The Internal Revenue Service has been shifting its priorities from taxpayer service to enforcement and its management of the Business Systems Modernization program - an ongoing umbrella program of upgrades - from contractors to IRS staff.
Although there are sound reasons for these adjustments, they also involve risk, according to the Government Accountability Office.
The IRS's fiscal year 2006 budget request of $10.9 billion is an increase of 3.7 percent over last year's enacted level. In its assessment of the IRS's 2006 budget request, the GAO noted that the IRS budget requested for 2006 includes an 8 percent increase for enforcement and a 1 percent decrease and 2 percent decrease for taxpayer service and BSM, respectively.
However, the GAO said, the potential impact of these changes on taxpayers in either the short- or the long-term is unclear, since the IRS hasn't provided details for proposed taxpayer service reductions. Although it is developing long-term goals, they are not yet finalized.
"The IRS has not finalized the details on where reductions in service would occur," the GAO said. "The risk, as the IRS shifts its priorities towards enforcement, is that some of the gains in the quality of taxpayer service could be surrendered. There are analogous risks associated with moving more of the management of BSM in-house."
At recent hearings on the budget, senators from both sides of the aisle and the Treasury Inspector General for Tax Administration questioned the IRS plan to cut back on walk-in and telephone customer service operations.
Commissioner Mark W. Everson discussed the agency's plan to close as many as 105 Taxpayer Assistance Centers and cut back its toll-free telephone service by 15 hours a week at a Senate Appropriations Subcommittee hearing. TACs are located nationwide and allow taxpayers to have face-to-face meetings with IRS employees, who can assist taxpayers with tax law, tax return preparation and account inquiry resolution.
"The IRS needs to balance customer service with its compliance and enforcement efforts," said Sen. Christopher Bond, R-Mo., chairman of the Transportation, Treasury and Housing and Urban Development Subcommittee. "I believe that most people who fail to comply with the tax code do so unintentionally because of its difficulty and complexity. Accurate and timely guidance from the service is imperative to ensuring taxpayer compliance."
"While the IRS has shown improvements in customer service," closing nearly a quarter of the 400 TACs nationwide "may disrupt the balance between customer service and enforcement," Treasury Inspector General J. Russell George testified.
Colleen M. Kelley, president of the National Treasury Employees Union, warned that closing TACs would result in reduced taxpayer education and compliance at a time when the gap between taxes owed and amounts paid has increased to upwards of $298 billion.
In its testimony, the GAO noted that recent gains in enforcement staffing are encouraging. However, it stated, "Tax law enforcement continues to remain an area of high risk for the federal government, because the resources the IRS has dedicated to enforcing the tax laws have declined, while the IRS's enforcement workload - measured by the number of taxpayer returns filed - has continually increased."
The cost of modernization
Meanwhile, the BSM program continues to be high-risk, at least partly because projects have incurred significant cost increases and schedule delays, and it faces major challenges in areas such as human capital and requirements management.
"As a result of budget reductions and other factors, the IRS has made major adjustments," said the GAO. "It is too early to tell what effect these adjustments will have on the program, but they are not without risk and could potentially impact future budgets. Further, the BSM program is based on strategies developed years ago, which, coupled with the delays and changes brought on by budget reductions, indicates that it is time for the IRS to revisit its long-term goals, strategy and plans for BSM."
The program is critical to supporting both the IRS's taxpayer service and its enforcement goals, said the GAO, which noted some recent successes in implementing the program:
* Modernized e-file. Initial releases of this project were implemented in June and December 2004, providing electronic filing for large corporations, small businesses and tax-exempt organizations.
* E-Services. The IRS created a Web portal to conduct most IRS transactions with taxpayers and practitioners electronically. As of late March 2005, over 84,000 users have registered with the portal.
* Customer Account Data Engine. CADE, intended to replace the antiquated system that contains the IRS's repository of taxpayer information, "is the BSM program's linchpin and highest-priority project," said the GAO. The initial releases of CADE have so far been used to process 1040EZ returns for single taxpayers with refund or even-balance returns. As of March 16, 2005, CADE had processed more than 842,000 returns. The GAO pointed out that these returns are the most basic, and constitute less than 1 percent of the returns expected to be processed this year. The full implementation of CADE will take several more years.
* Integrated Financial System. This system will eventually replace the IRS's core financial systems and will operate as its new accounting system of record. The first release became fully operational in January 2005.
On the negative side, the BSM program has a history of cost increases and delays. The GAO said that these are due in part to weaknesses in management controls and capabilities. Due to budget reductions and the IRS's assessment of the prime systems contractor's performance, the IRS has decided to shift significant responsibilities for program management, systems engineering and business integration to IRS staff.
The GAO is not confident that this is the answer to the BSM problem. "To successfully accomplish this transfer, the IRS must have the management capability to perform this role," it said. And it noted that the IRS has had "significant problems in the past managing this and other large development projects, and acknowledges that it has major challenges to overcome in this area."
Nevertheless, BSM and related initiatives such as e-filing hold the promise of delivering efficiency gains that could offset the need for larger budget increases to fund taxpayer service and enforcement, the GAO concluded.
