estimate: Partially meets. 

Best practice: Credible
October 2010 cost estimate: Minimally meets; Updated December 2012 
cost estimate: Partially meets. 

Key: 
Substantially meets: IRS provided evidence that satisfies a large 
portion of the criterion. 

Partially meets: IRS provided evidence that satisfies about half of 
the criterion 

Minimally meets: IRS provided evidence that satisfies a small portion 
of the criterion. 

Source: GAO analysis of IRS documentation. 

[End of table] 

Although the information technology (IT) systems for PPACA met dollar 
thresholds (as outlined in the Department of Treasury’s guidance) as a 
major investment for public reporting, IRS did not report this as 
such. Officials told GAO they did not have time to prepare the 
information for the fiscal year 2014 budget justification, but plan to 
do so for fiscal year 2015. Until IRS publicly reports the IT systems 
for PPACA as a major investment, transparency about these systems’ 
implementation and administration is limited. 

Although IRS included new and useful information on its major IT 
investments in the budget justification (such as life-cycle costs) 
other important information (such as the start date and percent of 
life-cycle costs obligated) is reported elsewhere or must be 
calculated. IRS officials said they could consolidate this information 
for ease of review. Consolidating key budget and performance data 
would ensure Congress has comprehensive, easily accessible information 
on major IT investments to guide decisions. 

What GAO Recommends: 

GAO recommends that IRS improve budget formulation guidance for new 
initiatives; improve the accuracy and credibility of future updates to 
the PPACA cost estimate as well as report the related IT investment 
publicly; and consolidate major IT investment reporting. IRS agreed 
with three of GAO’s four recommendations and agreed with the majority 
of the actions associated with improving the accuracy and credibility 
of the PPACA cost estimate. 

View [hyperlink, http://www.gao.gov/products/GAO-13-835]. For more 
information, contact James R. McTigue, (202) 512-9110, or 
mctiguej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

IRS Can Report Some Program-Level Obligations and FTE Data: 

New Budget Formulation Process Identifies Priorities and Reduces Some 
Work, but Guidance is Insufficient: 

IRS Identified Potential Savings in Its Base Budget: 

IRS Developed New Revenue Protection and Revenue Enhancement ROI 
Projections: 

IRS Significantly Improved Its PPACA Cost Estimate, but Did Not 
Publicly Report Investment Information for the Fiscal Year 2014 Budget 
Request: 

IRS Expanded Information Reported on Its Major IT Investments in the 
Fiscal Year 2014 Budget Justification, but Additional Information 
Would Be Useful: 

IRS Implemented Six of Our Nine Prior Recommendations to Improve the 
Budget Presentation and Aid Decision Making: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Non-Interactive Version of Figure 1: IRS's Budget 
Formulation Structure: 

Appendix III: Figure 8: Pre-selection Budget Formulation Process --
Sample Template: 

Appendix IV: Reliability of Patient Protection and Affordable Care Act 
Cost Estimate: 

Appendix V: Summary of IRS's Major Information Technology (IT) 
Investments: 

Appendix VI: Comments from the Internal Revenue Service: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Availability of IRS Fiscal Year 2012 Obligations Data for 
Selected Program Activities, Organizational Entities, and Other 
Efforts of Interest: 

Table 2: Fiscal Year 2014 Projected Base Budget Savings (in Millions): 

Table 3: Overall Assessment of PPACA Cost Estimate Alignment with Best 
Practices: 

Table 4: Summary of IT Investment Data Presented in the Fiscal Year 
2014 Congressional Budget Justification for IRS and Exhibit 300: 

Table 5: Prior GAO Recommendations Implemented by IRS: 

Table 6: Budget-Related Recommendations to IRS That Remain Open: 

Table 7: Non-Interactive Version of Figures 9 through 12: PPACA Cost 
Estimate Alignment with Best Practices Outlined in the GAO Cost Guide: 

Figures: 

Figure 1: IRS Budget Formulation Structure: 

Figure 2: Alignment of Budget Execution Fund Centers to IRS's 
Organizational Structure: 

Figure 3: Location of Appeals Fund Center Obligations in IRS's Budget 
Formulation Structure: 

Figure 4: Location of Wage and Investment Fund Center Obligations in 
IRS's Budget Formulation Structure: 

Figure 5: Overview of IRS's Pre-selection Budget Formulation Process 
for Fiscal Year 2014: 

Figure 6: Projected ROI for Improve Identification and Prevention of 
Refund Fraud and Identity Theft Initiative: 

Figure 7: Projected ROI for Leverage Data to Improve Case Selection 
Initiative: 

Figure 9: PPACA Cost Estimate Alignment with Best Practices for 
Comprehensiveness: 

Figure 10: PPACA Cost Estimate Alignment with Best Practices for Being 
Well Documented: 

Figure 11: PPACA Cost Estimate Alignment with Best Practices for 
Accuracy: 

Figure 12: PPACA Cost Estimate Alignment with Best Practices for 
Credibility: 

Abbreviations: 

ACA IT: Affordable Care Act information technology: 

BSM: Business Systems Modernization: 

DME: development, modernization and enhancement: 

FTE: full-time equivalent: 

GPRA: Government Performance and Results Act: 

HHS: Department of Health and Human Services: 

IRDM: Information Reporting and Document Matching: 

IRS: Internal Revenue Service: 

IT: information technology: 

MeF: Modernized e-File: 

OMB: Office of Management and Budget: 

PPACA: Patient Protection and Affordable Care Act: 

ROI: return on investment: 

Treasury: Department of Treasury: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

September 26, 2013: 

The Honorable Tom Udall: 
Chairman: 
The Honorable Mike Johanns: 
Ranking Member: 
Subcommittee on Financial Services and General Government: 
Committee on Appropriations: 
United States Senate: 

The Honorable Charles W. Boustany, Jr. Chairman: 
The Honorable John Lewis: 
Ranking Member: 
Subcommittee on Oversight: 
Committee on Ways and Means: 
House of Representatives: 

The financing of the federal government depends largely upon the 
Internal Revenue Service’s (IRS) ability to collect taxes, including 
providing taxpayers services to make voluntary compliance easier and 
enforcing tax laws to ensure everyone meets their obligation to pay 
taxes. 

For fiscal year 2014, the President requested a $12.9 billion budget 
for the IRS. This is an increase of 9 percent ($1,044 million) in 
discretionary funding over the fiscal year 2012 appropriation, and an 
increase of 8 percent (6,732 full-time equivalents) in staffing over 
the fiscal year 2012 actual levels.[Footnote 1] In April and May of 
2013, we reported preliminary observations on the fiscal year 2014 
budget request for IRS; we also reported budget and staffing trends 
from fiscal year 2010 through 2014, work we conducted related to 
proposals highlighted in the President’s budget request, and 
reductions to the fiscal year 2013 budget for IRS that were due to the 
continuing resolution and sequestration.[Footnote 2] Specific
amounts requested for fiscal year 2014 for IRS’s four appropriation
accounts are $5.7 billion for enforcement, $4.5 billion for operations
support, $2.4 billion for taxpayer services, and $301 million for 
Business Systems Modernization (BSM).[Footnote 3] 

Because of the size of IRS’s budget and the importance of its service 
and compliance programs for all taxpayers, you asked us to review the 
fiscal year 2014 budget request for IRS. In this report we (1) 
describe IRS’s capacity to report fiscal year 2012 obligations and 
FTEs by program activity, organizational entity, and other efforts of 
interest; (2) assess IRS’s process and the type of information used to 
prioritize and select new program initiatives; (3) describe proposed 
base budget savings; (4) describe IRS’s new projected return on 
investment (ROI) methodologies; (5) evaluate steps IRS took to improve 
the cost estimate for the Patient Protection and Affordable Care Act 
(PPACA)[Footnote 4] in accordance with GAO’s Cost Estimating and 
Assessment Guide (GAO Cost Guide)[Footnote 5] and determine the extent 
to which IRS is transparently reporting on the Affordable Care Act 
(ACA) information technology (IT) investment; (6) summarize IRS’s 
major IT investments and assess the type of information available in 
the congressional justification; and (7) describe IRS’s progress in 
implementing our prior budget-related recommendations. 

To conduct this work for all objectives, we reviewed key documents, 
such as the fiscal year 2014 congressional budget justification for 
IRS and IRS’s Financial Management Handbook. For the first objective, 
we analyzed inputs and outputs to the budget formulation process, and 
determined IRS’s ability to report information for eight program 
activities, organizational entities, and efforts of interest. For the 
second objective, we reviewed guidance related to IRS’s pre-selection 
budget formation process, and reviewed submissions for completeness 
against criteria outlined in the Office of Management and Budget (OMB) 
Circular A-94.[Footnote 6] 

For the third objective, we reviewed supporting documents obtained from
IRS on its proposed fiscal year 2014 budget savings. For the fourth
objective, we reviewed relevant studies on methods to calculate ROI. For
the fifth objective, we analyzed the updated PPACA cost estimate and
compared it to the characteristics of a high-quality cost estimate, as
identified in the GAO Cost Guide. For the sixth objective, we reviewed
Exhibit 300 “capital asset summaries,” prepared by IRS for major IT
investments, as well as IRS and OMB guidance on preparing those
documents, such as the Office of Management and Budget Guidance on
Exhibits 53 and 300—Information Technology and E-Government. For the
seventh objective, we obtained information on prior year budget
recommendations from various IRS officials and reviewed relevant
documentation to determine if they were implemented. In addition, we
interviewed IRS officials, including those from the Corporate Budget
Office, selected business units, the Office of Compliance Analytics, and
the Affordable Care Act program office. We spoke with IRS officials and
reviewed data collection procedures and determined that the data used in
this report were sufficiently reliable for our purposes 

We conducted this performance audit from October 2012 to September
2013 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 further 
details on our scope and methodology, see appendix I. 

Background: 

IRS Budget Formulation and Execution Structures: 

IRS formulates its budget at three levels: appropriation account, 
budget activity, and program activity, as shown in figure 1. (See 
appendix II for the non-interactive figure of IRS's budget formulation 
structure.) The annual budget request for IRS presents funding and FTE 
data at the appropriation and budget activity levels. IRS formulates 
its budget to align with its strategic goals, which is an intended 
outcome of the Government Performance and Results Act of 1993 (GPRA). 
[Footnote 7] 

Figure 1: IRS Budget Formulation Structure: 

[Refer to PDF for image: interactive graphic] 

Directions: For listings of specific program activities, mouseover the 
number of program activities in the circles below. 

To print full text version of this graphic, go to appendix II. 

Source: GAO analysis of IRS documents. 

Note: The number of program activities varies from one fiscal year to 
the next as IRS adjusts its budget formulation structure to address 
emerging priorities. Program activities are described in detail in the 
fiscal year 2014 congressional budget justification for IRS. 

[End of figure] 

IRS executes its budget by allocating funds from its appropriation 
accounts to fund centers. Fund centers manage and distribute funds and 
allocate funds to sub-units, known as cost centers, where funds are 
obligated. 

IRS's appropriation accounts align with its organizational structure 
at the highest level. For example, IRS has an Operations Support 
appropriation account and an Operations Support commissioner-level 
organization. In addition, IRS's organizational structure tracks 
roughly to its budget execution structure, which is made up of three 
types of fund centers: (1) support, (2) functional, and (3) operating. 
(See figure 2.) 

Figure 2: Alignment of Budget Execution Fund Centers to IRS's 
Organizational Structure: 

[Refer to PDF for image: organizational chart] 

Top level: IRS Commissioner[A]. 

Second level, reporting to IRS Commissioner: 

Operations Support[A]: 
* Agency-Wide Shared Services[B]; 
* Chief Financial Officer[B]; 
* Chief Technology Officer[B]; 
* IRS Human Capital Officer[B]; 
* Privacy, Governmental Liaison and Disclosure[B]. 

Services and Enforcement[A]: 
* Criminal Investigation[D]; 
* Large Business and International[C]; 
* Small Business and Self-Employed[C]; 
* Tax Exempt and Government Entities[C]; 
* Wage and Investment[C]. 

Other[A]: 
* Appeals[D]; 
* Chief Counsel[D]; 
* Communications and Liaison[D]; 
* National Taxpayer Advocate[D]. 

Key: 
[A] Commissioner level organizations. 
[B] Support fund centers. 
[C] Operating fund centers. 
[D] Functional fund centers. 

Source: GAO analysis of IRS documents. 

Note: This graphic shows common elements between IRS's organizational 
structure and budget execution structure. This illustration does not 
include three fund centers that are not part of IRS's organizational 
structure--Stewardship, Wage and Investment Stewardship, and Executive 
Leadership and Direction. In addition, the illustration does not 
include several units/functions identified in IRS's organizational 
structure that are not fund centers. 

[End of figure] 

The lower levels of the budget formulation and budget execution 
structures include (1) program activities, which break down the budget 
activities and are listed above; and (2) organizational entities and 
other efforts of interest, which are not discrete categories and are 
different perspectives of IRS's organizational structure. For example, 
Wage and Investment is one division within IRS and can be referred to 
as an organizational entity, while identity theft would be considered 
an area of interest that crosses divisions within IRS, including Wage 
and Investment. 

Alignment of Budget Execution and Formulation Processes: 

Prior to the preparation of the annual budget request, IRS budget 
staff ensure that FTE movements between budgetary accounts made during 
the fiscal year (e.g., shifting staff to work on different issues) 
match up with base budget resources assigned to each account. This 
review (which is conducted by the IRS Corporate Budget Office in 
coordination with business units) is necessary because business units 
may have added or eliminated staff during the course of the fiscal 
year, which can result in a misalignment of funding and FTEs during 
budget formulation. Further, the review ensures that FTEs--which 
represent the majority of IRS's budgetary resources--are fully funded 
by appropriation accounts and that salary and benefits are aligned 
with current FTE levels. 

IRS Can Report Some Program-Level Obligations and FTE Data: 

Obligations and FTE Data are Available for Some Program Activities, 
Organizational Entities, and Efforts of Interest With Limitations: 

In its annual budget request, IRS provides funding information at the 
appropriation account and budget activity levels, but not at the more 
detailed program activity level. IRS officials stated that they could 
provide more information at the program activity level; however, 
reporting on requested funding amounts for program activities could 
limit IRS's flexibility to reprogram funds given statutory 
restrictions.[Footnote 8] Still, as we reported in May 2010, IRS could 
provide additional information that highlights new program activities 
or those that are proposed for either expansion or reduction.[Footnote 
9] This more detailed information could increase transparency and 
demonstrate the agency's priorities to congressional decision makers. 

As an alternative to more detailed information on requested funds, IRS 
Corporate Budget officials told us they could provide prior year 
obligations and FTE data in greater detail than reported in the annual 
budget request, including information for some program activities, 
organizational entities, and other efforts of interest. For eight 
areas we selected as examples,[Footnote 10] IRS officials confirmed 
that they could provide fiscal year 2012 obligations data for six and 
partial information for one.[Footnote 11] They could not provide 
information for one, as shown in table 1. 

Table 1: Availability of IRS Fiscal Year 2012 Obligations Data for 
Selected Program Activities, Organizational Entities, and Other 
Efforts of Interest: 

Area description: Appeals[A]; 
Provides an independent, second review of IRS examination decisions; 
Availability of fiscal year 2012 obligations data: Available. 

Area description: Identity theft; 
Identifies and prevents the issuance of fraudulent tax returns caused 
by identity theft; 
Availability of fiscal year 2012 obligations data: Partially available. 

Area description: International exam and collections; 
Addresses international tax and financial crimes, including 
international tax evasion; 
Availability of fiscal year 2012 obligations data: Available. 

Area description: Merchant card and basis matching, and the related 
Information Reporting and Document Matching (IRDM) IT system; 
Establishes a new business tax return and information returns 
pertaining to merchant card payments and cost basis of securities and 
automatically matches information with the goals of increasing 
voluntary compliance and accurate reporting of income; 
Availability of fiscal year 2012 obligations data: Available. 

Area description: Offshore voluntary disclosure program; 
Encourages taxpayers with hidden offshore assets and income to 
voluntarily come back into the tax system; 
Availability of fiscal year 2012 obligations data: Not available. 

Area description: Online services; 
Develops new web-based taxpayer services tools; 
Availability of fiscal year 2012 obligations data: Available. 

Area description: Telephone & correspondence services; 
Allows taxpayers and paid preparers to communicate with IRS customer 
service representatives via phone and paper correspondence; 
Availability of fiscal year 2012 obligations data: Available. 

Area description: Wage & Investment[A]; 
Serves taxpayers whose primary income is derived from wages and 
investments; 
Availability of fiscal year 2012 obligations data: Available. 

Key: Available = IRS can provide the data; Partially available = IRS 
can provide some of the data; Not available = IRS cannot provide the 
data. 

Source: IRS Financial Management Code Handbook and discussions with 
IRS Corporate Budget officials. 

Notes: [A] To obtain both a simple and complex example of the 
information available and we only requested fiscal year 2012 
obligations data for the Appeals and Wage and Investment fund centers. 

[End of table] 

According to IRS officials, obligations data for identity theft are 
only partially available because IRS tracks obligations attributed to 
identity theft from its Wage and Investment fund center, which handles 
most of its identity theft workload. However, IRS does not track 
identity theft-related obligations incurred by other IRS business 
units. According to a senior official, IRS plans to establish a 
Servicewide internal order code for identity theft at the beginning of 
fiscal year 2014 because it has become a long-term priority. Officials 
said they were not able to provide fiscal year 2012 obligations data 
for the offshore voluntary disclosure program because they had not 
established a mechanism to track it (in part because the program was 
operated as a short-term effort in the past and, according to 
officials, has only recently been made permanent.) IRS has not decided 
if it will track obligations for the offshore voluntary disclosure 
program in the future.[Footnote 12] 

According to IRS officials, IRS obligations data for program 
activities, organizational entities, and other efforts of interest 
have some limitations. For example, the data do not include indirect 
costs, including costs associated with IRS-wide functions like human 
capital management and procurement. In addition, obligations 
associated with IT are tracked separately from non-IT costs in IRS's 
financial management system. For example, non-IT costs for merchant 
card and basis matching are tracked separately from the related 
Information Reporting and Document Matching (IRDM) IT system. 
Furthermore, organizational entities and other efforts of interest are 
not discrete. Obligations can be analyzed in different ways, such as 
from an organizational perspective or a program perspective. Different 
analyses should not necessarily be summed together because they may 
use different perspectives and, when considered together, might result 
in overlaps or gaps. For example, organizational entities and other 
efforts of interest have different perspectives where obligations may 
be counted towards either. For instance, obligations for the Wage and 
Investment fund center--an organizational entity--may overlap with 
related efforts of interest, such as identity theft. Users of IRS 
obligations data should be cognizant of these limitations. 

Funding Streams for Obligations Data Vary in Complexity: 

IRS's obligations data show how the elements of IRS's budget 
formulation and budget execution structures described in figures 1 and 
2 interact, and how those relationships vary in complexity. The data 
demonstrate the funding streams for IRS's obligations: they show which 
appropriation accounts, budget activities, and program activities in 
IRS's budget formulation structure received appropriated funds, as 
well as which fund centers within IRS's budget execution structure 
managed and distributed the funds. Some fund centers in IRS's budget 
execution structure receive appropriations from a relatively small 
number of appropriations accounts, budget activities, and program 
activities in IRS's budget formulation structure. For example, as 
shown in figure 3, IRS obligated about $240 million from the Appeals 
fund center in fiscal year 2012. While most Appeals fund center 
resources come from the Appeals program activity, it also receives 
funding from other parts of IRS's budget formulation structure, 
including funds from the International exams program activity. 

Figure 3: Location of Appeals Fund Center Obligations in IRS's Budget 
Formulation Structure: 

[Refer to PDF for image: illustration] 

Appropriations account: 

Enforcement: $240 million; 1,981 FTEs; 
Operations support: Negligible[A]; 0 FTEs. 

Budget activities: 

Enforcement: Exam and collections: $240 million; 1,981 FTEs; 
Operations support: Shared services and support: Negligible; 0 FTEs. 

Program activities: 

Exam and collections: 
* Appeals: $216 million; 1,841 FTEs; 
* Compliance services management: $15 million; 80 FTEs; 
* International exams: $10 million; 60 FTEs; 
Shared services and support: 
* Real estate and facilities management: Negligible; 0 FTEs. 

Appeals fund center: $240 million; 1,981 FTEs. 

Source: GAO analysis of IRS fiscal year 2012 obligations data. 

Note: Numbers may not add due to rounding. 

[A] Negligible refers to obligations of less than $1,000. 

[End of figure] 

Obligations data for organizational entities and other efforts of 
interest can also have a more complex relationship to IRS's budget 
formulation structure than the Appeals example shown above. For 
example, in fiscal year 2012 the Wage and Investment fund center 
received funding from 3 of IRS's 4 appropriations accounts, 5 of its 9 
budget activities, and 23 of its 83 program activities (see figure 4). 
In addition, the ease with which IRS can compile obligations data 
varies: it can be more difficult for IRS to compile obligations data 
for programs with a more complex relationship to its budget 
formulation and budget execution structures. 

Figure 4: Location of Wage and Investment Fund Center Obligations in 
IRS's Budget Formulation Structure: 

[Refer to PDF for image: illustration] 

Appropriations account: 

Taxpayer services: $1.870 billion; 27,836 FTEs; 
Enforcement: $471 million; 6,313 FTEs; 
Operations support: $45 million; 419 FTEs; 

Budget activities: 
Taxpayer services: Pre-filing taxpayer assistance and education: $354 
million; 3,502 FTEs; 
Taxpayer services: Filing and account services: $1.516 billion; 24,334 
FTEs; 
Enforcement: Exam and collections: $442 million; 5,893 FTEs; 
Enforcement: Investigations: $30 million; 420 FTEs; 
Operations support: Shared services and support: $45 million; 419 FTEs. 

Program activities: 
Pre-filing taxpayer assistance and education: 
* Pre-filing services management: $2 million; 15 FTEs; 
* Taxpayer communication and education: $88 million; 544 FTEs; 
* Media and publications: $63 million; 583 FTEs; 
* Account management and assistance, field assistance: $149 million; 
2,006 FTEs; 
* Wage and Investment management, headquarters $52 million; 354 FTEs; 
Filing and account services: 
* Filing and account services management: $3 million; 20 FTEs; 
* Submission processing: $493 million; 8,822 FTEs; 
* Account management and assistance, electronic and correspondence 
assistance: $952 million; 14,988 FTEs; 
* Electronic products and services support: $25 million; 305 FTEs; 
* Pre-refund: $8 million; 30 FTEs; 
* Health care tax administration: $15 million; 9 FTEs; 
* Joint operations center: $19 million; 160 FTEs; 
Exam and collections: 
* Compliance services management: $28 million; 203 FTEs; 
* Payment compliance, correspondence collection: $72 million; 990 FTEs; 
* Automated collection and support: $143 million; 1,971 FTEs; 
* Tax reporting compliance, document matching: $78 million; 1,114
* Tax reporting compliance, electronic and correspondence exam: $115 
million; 1,585 FTEs; 
* Earned income tax credit management and administration: $6 million; 
30 FTEs; 
Investigations: 
* Accounts management taxpayer assurance program: $30 million; 420 
FTEs; 
Shared services and support: 
* Shared support not provided by agency-wide shared services: $1 
million; 0 FTEs; 
* Statistics of income: $14 million; 215 FTEs; 
* Research: $10 million; 67 FTEs; 
* Wage and Investment business modernization support: $20 million; 138 
FTEs. 

Wage and Investment fund center: $2.386 billion; 34,568 FTEs. 

Source: GAO analysis of IRS fiscal year 2012 obligations data. 

[End of figure] 

New Budget Formulation Process Identifies Priorities and Reduces Some 
Work, but Guidance is Insufficient: 

For fiscal year 2014, IRS implemented a new, pre-selection budget 
formulation process to provide senior leadership with the opportunity 
to screen, prioritize, and select funding proposals before business 
units prepare detailed business cases.[Footnote 13] However, we found 
that in some instances the information was incomplete. Previously, 
business unit staff and subject matter specialists developed detailed 
business cases for each proposed initiative. Business cases include 
detailed narrative descriptions, multi-year cost estimates, and 
account breakouts. IRS budget officials told us the new process 
reduces work substantially for business units, since staff no longer 
need to develop extensive information for each proposal; instead, they 
only develop full information for proposals approved by senior 
leadership. 

The new pre-selection process requires business unit staff to prepare 
selective, consistent information utilizing templates. (See appendix 
III for a sample template.) Templates include high level summary 
information on the purpose of the initiative, the amount of additional 
funds and FTEs requested, and the estimated impact of the initiative. 
Management reviews the templates and identifies a preliminary list of 
approved initiatives. Next, approved initiatives are communicated to 
business units via a decision document, along with any suggested 
changes in scope, such as combining initiatives or changing requested 
FTE or dollar levels. After preliminary approval, business unit staffs 
prepare detailed business cases for approved initiatives.[Footnote 14] 
Figure 5 shows an overview of the new process. 

Figure 5: Overview of IRS's Pre-selection Budget Formulation Process 
for Fiscal Year 2014: 

[Refer to PDF for image: illustration] 

Business units prepare pre-selection templates based on corporate 
budget guidance, which are approved by business unit head. 

Senior leadership reviews pre-selection templates and decides which 
initiatives to approve. 

A list of approved initiatives is forwarded to business units. 

Business units develop detailed business cases for approved 
initiatives for incorporation in budget justification request. 

Final business cases and budget request submitted for approval by the 
Commissioner and IRS Oversight Board. 

Sources: GAO analysis of IRS information (information); PhotoDisc and 
IRS (image). 

[End of figure] 

Based on our review of the templates from the taxpayer services and 
enforcement organizations, we found that the information included by 
business units on their templates varied in terms of detail and scope. 
This variation could limit the ability of senior leaders to thoroughly 
evaluate proposals. For example, about half of the templates reviewed 
did not describe the proposed initiative's expected benefits, and 
while almost all templates included a brief description of the 
proposed initiative, some entries did not include information on the 
purpose of the initiative or the strategies that would be used to 
achieve program goals. According to OMB Circular A-94, in order to 
evaluate and compare funding initiatives, decision-makers need to be 
aware of benefits and costs (tangible and intangible), as well as 
strategies needed to achieve program goals.[Footnote 15] 

According to IRS budget officials, there were several reasons for 
variations among template submissions. In some instances, senior 
leadership was very familiar with proposed initiatives and familiar 
with the estimated impact; in other instances, business units were 
less adept at articulating benefits of the proposed initiative. 
Officials also said that senior leadership conducts oral discussions 
with the business units to clarify an initiative's benefits. 

Template instructions provided to business units may have contributed 
to some incomplete pre-selection template submissions. For instance, 
the guidance template does not provide an example of qualitative 
benefits (appropriate for some initiatives) or proposal strategies 
(especially relevant for initiatives that have not previously been 
proposed). IRS budget officials acknowledged that improvements could 
be made in the pre-selection process guidance, especially since this 
was the first year for this new process. Providing more robust 
guidance to business units on the information to include in pre-
selection templates could help to ensure that business units more 
fully complete these templates. 

IRS Identified Potential Savings in Its Base Budget: 

The fiscal year 2014 budget request for IRS shows proposed savings and 
efficiencies in its base budget in several areas totaling over $217 
million as shown in table 2.[Footnote 16] Some of IRS's expected 
fiscal year 2014 savings are anticipated to be achieved through 
operational changes, such as shifting funds to automate processes and 
streamlining or consolidating operations and functions to make them 
more cost-effective. 

Table 2: Fiscal Year 2014 Projected Base Budget Savings: 

Realizing Personnel Savings; 
Taxpayer Services: $13.2 million; 
Enforcement: $56.6 million; 
Operations Support: $7.9 million; 
BSM: [Empty]; 
Total: $77.8 million. 

Reducing IT Infrastructure; 
Taxpayer Services: [Empty]; 
Enforcement: [Empty]; 
Operations Support: $57.5 million; 
BSM: [Empty]; 
Total: $57.5 million. 

Capturing Savings from Space Optimization[A]; 
Taxpayer Services: [Empty]; 
Enforcement: [Empty]; 
Operations Support: $39.2 million; 
BSM: [Empty]; 
Total: $39.2 million. 

Funding Business Systems Modernization (BSM); 
Taxpayer Services: [Empty]; 
Enforcement: [Empty]; 
Operations Support: [Empty]; 
BSM: $30.0 million; 
Total: $30.0 million. 

Implementing Human Capital Administrative Efficiencies; 
Taxpayer Services: [Empty]; 
Enforcement: [Empty]; 
Operations Support: $7.9 million; 
BSM: [Empty]; 
Total: $7.9 million. 

Achieving e-File Savings; 
Taxpayer Services: $5.0 million; 
Enforcement: [Empty]; 
Operations Support: $0.1 million; 
BSM: [Empty]; 
Total: $5.0 million. 

Total savings; 
Taxpayer Services: $18.2 million; 
Enforcement: $56.6 million; 
Operations Support: $112.6 million; 
BSM: $30.0; 
Total: $217.4 million. 

Source: Fiscal Year 2014 congressional budget justification for IRS. 

Notes: Numbers may not add due to rounding. 

[A] Savings are shown as net. 

[End of table] 

IRS's 2014 fiscal year budget includes the following savings and 
efficiencies: 

* Realizing Personnel Savings: Personnel savings are mainly the result 
of staff attrition and hiring restrictions. 

* Reducing IT Infrastructure: Examples of IT infrastructure changes 
include providing improved data storage capacity, updating computer 
servers to be more efficient, adopting common technology platforms and 
a more efficient telecommunications infrastructure, and changing IT 
contracting practices. For example, IRS is in the process of 
implementing virtual computer servers for data storage. Also, the IRS 
is implementing new technologies for sharing computer services across 
the agency. 

* Capturing Savings from Space Optimization: IRS has reduced (or plans 
to reduce) its office inventory, having selected 123 of its 648 
offices to be closed, consolidated, or reduced.[Footnote 17] These 
rental savings are the result of attrition, hiring restrictions, and 
changes in working environments (such as increased telework and 
development of workspace standards that decrease individual office 
size). Space optimization savings require a one-time investment of 
$37.5 million to build out new and consolidated space and relocate 
employees, resulting in expected future rent savings of $76.7 million 
annually ($39.2 million net). 

* Funding BSM: BSM savings represent differences in projected costs of 
IT operations from one year to the next, including implementation 
costs related to the Current Customer Account Data Engine 2; 
Modernized e-File; Core Infrastructure; and Architecture, Integration, 
and Management. 

* Implementing Human Capital Efficiencies: Administrative efficiency 
efforts include the consolidation of employment activities and 
modifications to training programs. For example, IRS reduced the 
number of Employment Hiring Centers from 9 to 3. IRS also streamlined 
processing of requests for personnel-related changes, such as salary 
increases, transfers, or leaves of absence. In addition, the 
Employment Operations Unit automated its hiring process to enable 
electronic completion of pre-hire forms. Some training programs are 
being modified from classroom training to webinars, reducing travel 
costs and allowing more employees to attend. 

* Achieving e-File Savings: These savings result from labor reductions 
related to increased use of electronic filing of tax returns and 
corresponding decrease in paper returns. 

IRS Developed New Revenue Protection and Revenue Enhancement ROI 
Projections: 

In its fiscal year 2014 congressional justification, IRS included 
projected ROI for 10 enforcement initiatives, including two 
initiatives that used new approaches in estimating potential ROI: 
revenue protection and revenue enhancement. According to agency budget 
officials, IRS developed the new ROI methodologies because it did not 
have enough historical data on these initiatives to use the same 
methodology used for other initiatives. Since fiscal year 2008, IRS 
has included ROI projections for new revenue-generating enforcement 
initiatives in its congressional justification.[Footnote 18] IRS has 
generally calculated ROI projections for revenue generating 
initiatives based on the amount of additional tax collected. For each 
initiative, IRS calculated an estimate of the potential revenue 
collected by requested FTEs using 10 years of historical data. Because 
10 years of historical data were not available for the revenue 
protection and revenue enhancement initiatives, IRS developed new 
methodologies. 

For example, the fiscal year 2014 budget for IRS requests $101.1 
million for an "Improve the Identification and Prevention of Refund 
Fraud and Identity Theft" initiative. According to IRS, if funded, the 
initiative would protect revenue because these activities would 
identify fraudulent returns related to identity theft and resolve 
cases prior to issuing a refund. To estimate the amount of projected 
revenue that would be protected, IRS determined the dollar amount of 
erroneous refunds detected per FTE from the beginning of the 2012 tax 
filing season through August of that year. As shown in figure 6, IRS 
estimated the ROI for this initiative to be 6.2 to 1 in fiscal year 
2014, rising to 14.4 to 1 in fiscal year 2016. 

Figure 6: Projected ROI for Improve Identification and Prevention of 
Refund Fraud and Identity Theft Initiative: 

[Refer to PDF for image: combined vertical bar and line graph] 

Fiscal year: 2014: 
Cost: $101.1 million; 
Revenue: $631 million; 
Projected ROI: $6.2 million. 

Fiscal year: 2014: 
Cost: $88.3 million; 
Revenue: $946 million; 
Projected ROI: $10.7 million. 

Fiscal year: 2014: 
Cost: $87.7 million; 
Revenue: $1,261 billion; 
Projected ROI: $14.4 million. 

Source: GAO analysis of fiscal year 2014 congressional budget 
justification for IRS. 

[End of figure] 

The fiscal year 2014 budget for IRS also requests $51.7 million for a 
"Leverage Data to Improve Case Selection" initiative. According to 
IRS, if funded, this initiative would enhance revenue by improving 
technology that would enable IRS to improve case selection, issue 
identification, and enforcement case treatment. This technology would 
also allow IRS to adapt quickly to changing taxpayer behavior and tax 
code misuse. To estimate the additional amount of projected revenue 
that would be generated by this initiative, IRS studied the impact of 
using certain electronically filed data in a new way to examine 
selected tax returns and found that it could help classifiers detect 
more noncompliance.[Footnote 19] Based on the study's findings, IRS 
estimated that using certain electronically filed data would increase 
examination assessments for taxpayers at all income levels, and used 
that estimate to calculate the amount of additional revenue that could 
be collected as a result of the "Leverage Data to Improve Case 
Selection" initiative. As shown in figure 7, IRS estimated an initial 
cost of $52 million in fiscal year 2014 followed by an estimated ROI 
of 1.3 to 1 in fiscal year 2015 and 1.5 to 1 in fiscal year 2016. 
[Footnote 20] 

Figure 7: Projected ROI for Leverage Data to Improve Case Selection 
Initiative: 

[Refer to PDF for image: combined vertical bar and line graph] 

Fiscal year: 2014: 
Cost: $51.7 million; 
Revenue: $0; 
Projected ROI: $0. 

Fiscal year: 2014: 
Cost: $50.2 million; 
Revenue: $63.2 million; 
Projected ROI: $1.3 million. 

Fiscal year: 2014: 
Cost: $50.0 million; 
Revenue: $75.7 million; 
Projected ROI: $1.5 million. 

Source: GAO analysis of fiscal year 2014 congressional budget 
justification for IRS. 

[End of figure] 

IRS Significantly Improved Its PPACA Cost Estimate, but Did Not 
Publicly Report Investment Information for the Fiscal Year 2014 Budget 
Request: 

Updated PPACA Cost Estimate Shows Significant Progress, But a Few 
Areas for Improvement Remain: 

In December 2012, IRS updated the PPACA cost estimate as part of its 
on-going practice to refine the cost estimate and address our prior 
recommendation.[Footnote 21] The updated cost estimate reflects best 
practices to a much greater extent, as shown in table 3. Unlike 
previous versions, the updated cost estimate shows significant 
progress, as it reflects the full-cycle cost of the program, which 
will total $1.89 billion from fiscal year 2010 through 2026. With this 
information, budget decision makers can see the amount IRS plans to 
spend on the multi-year PPACA effort in a particular year, as well as 
an estimate of costs that remain to be funded in future years. 
According to the GAO Cost Guide, a reliable cost estimate must be 
comprehensive, well documented, accurate, and credible.[Footnote 22] 
(See appendix IV for our full assessment of the updated PPACA cost 
estimate.) In June 2012, we reported that IRS's cost estimate for 
PPACA did not fully meet best practices for a reliable cost estimate. 
[Footnote 23] 

When enacted, PPACA contained 47 tax-related provisions that IRS is 
responsible for implementing with effective dates through 
2018.[Footnote 24] Meeting these statutory requirements has required a 
significant IT investment in new data models, databases, and IT 
systems and operations support. IRS's PPACA cost estimate is important 
in determining and communicating a realistic view of a program's 
likely cost and schedule outcomes that can be used to plan the work 
necessary to develop, produce, install, and support the program. The 
cost estimate is also integral to establishing and defending budget 
requests: it provides context for the $440 million requested for IRS 
to address PPACA requirements in fiscal year 2014. 

Table 3: Overall Assessment of PPACA Cost Estimate Alignment with Best 
Practices: 

Best practice: Comprehensive; 
October 2010 cost estimate: Partially meets; Updated December 2012 
cost estimate: Substantially meets. 

Best practice: Well documented; 
October 2010 cost estimate: Partially meets; Updated December 2012 
cost estimate: Substantially meets. 

Best practice: Accurate; 
October 2010 cost estimate: Partially meets; Updated December 2012 
cost estimate: Partially meets. 

Best practice: Credible
October 2010 cost estimate: Minimally meets; Updated December 2012 
cost estimate: Partially meets. 

Key: 
Substantially meets: IRS provided evidence that satisfies a large 
portion of the criterion. 

Partially meets: IRS provided evidence that satisfies about half of 
the criterion 

Minimally meets: IRS provided evidence that satisfies a small portion 
of the criterion. 

Source: GAO analysis of IRS documentation. 

[End of table] 

A few areas remain where IRS could continue to improve the reliability 
of the cost estimate to better meet best practices outlined in the GAO 
Cost Guide. We found that the cost estimate only partially met best 
practices for accuracy and credibility. Specifically, we identified 
three deficiencies in the accuracy of the cost estimate. First, the 
cost estimate was not fully adjusted for inflation. IRS adjusted 
future costs for inflation, and documented inflation rates, but 
reported past costs in current year dollars. Because sunk costs were 
not adjusted for inflation, their contribution to the cost estimate is 
higher than it should be. In August 2013, the IRS Chief Financial 
Officer told us that, as a result of this finding, IRS has already 
revised the next update to the PPACA cost estimate to adjust sunk 
costs for inflation. Second, IRS included actual sunk costs in the 
estimate, but it did not use earned value management--a process for 
capturing actual costs and comparing them to estimated costs. Earned 
value management would enable IRS to continuously update the estimate 
to reflect actual costs. Third, the estimate shows how it varies from 
a previous estimate, but it does not explain factors behind the 
variance. If the reasons for cost variances are not captured, 
estimators cannot identify lessons learned that would improve future 
estimates. 

We also identified three deficiencies in the credibility of the cost 
estimate. First, IRS conducted a sensitivity analysis on two cost 
drivers (a sensitivity analysis examines the effects on changing 
assumptions and estimating procedures to highlight elements that are 
cost-sensitive). However, it is not clear how the two cost drivers 
were selected for analysis or whether IRS identified the cost elements 
that were the most sensitive to change. Second, IRS developed multiple 
risk management plans and conducted a risk and uncertainty analysis, 
but it is unclear how the risk management plans were applied to 
address the risks identified in the cost estimate. In addition, IRS 
incorrectly treated the total funding risk for the entire program as 
equal to the sum of the risks of individual elements. A proper risk 
and uncertainty analysis is necessary to correctly assess the 
variability in the cost estimate due to program risks. Third, IRS did 
not obtain a second cost estimate. The GAO Cost Guide specifies that 
producing two cost estimates that are independent of one another is a 
best practice because the second cost estimate can validate the first 
and provide an unbiased test of whether the original cost estimate is 
reasonable. 

We discussed each of these deficiencies with IRS officials, who stated 
they gained a better understanding of the criteria in the GAO Cost 
Guide based on our meeting. Because it provides a sound basis for 
informed investment decision making, realistic budget formulation, and 
accountability for results, developing a reliable cost estimate that 
meets best practices is critical to PPACA's success. 

IRS Did Not Report PPACA Investment Information on the OMB Dashboard 
Website: 

Although the IT systems used to implement PPACA (which IRS refers to 
as the ACA IT investment) meet the Department of Treasury's (Treasury) 
definition of a major investment,[Footnote 25] IRS reported the 
investment as a non-major investment in fiscal year 2014. According to 
agency officials, IRS did not have time to prepare the information 
that is typically reported for major investments in the President's 
fiscal year 2014 budget request. Unlike major investments, non-major 
investments are not included for public reporting on the OMB IT 
Dashboard[Footnote 26] and are also not required to be included in the 
"Capital Asset Summary," referred to as an Exhibit 300.[Footnote 27] 

In prior years, IRS's portion of the ACA IT investment was included 
with related investments that were managed and reported by the 
Department of Health and Human Services (HHS). HHS reported ACA IT 
investment information on the Dashboard. In January 2013, at the end 
of the fiscal year 2014 budget formulation cycle, IRS's portion of the 
ACA IT investment was split from HHS's portion and IRS assumed 
responsibility for reporting on its portion. The Clinger-Cohen Act of 
1996 requires OMB to establish processes to analyze, track, and 
evaluate the risks and results of major capital investments in 
information systems and report to Congress on the net program 
performance benefits achieved as a result of these investments. In 
addition, OMB's Capital Programming Guide defines major acquisitions 
to include capital assets that require special management attention 
because of high costs, high risk, or a significant role in the 
administration of agency programs. According to the Treasury budget 
director and IRS officials, the ACA IT investment is expected to be 
reported as a major investment in the fiscal year 2015 budget request. 
IRS and Treasury officials also told us they plan to include an 
Exhibit 300 and report ACA IT information on the OMB Dashboard. 

Not reporting information on IRS's ACA IT investment on the Dashboard 
or in an Exhibit 300 makes it more difficult to monitor and limits 
transparency. As a result, information about the implementation of 
PPAA--such as the individual projects that comprise the investment, 
evaluation history, current Exhibit 300 and cost and schedule 
variances--is not as readily available to Congress and the general 
public. 

IRS Expanded Information Reported on Its Major IT Investments in the 
Fiscal Year 2014 Budget Justification, but Additional Information 
Would Be Useful: 

In the fiscal year 2014 budget justification, IRS included new, useful 
information on its major IT investments that was not included in prior 
budget justifications, such as life-cycle costs,[Footnote 28] 
projected useful life of the current asset, anticipated benefits, and 
how performance will be measured. This additional information is a 
significant enhancement to information provided in prior budget 
justifications, and provides decision makers with more context on 
IRS's portfolio of IT investments. However, IRS does not provide 
information on IT investments in a consolidated format. IT is a 
significant portion--about 20 percent--of the total IRS budget request 
for fiscal year 2014. It includes approximately $2.6 billion to fund 
18 major IT investments and 131 non-major investments. (See appendix V 
for a summary of the major IT investments.) 

In addition to the budget justification, information on major IT 
investments is also presented in other budget related documents, 
including the Exhibit 300. Exhibit 300s are developed by agencies and 
reviewed by OMB for each major IT investment. OMB sets forth 
requirements for the Exhibit 300 in its Circular A-11. Exhibit 300s 
are publicly available, with some sensitive information redacted on 
the Dashboard.[Footnote 29] In some instances, the type of information 
reported in the budget justification is also reported in the Exhibit 
300, such as the projected useful life of the current asset. However, 
certain other information (such as the start date, funds obligated 
through the prior fiscal year, and the number of FTEs represented by 
current costs) is only available in the Exhibit 300. Additional 
information (such as percent of life-cycle costs obligated through the 
prior fiscal year) is not available in either report, but can be 
calculated with information contained in the Exhibit 300 and budget 
justification. See table 4 for a general description of the type of 
information included in the budget justification and Exhibit 300. 

Table 4: Summary of IT Investment Data Presented in the Fiscal Year 
2014 Congressional Budget Justification for IRS and Exhibit 300: 

Source: Fiscal year 2014 congressional justification for IRS; 
Section name: Capital investments; 
Description: Identifies and describes the investment, including the 
projected useful life (e.g., end date) and the investment phase (e.g., 
development, modernization and enhancement (DME) or operations and 
maintenance)[A]; 
Description: Provides information on the funding source (e.g., 
appropriation account), obligations data from prior years, request for 
single budget year, and funding type for current year; 
Description: Describes current cost and schedule performance and the 
anticipated benefit of the investment. 

Source: Fiscal year 2014 Exhibit 300; 
Section name: General information; 
Description: Provides the investment name and Unique Investment 
Identifier, a numeric code applied to an investment that allows 
identification and tracking across multiple fiscal years of an 
agency's investment portfolio; 

Section name: Investment detail; 
Description: Describes the investment's purpose, goals, and current or 
anticipated benefits; currently projected return on investment; 
progress and accomplishments in prior years; 

Section name: Life-cycle costs; 
Description: Provides an overview of the costs for planning, 
development, modernization and enhancement, and operations and 
maintenance; full-time equivalents for the previous, current and 
future fiscal years; and the year the investment begins and ends; 

Section name: Acquisition/contract strategy; 
Description: Provides a list of all prime contracts or task orders for 
awarded or open solicitations; 

Section name: Project plan and execution data; 
Description: Describes all projects, activities, and/or operations 
associated with the investment scheduled to commence or continue in 
the current or future fiscal year; 

Section name: Operational data; 
Description: Identifies metrics associated with the investment, actual 
results, and risk assessments; 

Source: Fiscal year 2014 Congressional budget justification for IRS 
and Office of Management and Budget Guidance on Exhibits 53 and 300 -
Information Technology and E-Government. 

Notes: 

[A] DME is a term used by OMB to describe the program cost for new 
investments, changes or modifications to existing systems to improve 
capability or performance, changes mandated by the Congress or agency 
leadership, personnel costs for investment management, and direct 
support. For major IT investments, this amount should equal the sum of 
amounts reported for planning and acquisition plus the associated FTE 
costs reported in the Exhibit 300. 

[End of table] 

Because different information exists in different documents, decision 
makers must access multiple public documents to gain a full 
understanding of IRS's IT priorities. For example, if a decision maker 
was interested in the Modernized e-File (MeF) IT investment, the 
fiscal year 2014 budget justification would show that the projected 
useful life of the asset extends to 2019, however, to know the start 
date of the MeF investment--2001--the decision maker would also need 
to access the Exhibit 300. Likewise, the decision maker would see that 
the fiscal year 2014 budget justification shows the estimated life-
cycle costs for MeF to be $575 million, however, to know how much has 
been obligated for the investment from the start date through fiscal 
year 2012--$304 million--the decision maker would have to access the 
Exhibit 300 and calculate the amount of funding obligated across prior 
fiscal years. 

Consolidating key budget and performance information on major IT 
investments in one budget document (such as the congressional 
justification) would ensure decision makers have comprehensive, easy 
to understand information on major IT investments. In particular, 
consolidating information for complementary data elements (such as 
start date and projected useful life of the current asset, and amount 
of funding obligated through prior fiscal years and life-cycle costs) 
would provide useful context to understand IRS's progress in 
implementing long-term IT investments. IRS officials said they can 
consolidate this information for ease of review. 

GAO's Standards for Internal Control in the Federal Government states 
that information should be communicated in a format that enables 
management and others to carry out their oversight 
responsibilities.[Footnote 30] Further, the GPRA Modernization Act of 
2010--which can serve as a guide to leading practices for planning at 
lower levels within federal agencies--requires that agencies consult 
with relevant committees when developing or making adjustments to 
their strategic plans and agency priority goals. Consulting with 
relevant committees regarding IT investments would provide IRS with an 
opportunity to share performance information and confirm that various 
committees are getting the types of performance information needed. 
Congressional staffs have requested comprehensive, easy to understand 
information on IRS's IT investments: providing it in a comprehensive, 
consolidated format could provide them with better information to 
guide decisions. Congress directed IRS to include a summary of cost 
and schedule performance information for its major IT investments in 
its budget justification for fiscal year 2013; in addition, starting 
in March 2012, IRS was required to submit a report after every quarter 
with specific information on IRS's selected major IT investments, 
including a "plain English" explanation of the cost and schedule for 
the previous three months and the cost and schedule performance for 
the upcoming three months.[Footnote 31] IRS has been submitting these 
reports and briefing the Appropriations Committees and other 
congressional stakeholders. Despite the increased information in the 
budget justification and the new quarterly report, key budget and 
performance information on all of IRS's major IT investments remains 
in various budget documents. Until such data is consolidated, it is 
less accessible to congressional stakeholders. 

IRS Implemented Six of Our Nine Prior Recommendations to Improve the 
Budget Presentation and Aid Decision Making: 

Since June 2012, IRS implemented six recommendations made in our prior 
reviews of its budget justification documents. Three of the 
implemented recommendations resulted in additional information in the 
budget request, such as actual ROI and linking funding requests for 
new initiatives to strategic goals and objectives. Enhanced 
information in the budget request can aid decision making and provide 
context to Congress regarding how current operations and requests for 
new funding support IRS priorities. Table 5 summarizes the 
recommendations implemented by IRS. 

Table 5: Prior GAO Recommendations Implemented by IRS: 

Report: [hyperlink, http://www.gao.gov/products/GAO-09-754[A]; 
Recommendation: Compare actual ROI data with projections; 
We recommend that the Commissioner of Internal Revenue take steps to 
develop ROIs for IRS's enforcement programs using actual revenue and 
full cost data and to compare the actual ROIs to the projected ROIs 
included in the budget requests; 
Action taken: IRS calculated actual ROIs for three major enforcement 
programs--Exams, Collections, and Automated Underreporter--and 
reported the data in the fiscal year 2014 congressional justification; 
Benefit: By including data on actual ROIs there is a basis for 
assessing the revenue and cost impact of program-level changes. 

Report: [hyperlink, http://www.gao.gov/products/GAO-10-687R; 
Recommendation: Provide additional information about program 
activities. To enhance the transparency of IRS's budget request, the 
Commissioner of Internal Revenue should provide additional 
information, which could be qualitative if necessary to avoid losing 
existing reprogramming flexibility, about the program activities in 
the budget justification to better indicate IRS's priorities; 
Action taken: IRS has taken steps, such as setting up certain codes in 
its financial management system to track obligations, which allows it 
to more readily compile obligations data for many of its 
organizational entities and other efforts of interest--including 
program activities--when requested; 
Benefit: Information on prior year obligations can provide context for 
IRS's new resource requests and facilitate decision making. 

Report: [hyperlink, http://www.gao.gov/products/GAO-10-687R; 
Recommendation: Link budget request to strategic documents; 
To enhance the transparency of IRS's budget request, the Commissioner 
of Internal Revenue should make explicit linkages between initiatives 
and proposals in the budget and strategic documents; 
Action taken: In the fiscal year 2014 congressional justification IRS 
included a new table that identifies how budget initiatives are linked 
to Department of Treasury priority goals and strategic goals, and IRS 
strategic goals; 
Benefit: By linking the budget request to strategic documents, 
Congress and other stakeholders are better able to understand IRS's 
priorities to improve service and enforcement. 

Report: [hyperlink, http://www.gao.gov/products/GAO-10-687R; 
Recommendation: Describe noteworthy changes in performance goals; 
In the budget justification, explain noteworthy changes in performance 
goals that reflect changes from previous performance and describe the 
impact on funding; 
Action taken: IRS included some linkages between performance goals and 
funding, identifying some instances where funding impacted the level 
of performance, such as telephone level of service. IRS budget 
officials noted they plan to continue providing this type of 
information in future years; 
Benefit: Clear linkages between performance goals and funding can help 
determine how funded activities contribute to operational goals and to 
specific measures. These linkages can also illustrate how targets 
align with funding and how efficiently resources are used. 

Report: [hyperlink, http://www.gao.gov/products/GAO-11-547; 
Recommendation: Systematically identify savings and efficiencies; 
To improve the usefulness of the budget request for IRS, the 
Commissioner of Internal Revenue should further expand efforts to 
systematically identify savings and efficiencies as part of its budget 
development process on a periodic, but not necessarily annual, basis; 
Action taken: In fiscal years 2013 and 2014 budget formulation 
guidance, the IRS Corporate Budget Office instructed business units to 
identify specific and achievable savings and efficiencies, estimate 
cost savings, and describe associated assumptions. In addition, IRS 
established task forces and working groups to restructure and 
streamline operations, and solicited employees for cost-reduction 
suggestions; 
Benefit: By developing a more systematic process, IRS is better 
positioned to identify savings and efficiencies. 

Report: [hyperlink, http://www.gao.gov/products/GAO-12-603; 
Recommendation: Update the PPACA cost estimate. To continue to improve 
information on program costs and results that could aid in resource 
decision making, the Commissioner of Internal Revenue should ensure 
that an updated PPACA cost estimate is completed by September 2012 in 
accordance with best practices in the GAO Cost Guide; 
Action taken: IRS updated the PPACA cost estimate which now meets best 
practices to a greater extent. Specifically, the cost estimate 
substantially meets two, and partially meets two, of the four 
characteristics of a reliable cost estimate. For example, the cost 
estimate now includes full life-cycle costs; 
Benefit: By fully accounting for life-cycle costs, management has 
better information to plan program resource requirements and make wise 
decisions. 

Source: GAO analysis of prior GAO reports on IRS's budget request. 

Notes: 

[A] We previously reported this recommendation as partially 
implemented in [hyperlink, http://www.gao.gov/products/GAO-12-603]. 

[End of table] 

As shown in table 6, IRS officials agreed with two of the three budget 
related recommendations that remain open. IRS initially disagreed with 
our recommendation to modify its funding request for new hires. 
However, in August 2013, IRS Corporate Budget officials told us that 
IRS is considering options to implement the recommendation, including 
possibly describing in the operating plan how it plans to use 
available funds not needed for new hires in the first year. 

Table 6: Budget-Related Recommendations to IRS That Remain Open: 

Report: [hyperlink, http://www.gao.gov/products/GAO-12-603; 
Open recommendations: Conduct cost-effectiveness analyses; 
Ensure cost-effectiveness analyses are conducted for future 
significant investments when there are alternative approaches for 
achieving a given benefit, such as for any new significant PPACA 
projects; 
Benefit: Without cost effectiveness analyses, budget decision makers 
do not have information to compare alternatives and it may be 
difficult to determine the best use of resources; 
IRS agreed with recommendation: Yes. IRS officials are taking steps to 
implement this recommendation. 

Report: [hyperlink, http://www.gao.gov/products/GAO-12-603; 
Open recommendations: Develop a quantitative measure of scope; 
Develop a quantitative measure of scope, at a minimum for its major IT 
investments, in order to have complete information on the performance 
of these investments; 
Benefit: Without a quantitative measure of scope, IRS cannot ensure 
that it has a method for monitoring and comparing actual performance 
to planned results. Such a measure is a good management practice and 
provides Congress with information on IRS's performance in delivering 
IT systems; 
IRS agreed with recommendation: Yes. IRS officials told us they have 
not taken any action to implement the recommendation. 

Report: [hyperlink, http://www.gao.gov/products/GAO-12-603; 
Open recommendations: Modify funding request for new hires; 
Prepare funding requests for new staff based on estimated hiring dates; 
Benefit: By assuming an October 1 hire date, IRS's budgeting for new 
staff overstates its labor costs and could result in funding being 
used for other purposes; 
IRS agreed with recommendation: No. However, as of August 2013, 
officials told us they are considering options to implement the 
recommendation. 

Source: GAO analysis of prior GAO reports on IRS's budget request. 

[End of table] 

Conclusions: 

IRS has taken important steps to include new and useful information in 
its budget justification to aid Congress and other stakeholders, 
including new information on actual ROI and enhanced information on 
major IT investments. In addition, IRS made significant improvements 
to the PPACA cost estimate, which is integral to accurately informing 
budget decision makers of the anticipated long-term costs for both 
implementation and administration of the new health care program. 
Furthermore, IRS's new pre-selection process for determining which 
initiatives to request funding for was reported by officials to be a 
more efficient method for commencing budget formulation, although 
enhanced guidance could make it more effective. We also identified 
some other actions that could improve the budget request and aid 
Congress in decision making, including (1) improving the accuracy and 
credibility of the PPACA cost estimate in future updates because it 
provides the basis for informed investment decision making, realistic 
budget formulation, and accountability for results, (2) ensuring the 
ACA IT investment is publicly reported to increase transparency and 
(3) reporting consolidated information on major IT investments to make 
the information more accessible. 

Recommendations for Executive Action: 

To enhance the budget process and to improve transparency, we 
recommend the Acting Commissioner of Internal Revenue take the 
following four actions: 

* Improve guidance given to business units for the pre-selection 
budget formulation process, emphasizing the importance of information 
on the estimated impact--qualitative or quantitative--of proposed 
budget initiatives. 

* Improve the accuracy and credibility of future updates to the PPACA 
cost estimate by taking the following actions to more closely follow 
best practices outlined in the GAO Cost Guide: 

- Use earned value management to capture actual costs and use them as 
a basis for future updates. 

- Explain why variances occurred between the current estimate and 
previous estimates. 

- Document how cost drivers are selected for future sensitivity 
analyses. 

- Conduct future risk and uncertainty analyses consistent with best 
practices, and develop and document plans to address risks. 

- Validate the original cost estimate by preparing a second, 
independent cost estimate. 

* Publicly report the ACA IT investment as a major investment on the 
OMB IT Dashboard and the fiscal year 2015 budget request, including 
standard cost, schedule, and performance information. 

* Report key data on major IT investments in one consolidated 
document, such as the congressional justification, in consultation 
with congressional stakeholders. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Acting Commissioner of the 
IRS for his review and comment. We received an email on September 18, 
2013 from the Chief Financial Officer, which included an attachment 
that provided the agency's comments to our recommendations. This 
attachment is reprinted in appendix VI. In response to our draft 
report, the Chief Financial Officer stated that IRS agreed with three 
of our four recommendations and identified actions planned and taken 
to address them. For example, IRS agreed to include additional data on 
its major IT investments in the congressional justification, such as 
actual obligations for the investment to date. IRS agreed with the 
majority of the actions associated with our fourth recommendation on 
improving the accuracy and credibility of future updates of the PPACA 
cost estimate. IRS disagreed with two actions contained in our fourth 
recommendation. Specifically, 

* IRS disagreed with our recommended action to use earned value 
management, a process that would enable IRS to continuously update the 
cost estimate to reflect actual costs. IRS stated that earned value 
management is not part of its current program management processes 
because the cost and burden to use earned value management outweigh 
the value added. We disagree with IRS's view as to the benefits of 
earned value management. GAO has found that programs that establish 
good earned value management systems realize better project management 
decision making and fewer cost and schedule overruns. While there is 
an upfront investment to establish the earned value management system, 
there are long-term benefits that go beyond the individual project, 
such as fostering accountability, improving insight into program 
performance, and providing objective information for managing the 
program. Further, the OMB Capital Programming Guide states that earned 
value management is a critical component of risk management for major 
investments. 

* IRS also disagreed with our recommended action to validate the PPACA 
cost estimate by preparing a second, independent cost estimate. IRS 
stated that the cost and burden of having an external organization 
produce a second, independent cost estimate of the same scope would 
outweigh the value added. In addition, IRS stated that an external 
organization would lack the knowledge necessary to produce a 
reasonable estimate without relying heavily on the IRS group that 
produced the first estimate. We disagree with IRS's view. As reflected 
in the GAO Cost Guide, GAO has found that producing a second, 
independent cost estimate is considered one of the best and most 
reliable methods for validating a cost estimate. Without a second, 
independent cost estimate, decision makers lack insight into a 
program's potential costs and may lack confidence that the estimate is 
reasonable and costs described in the first estimate can be achieved. 
While preparing a second cost estimate that is independent of the 
first cost estimate requires additional resources, it is generally 
based on the same detailed technical and procurement information. 
Furthermore, an independent cost estimate does not need to be 
conducted by an external organization, but the estimation team should 
be outside the acquisition chain and have nothing at stake with regard 
to program outcome or funding decisions. The major benefit of a 
second, independent cost estimate is that it provides an objective and 
unbiased assessment of whether the original estimate can be achieved; 
reducing the risk that the program will proceed underfunded or costs 
will exceed its value. 

We plan to send copies of this report to the Chairman and Ranking 
Members of other Senate and House committees and subcommittees that 
have appropriation, authorization, and oversight responsibilities for 
IRS. We are also sending copies to the Acting Commissioner of Internal 
Revenue, the Secretary of the Treasury, and the Chairman of the IRS 
Oversight Board. Copies are also available at no charge on the GAO web 
site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have further questions or wish to discuss the 
material in this report further, please contact me at (202) 512-9110 
or mctiguej@gao.gov. Contact points for our offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in appendix VII. 

Signed by: 

James R. McTigue, Jr.
Director, Tax Issues: 
Strategic Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

We were asked to review the President's fiscal year 2014 budget 
request for the Internal Revenue Service (IRS). The objectives of this 
report were to (1) describe IRS's capacity to report fiscal year 2012 
obligations and full-time equivalent (FTE) data for program 
activities, organizational entities, and other efforts of interest; 
(2) assess IRS's process and the type of information used to 
prioritize and select new program initiatives; (3) describe proposed 
base budget savings; (4) describe IRS's new projected return on 
investment (ROI) methodologies; (5) evaluate steps IRS took to improve 
the cost estimate for the Patient Protection and Affordable Care Act 
(PPACA) in accordance with GAO's Cost Estimating and Assessment 
Guide[Footnote 32] and determine the extent to which IRS is 
transparently reporting on the Affordable Care Act (ACA) information 
technology (IT) investment; (6) summarize IRS's major IT investments 
and assess the type of information available in the congressional 
justification; and (7) describe IRS's progress in implementing our 
prior budget-related recommendations. 

To describe IRS's capacity to report fiscal year 2012 obligations and 
FTE data, we reviewed documentation related to IRS budget formulation 
and budget execution, including IRS's Financial Management Codes 
Handbook, IRS's organizational chart, and its fiscal year 2014 
congressional budget justification. We also interviewed knowledgeable 
officials in IRS's Corporate Budget Office. We selected eight program 
activities, organizational entities, and efforts of interest for 
analysis: (1) Appeals, (2) Identity Theft, (3) International Exam and 
Collections, (4) Merchant Card and Basis Matching and the related 
Information Reporting and Document Matching (IRDM) IT system, (5) 
Offshore Voluntary Disclosure Program, (6) Online Services, (7) 
Telephone and Correspondence Services, and (8) Wage and Investment. We 
selected this list based on the following criteria: whether it was 
included in the proposed fiscal year 2014 budget initiatives, whether 
it was the topic of prior GAO work, and whether the selected list (as 
a whole) spans most of IRS's appropriation accounts and encompasses a 
range of methods by which the data can be obtained from IRS's 
financial management system. To determine IRS's capacity to compile 
fiscal year 2012 obligations data for these eight items, we 
interviewed knowledgeable officials in IRS's Corporate Budget Office. 
From the eight selected program activities, organizational entities, 
and other efforts of interest, we selected two illustrative examples 
to report fiscal year 2012 obligations data and to show how IRS's 
budget formulation and budget execution structures interact: Appeals, 
and Wage and Investment. We selected these two examples largely to 
demonstrate the differences in structures. While they are both fund 
centers in IRS's budget execution structure that manage and distribute 
funds, Appeals is also a program activity in IRS's budget formulation 
structure and shows a relatively simple relationship between these 
structures. In contrast, Wage and Investment is a complex fund center 
that receives funding from many segments of IRS's budget formulation 
structure. We assessed the reliability of IRS's fiscal year 2012 
obligations data by reviewing relevant IRS documents, including the 
Financial Management Codes Handbook, as well as prior work we 
conducted that assesses IRS's financial statements.[Footnote 33] We 
believe that the data are sufficiently reliable for our purposes. We 
identified some limitations, but they do not affect our illustrative 
use of the data and are discussed in our report. 

To assess IRS's process and the type of information used to prioritize 
and select new program initiatives, we reviewed IRS documents related 
to its pre-selection budget formulation process for fiscal year 2014. 
Documents included guidance from the IRS Corporate Budget Office and 
pre-selection templates submitted for review by the taxpayer services 
and enforcement business units to senior leadership between November 
2011 and May 2012. We analyzed these submissions for completeness 
against criteria for budget formulation outlined in OMB Circulars A-
94.[Footnote 34] We also interviewed IRS officials familiar with the 
pre-selection process. 

To describe proposed base budget savings, we reviewed the fiscal year 
2014 congressional budget justification for IRS. To determine the 
processes followed to identify savings and efficiencies, we also 
interviewed IRS officials in the IRS Corporate Budget Office and from 
the Large Business and International division. We analyzed documents 
obtained from IRS on its proposed fiscal year 2014 budget savings and 
efficiencies, such as human capital, space optimization, and IT 
infrastructure summaries. 

To describe IRS's new projected ROI methodologies (of revenue 
protection and revenue enhancement) included in the fiscal year 2014 
budget request, we discussed the difference between the new 
methodologies and IRS's other projected ROI calculations with 
officials in IRS's Office of Compliance Analytics and Corporate Budget 
Office. We also reviewed a related briefing developed by the Office of 
Compliance Analytics that summarizes the extent to which the use of 
non-transcribed electronic data impacts the classification of cases. 
[Footnote 35] 

To evaluate steps IRS took to improve the PPACA cost estimate, we 
compared IRS's updated PPACA cost estimate, completed in December 
2012, with the characteristics of a high-quality cost estimate, 
identified in the GAO Cost Estimating and Assessment Guide (Cost 
Guide).[Footnote 36] Our Cost Guide identifies four characteristics of 
a high quality cost estimate. The cost estimate should be (1) 
comprehensive, (2) well documented, (3) accurate, and (4) credible. We 
calculated the assessment rating of each criterion within the four 
characteristics by assigning each an individual assessment rating as 
follows: does not meet = 1, minimally meets = 2, partially meets = 3, 
substantially meets = 4, and meets = 5. We then averaged the 
individual practice scores to determine the overall rating. We shared 
our preliminary analysis of the updated PPACA cost estimate with 
program officials. When warranted, we updated our analyses based on 
the agency's response and additional documentation provided to us. 

To assess the transparency of IRS's reporting on the ACA IT 
investment, we reviewed information reported by the Department of 
Treasury (Treasury) on its capital investments, including the Office 
of Management and Budget (OMB) IT Dashboard. We also interviewed IRS 
and Treasury officials to obtain their views on PPACA management and 
reporting. To perform our assessment, we used relevant criteria on 
reporting capital investment information, including the Clinger-Cohen 
Act of 1996 and the OMB Capital Programming Guide.[Footnote 37] 

To summarize IRS's major IT investments (defined by Treasury as 
investments costing $10 million in either current year or budget year, 
or $50 million over the 5-year period extending from the prior year 
through the budget year +2) and to assess the type of information 
available in the congressional justification, we reviewed fiscal year 
2013 and 2014 congressional budget justifications, Exhibit 300s--
capital asset summaries--prepared by IRS for major IT investments, as 
well as IRS and OMB guidance on preparing those documents, such as the 
Office of Management and Budget Guidance on Exhibits 53 and 300--
Information Technology and E-Government. We identified the type of 
information that is available across budget documents, in particular 
key information such as cost to date, full time equivalents, life-
cycle costs, start date and end date. 

To describe IRS's progress in implementing our prior budget-related 
recommendations, we obtained information from various IRS officials 
and reviewed relevant documentation, including the fiscal year 2014 
congressional budget justification and IRS's Joint Audit Management 
Enterprise System (JAMES) reports, which track IRS actions taken to 
implement GAO recommendations. We then determined which 
recommendations were implemented. 

We conducted our work in Washington, D.C., where key IRS officials 
involved with the budget and IT systems are located. 

We conducted this performance audit from October 2012 to September 
2013 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. 

[End of section] 

Appendix II: Non-Interactive Version of Figure 1: IRS's Budget 
Formulation Structure: 

Budget activity: Pre-filing taxpayer assistance and education; 
Program activities: 
* Pre-filing services management; 
* Taxpayer communication and education; 
* Media and publications; 
* Taxpayer advocacy; 
* Account management and assistance, field assistance; 
* Taxpayer advocate case processing; 
* Wage and investment headquarters management and administration; 
* National distribution center. 

Budget activity: Filing and account services; 
Program activities: 
* Filing and account services management; 
* Submission processing; 
* Account management and assistance, electronic and correspondence 
assistance; 
* Electronic products and services support; 
* Electronic tax administration; 
* Pre-refund; 
* Health insurance tax credit administration; 
* Joint operations center; 
* Files most efficient organization; 
* Emergency response funds. 

Budget activity: Investigations; 
Program activities: 
* General management and administration; 
* Criminal investigations; 
* Criminal tax legal support; 
* International investigations. 

Budget activity: Exam and collections; 
Program activities: 
* Compliance services management; 
* Payment compliance, correspondence collection; 
* Automated collection and support; 
* Payment compliance, field collection; 
* Tax reporting compliance, document matching; 
* Tax reporting compliance, electronic and correspondence exam; 
* Tax reporting compliance, field exam; 
* Fraud and Bank Secrecy Act; 
* Appeals; 
* Litigation; 
* Specialty programs, exams; 
* International collection; 
* International exams; 
* Unit general management and administration; 
* Earned income tax credit management and administration; 
* Accounts management taxpayer assurance program; 
* Whistleblower; 
* Communications and liaison. 

Budget activity: Regulatory; 
Program activities: 
* Tax law interpretation and published guidance; 
* General legal services; 
* Rulings and agreements; 
* International regulatory legal support; 
* Return preparer strategy; 
* Office of professional responsibility; 
* Emergency response funds. 

Budget activity: Infrastructure; 
Program activities: 
* Building delegation; 
* Rent; 
* Space and housing, non-information technology equipment; 
* Security. 

Budget activity: Shared services and support; 
Program activities: 
* National headquarters management and administration; 
* Real estate and facilities management; 
* Procurement; 
* Equity, diversity, and inclusion field services; 
* Communications and liaison; 
* Employee support services; 
* Treasury complaint centers; 
* Shared support not provided by agency-wide shared services; 
* Printing and postage, media and publications; 
* Statistics of income; 
* Research; 
* Security administration and management; 
* Wage and investment business modernization support; 
* Benefit payments; 
* Shared services. 

Budget activity: Information services; 
Program activities: 
* Security services; 
* Tier B; 
* Management services; 
* National headquarters information technology management; 
* Affordable Care Act program management office; 
* Information technology executive oversight; 
* Application development; 
* Enterprise operations; 
* Enterprise network; 

* Enterprise services; 
* User and network services; 
* Strategy and planning; 
* Information technology security certification and accreditation; 
* Disaster recovery; 
* Information technology security training; 
* Information technology homeland security Presidential Directive 12; 
* Information technology infrastructure; 
* Treasury working capital fund; 
* Integrated document solutions enterprise; 
* Emergency response funds. 

Budget activity: Information technology investments; 
Program activities: 
* Business systems modernization management; 
* Tier A; 
* Customer account data engine II; 
* Move toward more timely service and enforcement; 
* Integrated financial systems; 
* Custodial accounting project; 
* E-Services; 
* Filing and payment compliance; 
* Modernized e-file; 
* Customer account data engine; 
* Infrastructure; 
* Program level initiatives; 
* Management reserve; 
* Accounts management services. 

Source: GAO analysis of IRS documents. 

Note: The number of program activities varies from one fiscal year to 
the next as IRS adjusts its budget formulation structure to address 
emerging priorities. Program activities are described in detail in the 
fiscal year 2014 congressional budget justification for IRS. 

[End of table] 

[End of section] 

Appendix III: Figure 8: Pre-selection Budget Formulation Process--
Sample Template: 

Figure: Rough Order of Magnitude Template (Sample): 

[Refer to PDF for image: illustration] 

Proposed FY 2014 Initiative Requests: 

Proposed Initiative & Affected Programs: Program XX; 
Position Types: 
RA: 
TE: 
RO: 
Mgr: 
SPT: 
Resource Request: 
FTE: 
Cost[A]: 
Description: one or two sentences describing the purpose of new 
resources. Note other important factors: General overview of 
need/activity/impact; 
Estimated impact[2]: 

1. Estimated costs will be calculated by Finance using the FY 2013 
Unit Cost Rates. Finance will also assist to determine managers and 
support of necessary. 

2. Estimated increase in number of closures or estimated LOS. 

Source: IRS. 

Note: Acronyms are as follows: RA = Revenue Agent; TE = Tax Examiner; 
RO = Revenue Officer; Mgr = Manager; SPT = Specialists; FTE = Full 
Time Equivalent; and LOS = Level of Service: 

[End of figure] 

[End of section] 

Appendix IV: Reliability of Patient Protection and Affordable Care Act 
Cost Estimate: 

Figures 9 through 12 outline our assessment of the extent to which 
IRS's updated, December 2012 Patient Protection and Affordable Care 
Act (PPACA) cost estimate meets best practices. This information is 
repeated in table 7, following the graphics. 

Figure 9: PPACA Cost Estimate Alignment with Best Practices for 
Comprehensiveness: 

[Refer to PDF for image: interactive graphic] 

Rollover each 'star' below to see further information on cost 
estimation best practices. 

Source: GAO analysis of IRS’s updated December 2012 PPACA cost 
estimate and GAO-09-3SP. 

To print a text version of this graphic, go to table 7. 

[End of figure] 

Figure 10: PPACA Cost Estimate Alignment with Best Practices for Being 
Well Documented: 

[Refer to PDF for image: interactive graphic] 

Rollover each 'star' below to see further information on cost 
estimation best practices. 

Source: GAO analysis of IRS’s updated December 2012 PPACA cost 
estimate and GAO-09-3SP. 

To print a text version of this graphic, go to table 7. 

[End of figure] 

Figure 11: PPACA Cost Estimate Alignment with Best Practices for 
Accuracy: 

[Refer to PDF for image: interactive graphic] 

Rollover each 'star' below to see further information on cost 
estimation best practices. 

Source: GAO analysis of IRS’s updated December 2012 PPACA cost 
estimate and GAO-09-3SP. 

To print a text version of this graphic, go to table 7. 

[End of figure] 

Figure 12: PPACA Cost Estimate Alignment with Best Practices for 
Credibility: 

[Refer to PDF for image: interactive graphic] 

Rollover each 'star' below to see further information on cost 
estimation best practices. 

Source: GAO analysis of IRS’s updated December 2012 PPACA cost 
estimate and GAO-09-3SP. 

To print a text version of this graphic, go to table 7. 

[End of figure] 

Table 7: Non-Interactive Version of Figures 9 through 12: PPACA Cost 
Estimate Alignment with Best Practices Outlined in the GAO Cost Guide: 

Best practices characteristics: (1) A comprehensive cost estimate: ; 
Overall assessment: Substantially meets best practices for a 
comprehensive cost estimate; 
Assessment of whether best practices are met: [Empty]; 
Effect: [Empty]. 

Best practices characteristics: Includes all life-cycle costs; 
A life-cycle cost estimate provides a complete and structured 
accounting of all resources and associated cost elements required to 
develop, produce, deploy, and sustain a particular program. It should 
cover the inception of the program through its retirement; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: The cost estimate 
included both government and contractor costs of the program over its 
full life cycle, from inception of the program through development, 
deployment, and operation and maintenance to its eventual retirement. 
(Meets); 
Effect: [A]. 

Best practices characteristics: Completely defines the program, 
reflects the current schedule, and is technically reasonable; 
The cost estimate should be based on a documented technical baseline 
description, which provides a common definition of the program, 
including detailed technical, program, and schedule descriptions of 
the system; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: Documentation included a 
description of technical requirements for all affordable care act 
components, with sufficient detail on the system's purpose and 
performance characteristics. It did not explain how the system fits 
into certain other aspects of program management, such as personnel 
requirements. Additionally, risks and their specific effects on cost 
elements were not documented in sufficient detail. (Substantially 
meets); 
Effect: [A]. 

Best practices characteristics: Has a product-oriented work breakdown 
structure (WBS), traceable to the program's technical scope at an 
appropriate level of detail; 
A WBS provides a basic framework for a variety of related activities 
like estimating costs, developing schedules, identifying resources and 
potential risks, and providing the means for measuring program status 
using earned value management (EVM). It is product-oriented if it 
allows a program to track cost and schedule by defined deliverables, 
such as a hardware or software component; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: The WBS clearly outlined 
the end product and major work of the program. It is standardized so 
that cost data can be collected and used for estimating future 
programs. IRS provided a generic dictionary that discussed major WBS 
elements. (Meets); 
Effect: [A]. 

Best practices characteristics: Documents all cost-influencing ground 
rules and assumptions; Cost estimates are typically based on limited 
information and therefore need to be bound by ground rules and 
assumptions. Ground rules are a set of estimating standards that 
provide guidance and common definitions, while assumptions are 
judgments about past, present, or future conditions that may affect 
the estimate. Any risks associated with assumptions should be 
identified and traced to specific WBS elements; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: The cost estimate 
documentation defined and documented ground rules and assumptions. 
However, the estimate did not explain how risks trace to specific WBS 
elements and did not consider the effects of schedule and funding 
delays. (Substantially meets); 
Effect: [A]. 

Best practices characteristics: (2) A well documented cost estimate 
should: 
Overall assessment: Substantially meets best practices for a well 
documented cost estimate; 
Assessment of whether best practices are met: [Empty]; 
Effect: [Empty]. 

Best practices characteristics: Capture the source data used, the 
reliability of the data, and how the data were made compatible with 
other data in the estimate; 
Data should be collected from primary sources. The source, content, 
time, and units should be adequately documented. Further, data should 
be analyzed to determine accuracy and reliability, and to identify 
cost drivers; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS used two 
commercially available software models to develop the estimate. IRS 
documented some inputs, including labor rates and support activities, 
but GAO could not confirm whether inputs to the software models were 
appropriate for the program. (Substantially meets); 
Effect: [A]. 

Best practices characteristics: Describe the calculations and the 
methodology used to derive each element's cost; 
Documentation should describe what calculation methods are used, as 
well as how they were applied, and explain any anomalies; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: The cost estimate 
provided a general summary of the methodologies used to create it. IRS 
used some actual data from parts of the program that it already 
developed, and documented how those data were adjusted, but did not 
explain why the data were adjusted. (Substantially meets); 
Effect: [A]. 

Best practices characteristics: Describe how the estimate was 
developed; 
The data supporting the estimate should be available and adequately 
documented so that the estimate can be easily updated to reflect 
actual costs or program changes; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: The estimate showed 
inputs to the software models, including data provided by subject 
matter experts. However, IRS used an incorrect method to calculate 
confidence levels for the estimate. (Substantially meets); 
Effect: [A]. 

Best practices characteristics: Discuss the technical baseline 
description; 
A technical baseline description provides a common definition of the 
program, including detailed technical, program, and schedule 
descriptions of the system, for a cost estimate to be built on. The 
data in the technical baseline should be consistent with the cost 
estimate; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS developed a 
technical baseline description that is consistent with the cost 
estimate. (Meets); 
Effect: [A]. 

Best practices characteristics: Provide evidence of management review 
and acceptance; 
There should be a briefing to management, including a clear 
explanation of how the cost estimate was derived. Management's 
acceptance of the cost estimate should be documented; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS provided evidence 
that staff briefed management on the cost estimate multiple times, and 
provided email documentation of management feedback and approval, but 
the briefings did not contain technical details of the cost estimate. 
(Substantially meets); 
Effect: [A]. 

Best practices characteristics: (3) An accurate cost estimate: 
Overall assessment: Partially meets best practices for an accurate 
cost estimate; 
Assessment of whether best practices are met: [Empty]; 
Effect: [Empty]. 

Best practices characteristics: Produces unbiased results; 
Cost estimates should have an uncertainty analysis, which determines 
where the estimate falls against the range of all possible costs; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS developed the cost 
estimate at an 80 percent confidence level, which is slightly 
conservative compared to best practices, which call for estimates to 
fall between 55 percent and 65 percent confidence levels. 
(Substantially meets); 
Effect: [A]. 

Best practices characteristics: Is properly adjusted for inflation; 
Cost data should be adjusted for inflation to ensure that comparisons 
and projections are valid. Data should also be normalized to constant 
year dollars to remove the effects of inflation. Also, inflation 
assumptions must be well documented; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS adjusted future 
costs for inflation, and documented inflation rates, but reported past 
costs in current year dollars. (Partially meets); 
Effect: Adjusting for inflation is important because in the 
development of an estimate, cost data must be expressed in like terms. 
If a mistake is made or the inflation amount is not correct, cost 
overruns can result. 

Best practices characteristics: Contains few mistakes; 
Results should be checked for accuracy, double counting, and 
omissions. Validating that a cost estimate is accurate requires 
thoroughly understanding and investigating how the cost model was 
constructed; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: Our assessment detected 
only one minor mistake, and IRS confirmed that it was a typographical 
error. (Substantially meets); 
Effect: [A]. 

Best practices characteristics: Is regularly updated to reflect 
significant program changes; 
The cost estimate should be updated to reflect significant program 
changes, such as changes to schedules or other assumptions. Updates 
should also reflect actual costs so that the estimate always reflects 
the current program status; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS updates the PPACA 
cost estimate annually. The estimate included sunk costs incurred 
through September 2012. IRS did not use Earned Value Management, which 
would enable it to continuously incorporate actual cost and schedule 
information. (Partially meets); 
Effect: If a cost estimate is not properly updated on a regular basis, 
it cannot provide decision makers with accurate information for 
assessing alternative decisions. 

Best practices characteristics: Documents and explains variances 
between planned and actual costs; 
Variances between planned and actual costs should be documented, 
explained, and reviewed. For any elements whose actual costs or 
schedules differ from the estimate, the estimate should discuss 
variances and lessons learned; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: The estimate showed how 
it varies from a previous estimate, but it did not explain factors 
behind the variances. (Minimally meets); 
Effect: Without a documented comparison between the current estimate 
(updated with actual costs) and the old estimate, cost estimators 
cannot determine the level of variance between the two estimates. That 
is, the estimators cannot see how well they are estimating and how the 
program is changing over time. 

Best practices characteristics: Reflects cost estimating experiences 
from comparable programs; 
The estimate should be based on historical cost estimation data and 
actual experiences from other comparable programs. These data should 
be reliable and relevant to the new program; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS collected sunk cost 
data from the program's initiation in fiscal year 2010 through 
September 2012 and used those data to inform the estimate. IRS also 
used historical data from other comparable programs. (Substantially 
meets); 
Effect: [A]. 

Best practices characteristics: The estimating technique for each cost 
element was used appropriately; 
A variety of techniques can be used to estimate costs, including 
extrapolating from actual costs, expert opinion, and analogy to other 
programs. Estimators should use an appropriate technique for each cost 
element; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS used commercially 
available models to estimate software development costs, which is a 
reasonable method. (Substantially meets); 
Effect: [A). 

Best practices characteristics: (4) A credible cost estimate includes: 
Overall assessment: Partially meets best practices for a credible cost 
estimate; 
Assessment of whether best practices are met: [Empty]; 
Effect: [Empty]. 

Best practices characteristics: A sensitivity analysis that identifies 
a range of possible costs based on varying inputs; 
A sensitivity analysis examines how changes to key assumptions and 
inputs affect the estimate. The estimate should identify key cost 
drivers, examine their parameters and assumptions, and re-estimate the 
total cost by varying each parameter between its minimum and maximum 
range; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS assessed two cost 
drivers for its sensitivity analysis: labor mix and development team 
capability. However, it is not clear how those cost drivers were 
identified. (Partially meets); 
Effect: Without a sensitivity analysis that reveals how the cost 
estimate is affected by a change in a single assumption, the cost 
estimator will not fully understand which variable most affects the 
cost estimate. 

Best practices characteristics: A risk and uncertainty analysis; 
A risk and uncertainty analysis recognizes the potential for error and 
attempts to quantify it by identifying the effects of changing key 
cost drivers; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS developed multiple 
risk management plans and conducted a risk and uncertainty analysis, 
but it is unclear how the risk management plans are applied to address 
the risks identified in the cost estimate. In addition, IRS 
incorrectly treated the total funding risk for the entire program as 
equal to the sum of the risks of individual elements. (Partially 
meets); 
Effect: For management to make good decisions, the program estimate 
must reflect the degree of uncertainty, so that a level of confidence 
can be given about the estimate. An estimate without risk and 
uncertainty analysis is unrealistic because it does not assess the 
variability in the cost estimate from such effects as schedules 
slipping, missions changing, and proposed solutions not meeting users' 
needs. 

Best practices characteristics: Cross-checking of major cost elements; 
A cross-check is done by using a different cost estimation method to 
see if it produces similar results; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS provided a table 
showing how cost elements were cross-checked, but did not provide 
supporting documentation. (Substantially meets); 
Effect: [A]. 

Best practices characteristics: A comparison to an independent cost 
estimate conducted by another organization; A second, independent cost 
estimate should be performed to validate the original cost estimate. 
It should be based on the same technical baseline, ground rules, and 
assumptions as the original estimate; 
Overall assessment: [Empty]; 
Assessment of whether best practices are met: IRS did not prepare a 
second cost estimate to validate the original estimate and thus 
provide assurance of its quality. (Minimally meets); 
Effect: Preparing two cost estimates is considered one of the best and 
most reliable methods for validation. It provides an independent view 
of expected program costs that tests the original estimate for 
reasonableness. Without a second cost estimate, decision makers will 
lack insight into a program's potential costs because cost estimates 
frequently use different methods. 

Source: GAO analysis of IRS's updated December 2012 PPACA cost 
estimate and [hyperlink, http://www.gao.gov/products/GAO-09-3SP]. 

Note: We determined the overall assessment rating by assigning the 
following ratings: Does Not Meet - IRS provided no evidence that 
satisfies any of the criterion, Minimally Meets - IRS provided 
evidence that satisfies a small portion of the criterion, Partially 
Meets - IRS provided evidence that satisfies about half of the 
criterion, Substantially Meets - IRS provided evidence that satisfies 
a large portion of the criterion, Meets - IRS provided complete 
evidence that satisfies the entire criterion. 

[A] We did not describe effects for characteristics scored as "meets" 
or "substantially meets." 

[End of table] 

[End of section] 

Appendix V: Summary of IRS's Major Information Technology (IT) 
Investments: 

Investment name: Account Management Services (AMS); 
Enhances customer support by providing applications that enable IRS 
employees to access, validate, and update individual taxpayer accounts 
on demand; 
Fiscal year 2013 FTEs: 82; 
Fiscal year 2013 funding type[A]: O&M; 
Total obligations through fiscal year 2012 (in millions): $89.0; 
Lifecycle costs (in millions): $212.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 42.0%; 
Start Date: 2009; 
Projected useful life: 2019. 

Investment name: Customer Account Data Engine 2 (CADE 2); 
Provides timely access to authoritative individual taxpayer account 
information and enhances IRS's ability to address technology, 
security, financial material weaknesses, and long-term architectural 
planning and viability; 
Fiscal year 2013 FTEs: 536; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $540.0; 
Lifecycle costs (in millions): $1,479.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 36.5%; 
Start Date: 2009; 
Projected useful life: 2019. 

Investment name: Electronic Fraud Detection System (EFDS); 
Assists in detecting fraud at the time that tax returns are filed in 
order to eliminate the issuance of fraudulent tax refunds; 
Fiscal year 2013 FTEs: 44; 
Fiscal year 2013 funding type[A]: O&M; 
Total obligations through fiscal year 2012 (in millions): $92.0; 
Lifecycle costs (in millions): $150.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 61.3%; 
Start Date: 1996; 
Projected useful life: 2015. 

Investment name: e-Services (e-SVS); 
Comprises several web-based self-assisted services that are intended 
to allow authorized individuals to do business with the IRS 
electronically; 
Fiscal year 2013 FTEs: 37; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $162.0; 
Lifecycle costs (in millions): $211.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 76.8%; 
Start Date: 1999; 
Projected useful life: 2019. 

Investment name: Foreign Account Tax Compliance Act (FATCA); 
Intended to implement provisions of the Foreign Account Tax Compliance 
Act that require financial accounts held by U.S. taxpayers, or by 
foreign entities in which U.S. taxpayers hold a substantial ownership 
interest; 
Fiscal year 2013 FTEs: 31; 
Fiscal year 2013 funding type[A]: DME; 
Total obligations through fiscal year 2012 (in millions): $8.0; 
Lifecycle costs (in millions): $91.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 8.8%; 
Start Date: 2011; 
Projected useful life: 2019. 

Investment name: Implement Return Review Program (RRP) (Replaces EFDS); 
Currently under development, is intended to maximize fraud detection 
at the time that tax returns are filed in order to eliminate issuance 
of questionable refunds; 
Fiscal year 2013 FTEs: 78; 
Fiscal year 2013 funding type[A]: DME; 
Total obligations through fiscal year 2012 (in millions): $60.0; 
Lifecycle costs (in millions): $169.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 35.5%; 
Start Date: 2010; 
Projected useful life: 2019. 

Investment name: Individual Master File (IMF); 
Represents the authoritative data source for individual tax account 
data. All other IRS information systems that process IMF data depend 
on output from this source. This investment is a critical component of 
IRS's ability to process tax returns; 
Fiscal year 2013 FTEs: 37; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $71.0; 
Lifecycle costs (in millions): $108.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 65.7%; 
Start Date: 1970; 
Projected useful life: 2019. 

Investment name: Information Reporting and Document Matching (IRDM); 
Intended to establish a new business information matching program in 
order to increase voluntary compliance and accurate income reporting; 
Fiscal year 2013 FTEs: 76; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $70.0; 
Lifecycle costs (in millions): $186.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 37.6%; 
Start Date: 2009; 
Projected useful life: 2019. 

Investment name: Integrated Customer Communication Environment (ICCE); 
Includes several projects that are intended to simplify voluntary 
compliance using voice response, Internet, and other computer 
technology such as the Modernized Internet Employee Identification 
Number, which allows third parties to act on the behalf of taxpayers; 
Fiscal year 2013 FTEs: 73; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $467.0; 
Lifecycle costs (in millions): $534.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 87.5%; 
Start Date: 1996; 
Projected useful life: 2019. 

Investment name: Integrated Data Retrieval System (IDRS); 
Intended to provide systemic review, improve consistency in case 
control, alleviate staffing needs, issue notices to taxpayers, and 
allow taxpayers to see status of refunds. It is a mission-critical 
system used by 60,000 IRS employees; 
Fiscal year 2013 FTEs: 129; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $186.0; 
Lifecycle costs (in millions): $322.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 57.8%; 
Start Date: 1973; 
Projected useful life: 2019. 

Investment name: Integrated Financial System/CORE Financial System 
(IFS); 
Used by IRS for budget, payroll, accounts payable/receivable, general 
ledger functions, and financial reporting; 
also used to report on the cost of operations and to manage budgets by 
fiscal year; 
Fiscal year 2013 FTEs: 11; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $398.0; 
Lifecycle costs (in millions): $483.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 82.4%; 
Start Date: 2001; 
Projected useful life: 2019. 

Investment name: Integrated Submission and Remittance Processing 
System (ISRP); 
Processes paper tax returns, and updates tax forms to comply with tax 
law changes; 
Fiscal year 2013 FTEs: 16; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $132.0; 
Lifecycle costs (in millions): $192.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 68.8%; 
Start Date: 1998; 
Projected useful life: 2019. 

Investment name: IRS End User Systems and Services (EUSS); 
Supports products and services necessary for daily functions for over 
100,000 IRS employees at headquarters and field sites; 
Fiscal year 2013 FTEs: 1155; 
Fiscal year 2013 funding type[A]: O&M; 
Total obligations through fiscal year 2012 (in millions): $511.0; 
Lifecycle costs (in millions): $1,684.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 30.3%; 
Start Date: 1970; 
Projected useful life: 2025. 

Investment name: IRS Main Frames and Servers Services and Support 
(MSSS); 
Intended to support the design, development, and deployment of server 
storage infrastructures, software, databases, and operating systems; 
Fiscal year 2013 FTEs: 1586; 
Fiscal year 2013 funding type[A]: O&M; 
Total obligations through fiscal year 2012 (in millions): $3,620.0; 
Lifecycle costs (in millions): $6,016.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 60.2%; 
Start Date: 1970; 
Projected useful life: 2025. 

Investment name: IRS Telecommunications Systems and Support (TSS); 
Supports IRS's broad and local network infrastructure, such as servers 
and switches for voice, data, and video servicing of about 1,000 IRS 
sites; 
Fiscal year 2013 FTEs: 425; 
Fiscal year 2013 funding type[A]: O&M; 
Total obligations through fiscal year 2012 (in millions): $710.0; 
Lifecycle costs (in millions): $2,583.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 27.5%; 
Start Date: 2002; 
Projected useful life: 2021. 

Investment name: IRS.Gov - Portal Environment; 
Provides web-based services (such as tax filing and refund tracking) 
to internal and external users, such as IRS employees and other 
government agencies, taxpayers, and business partners; 
Fiscal year 2013 FTEs: 17; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $403.0; 
Lifecycle costs (in millions): $612.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 65.8%; 
Start Date: 2009; 
Projected useful life: 2020. 

Investment name: Modernized e-File (MeF); 
Provides a secure web-based platform for electronic tax filing of 
individual and business tax and information returns by registered 
Electronic Return Originators; 
Fiscal year 2013 FTEs: 77; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $304.0; 
Lifecycle costs (in millions): $575.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 52.9%; 
Start Date: 2001; 
Projected useful life: 2019. 

Investment name: Service Center Recognition/Image Processing System 
(SCRIPS); 
Used as a data capture, management, and image storage system using 
high-speed scanning and digital imaging to convert data from the 940, 
941, K-1, and paper returns from Information Returns Processing into 
electronic format; 
Fiscal year 2013 FTEs: 15; 
Fiscal year 2013 funding type[A]: O&M and DME; 
Total obligations through fiscal year 2012 (in millions): $145.0; 
Lifecycle costs (in millions): $195.0; 
Percent of lifecycle costs obligated through fiscal year 2012: 74.4%; 
Start Date: 1993; 
Projected useful life: 2019. 

Source: GAO analysis of IRS's fiscal year 2014 congressional budget 
justification and Exhibit 300A data. 

[A] O&M = Operations and Maintenance; DME = Development, 
Modernization, and Enhancement. 

[End of table] 

[End of section] 

Appendix VI: Comments from the Internal Revenue Service: 

IRS Agency Comments on the Draft Report: GAO-13-835: 

IRS 2014 Budget: Improvements Made to Budget Request and Cost 
Estimate, but Further Actions Needed: 

Recommendation #1: Improve guidance given to business units for the 
pre-selection budget formulation process, emphasizing the importance 
of information on the estimated impact—qualitative or quantitative—of 
proposed budget initiatives. 

Comments: The IRS agrees with this recommendation. For the FY 2016 
budget formulation cycle, the IRS will provide the business units with 
more detailed instructions on completing the pre-selection templates, 
emphasizing the importance of providing information on the estimated 
impact – qualitative or quantitative – of proposed budget initiatives. 

Recommendation #2: Improve the accuracy and credibility of future 
updates to the PPACA cost estimate by taking the following actions to 
more closely follow best practices outlined in the GAO Cost Guide: 

* Use earned value management to capture actual costs and use them as 
a basis for future updates. 

* Explain why variances between the current estimate and previous 
estimates occurred. 

* Document how cost drivers are selected for future sensitivity 
analyses. 

* Conduct future risk and uncertainty analyses consistent with best 
practices, and develop and document plans to address risks. 

* Validate the original cost estimate by preparing a second, 
independent cost estimate. 

Comments: The IRS agrees with the majority of the actions in this 
recommendation. We partially disagree with the action concerning the 
use of the Earned Value Management (EVM) data as a best practice and 
we disagree with the action to have a second organization, outside of 
the Estimation Program Office (EPO) and the Affordable Care Act (ACA) 
Program Management Office (PMO), conduct a second, independent cost 
estimate. 

As previously stated in the GAO report, Information Technology: 
Consistently Applying Best Practices Could Help IRS Improve the 
Reliability of Reported Cost and Schedule Information, GAO-13-401, EVM 
is not part of our current program management processes since we 
believe the cost and burden to use it outweigh the value added. 
However, we agree that we should capture actual costs and use them as 
a basis for future updates by using a pragmatic approach that is 
consistent with IRS information technology (IT) management best 
practices. 

The IRS does not support having a second organization, outside of EPO 
and ACA PMO, provide a second, independent cost estimate of the same 
scope as the Patient Protection Affordable Care Act (PPACA) estimate 
that was the subject of the GAO audit since the cost and burden to 
have an external organization develop an estimate outweighs the value 
added. Additionally, we believe that outside vendors would lack the 
historical knowledge of IRS IT development practices and their 
associated costs to produce reasonable estimates. There would be a 
tremendous learning curve for any vendor to produce an independent 
estimate and they would likely end up heavily leveraging EPO for 
information which would call their independence into question. 

Recommendation #3: Report publicly the ACA IT investment as a major 
investment on the OMB IT Dashboard and the fiscal year 2015 budget 
request, including standard cost, schedule, and performance 
information. 

Comments: The IRS agrees with this recommendation. The IRS has 
completed a FY 2015 Exhibit 300 for the ACA IT investment. The ACA IT 
investment, including standard cost, schedule and performance 
information, will be reported publicly as a major investment on the 
OMB Dashboard and in the fiscal year 2015 budget request. 

Recommendation #4: Report key data on major IT investments in one 
consolidated document, such as the Congressional Justification, in 
consultation with congressional stakeholders. 

Comments: The IRS agrees with this recommendation. In the FY 2014 
Congressional Justification, the IRS included the following useful 
information related to its portfolio of Major IT Investments: 

* Name and Description; 

* Immediate cost (defined as the base FY 2013 budget plus FY 2014 
request); 

* Full life cycle cost of the asset; 

* Projected useful life of the current asset; 

* Timeframe for the “development, modernization, and enhancement” 
(DME) or “operations and maintenance” (O&M) phase of the investment; 

* Anticipated benefit(s) of the investment; 

* How performance will be measured and evaluated. 

In order to include all IT investment key data in one place, as 
requested by congressional stakeholders, the IRS plans to also include 
information from the Exhibit 300s in the upcoming year’s congressional 
justification, adding: 

* Start date of Major IT Investment; 

* Actual obligations for the investment to date. 

[End of section] 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. McTigue, Jr. (202) 512-9110, mctiguej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Libby Mixon, Assistant 
Director; Remmie Arnold, Amy Bowser, Jennifer Echard, Emile Ettedgui, 
Mary Evans, Chuck Fox, Paul Middleton, Donna L. Miller, Edward 
Nannenhorn, Karen O'Conor, Sabine Paul, Laurel Plume, Karen Richey, 
Erinn L. Sauer, Cynthia Saunders, and Robert Yetvin made major 
contributions to this report. 

[End of section] 

Footnotes: 

[1] Fiscal year 2013 funding levels reported in IRS's fiscal year 2014 
congressional justification did not include reductions due to 
sequestration and a rescission. In April 2013, IRS released its fiscal 
year 2013 operating plan, which showed how reductions were implemented 
due to sequestration and rescission. The final funding level for IRS 
in fiscal year 2013 is $11.2 billion. 

[2] GAO, Internal Revenue Service: Preliminary Observations on the 
Fiscal Year 2014 Budget Request, [hyperlink, 
http://www.gao.gov/products/GAO-13-599R], (Washington, D.C.: May 3, 
2013). Internal Revenue Service: 2013 Tax Filing Season Performance to 
Date and Budget Data, [hyperlink, 
http://www.gao.gov/products/GAO-13-541R], (Washington, D.C.: April 15, 
2013). 

[3] The BSM appropriation provides resources for the planning and 
capital asset acquisition of IT to modernize the IRS business systems, 
such as Customer Account Data Engine 2 (CADE 2) and Modernized e-File. 

[4] Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by 
the Health Care and Education Reconciliation Act (HCERA), Pub. L. No. 
111-152, 124 Stat. 1029 (Mar. 30, 2010). All references to PPACA 
include amendments by HCERA. 

[5] GAO, Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs (Supersedes GAO-07-
1134SP), [hyperlink, http://www.gao.gov/products/GAO-09-3SP] 
(Washington, D.C.: Mar. 2, 2009). 

[6] Office of Management and Budget, Guidelines and Discount Rates for 
Benefit-Cost Analysis of Federal Programs, OMB Circular No. A-94 
(revised October 1992). 

[7] Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993). GPRA was updated 
by the GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 
3866 (Jan. 4, 2011). IRS's strategic goals are to (1) improve service 
to make voluntary compliance easier, and (2) enforce the law to ensure 
everyone meets their obligation to pay taxes. 

[8] IRS is restricted from reprogramming funds within its 
appropriation accounts without committee approval if, among other 
reasons, the reprogramming will augment existing programs, projects, 
or activities in excess of $5 million or 10 percent, whichever is 
less. See, for example, the Financial Services and General Government 
Appropriations Act, 2012, Pub. L. No. 112-74, div. C, title VI, § 608, 
125 Stat. 786, 924 (Dec. 23, 2011). 

[9] GAO, Internal Revenue Service: Assessment of Budget Justification 
for Fiscal Year 2011 Identified Opportunities to Enhance Transparency, 
[hyperlink, http://www.gao.gov/products/GAO-10-687R] (Washington, 
D.C.: May 26, 2010). 

[10] We selected the eight areas based on several criteria, such as 
whether it was included in the proposed fiscal year 2014 budget 
initiatives or the topic of prior GAO work. See appendix I for a full 
description of our scope and methodology. 

[11] We only requested fiscal year 2012 obligations data for the 
Appeals and Wage and Investment fund centers to obtain both a simple 
and complex example of the information available. 

[12] In March 2013, we reported that since 2003, IRS had carried out 
four offshore voluntary disclosure programs that offered incentives 
for taxpayers to disclose their offshore accounts and pay delinquent 
taxes, interest, and penalties. The first three programs occurred in 
2003, 2009, and 2011. The fourth program started in 2012 and did not 
have an end date as of September 2013. See GAO, Offshore Tax Evasion: 
IRS Has Collected Billions of Dollars, but May be Missing Continued 
Evasion, [hyperlink, http://www.gao.gov/products/GAO-13-318] 
(Washington, D.C.: Mar. 27, 2013). 

[13] The new pre-selection process does not include proposed IT-
related program initiatives. New IT funding requests have been using a 
similar pre-selection budget formulation process for several years. 

[14] Business cases may ultimately be included in the budget request. 

[15] OMB Circular No. A-94. 

[16] The base budget is the estimated funding necessary to maintain 
the current level of services without increases for new program 
initiatives. 

[17] Other than personnel costs, rent and related infrastructure costs 
represent one of the largest line items in the IRS budget. Although 
this initiative began during fiscal year 2011, the IRS did not know 
the magnitude of these savings until the fiscal year 2014 budget 
formulation process. Plans for closures, consolidations, and space 
reductions fall into three categories: small posts-of-duty offices (25 
or fewer employees), mid-size and large posts-of-duty (generally more 
than 40,000 square feet), and space reduction projects. 

[18] IRS develops ROI projections by dividing projected revenue by 
projected cost. IRS's ROI calculations do not reflect benefits from 
improved voluntary compliance and taxpayer compliance costs. IRS's ROI 
estimates provide useful information but-given the limits of current 
data, are not complete estimates of benefits and costs. 

[19] In May 2013, we recommended that IRS make all data from certain 
electronically submitted tax returns available to examiners conducting 
classification. See Tax Administration: IRS Could Improve Examinations 
by Adopting Certain Research Program Practices, [hyperlink, 
http://www.gao.gov/products/GAO-13-480] (Washington, D.C.: May 24, 
2013). 

[20] IRS officials have told us that ROI is not the only factor used 
in determining which new initiatives to request funding for. The 
"Leverage Data to Include Case Selection" initiative includes a pilot 
in which future policy decisions will be made based on the research 
results. For fiscal year 2014, IRS requested funding for two other 
enforcement initiatives for which no ROI was provided, "Build Out Tax 
Return Preparer Compliance Activities" and "Leverage Digital Evidence 
for Criminal Investigation." 

[21] GAO, IRS 2013 Budget: Continuing to Improve Information on 
Program Costs and Results Could Aid in Resource Decision Making, 
[hyperlink, http://www.gao.gov/products/GAO-12-603] (Washington, D.C.: 
June 8, 2012). 

[22] [hyperlink, http://www.gao.gov/products/GAO-09-3SP]. 

[23] [hyperlink, http://www.gao.gov/products/GAO-12-603]. As a result 
of our previous assessment, IRS's updated PPACA cost estimate 
specifies that it is intended to follow best practices from the GAO 
Cost Guide. IRS awarded a contract to update portions of the cost 
estimate, and it also directed the contractor to follow best practices 
outlined in the GAO Cost Guide. 

[24] For more information on IRS's implementation of PPACA, see 
Patient Protection and Affordable Care Act: IRS Managing 
Implementation Risks, but Its Approach Could Be Refined, [hyperlink, 
http://www.gao.gov/products/GAO-12-690] (Washington, D.C.: June 13, 
2012). 

[25] According to IRS, major investments are defined by Treasury as 
those that cost $10 million in either the current year or budget year, 
or $50 million over the 5-year period extending from the prior year 
through budget year +2. 

[26] The IT Dashboard [hyperlink, https://www.itdashboard.gov/] is a 
website enabling federal agencies, industry, the general public, and 
other stakeholders to view details of federal IT investments. The 
purpose of the Dashboard is to provide information on the 
effectiveness of government IT programs and to support decisions 
regarding the investment and management of resources. 

[27] The Exhibit 300, "Capital Asset Summary," is used to justify 
resource requests for major IT investments and is intended to enable 
an agency to demonstrate to its own management (as well as to OMB) 
that a major investment is well planned. Exhibits 300 for major IRS IT 
investments are available on the Dashboard. 

[28] Life-cycle costs are the overall estimated costs (including 
direct and indirect initial costs plus any periodic or continuing 
costs of operation and maintenance), both government and contractor, 
for a particular program alternative over the time period 
corresponding to the life of the program. 

[29] Redacted Exhibit 300s do not include sensitive data, such as 
estimated obligations for future budget years, names and contact 
information, and operational risks. 

[30] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1], 
(Washington, D.C.: November 1999). 

[31] See Financial Services and General Government Appropriations Act, 
2012, Pub. L. No. 112-74, div. C, title I, 125 Stat. 786, 888 (Dec. 
23, 2011). See also, H.R. Rep. No. 112-331, at 901 (2011). . 

[32] GAO, Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs (Supersedes GAO-07-
1134SP), [hyperlink, http://www.gao.gov/products/GAO-09-3SP] 
(Washington, D.C.: Mar. 2, 2009). 

[33] See GAO, Financial Audit: IRS's Fiscal Years 2012 and 2011 
Financial Statements, [hyperlink, 
http://www.gao.gov/products/GAO-13-120] (Washington, D.C.: Nov. 9, 
2012). 

[34] Office of Management and Budget, Revised, Guidelines and Discount 
Rates for Benefit-Cost Analysis for Federal Programs, OMB Circular No. 
A-94, (Revised October 1992). 

[35] Because it is IRS's policy to treat paper-filed returns the same 
as electronically filed returns, IRS does not use data that is not 
transcribed from paper returns in its classification process. This 
process determines, in part, whether a return should be selected for 
examination, what issues should be examined, and how the examination 
should be conducted. 

[36] See GAO, Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs (Supersedes GAO-07-
1134SP), [hyperlink, http://www.gao.gov/products/GAO-09-3SP] 
(Washington, D.C.: Mar. 2, 2009). 

[37] 40 U.S.C. § 11302(c). Office of Management and Budget, Capital 
Programming Guide: Planning, Budgeting, and Acquisition of Capital 
Assets, Supplement to Circular A-11, (Washington, D.C.: August 2011). 

[End of section] 

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E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Katherine Siggerud, Managing Director, siggerudk@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, DC 20548. 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, DC 20548. 

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