Executive Summary

Objective and Scope

Background

Results

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response to the Draft Report

Executive Summary

The budget cycle at the Internal Revenue Service (IRS) begins with estimates of funds needed to operate its programs in a designated fiscal year. The IRS presents these estimates to the Department of the Treasury, the Office of Management and Budget (OMB), and the Congress. The budget cycle continues with processes to allocate funds to functions, organizations, and programs and to track and report actual expenditures.

The Information Systems (IS) organization has an Office of Financial Planning and Budget (FP&B) that works with the Chief Financial Officer (CFO) and the Financial Plan Managers from IS’ divisions to manage its budget appropriation. The FP&B office’s duties include assisting the CFO in formulating the IS budget, developing the IS financial plan, and monitoring the execution of the IS budget. The IS budget appropriations for Fiscal Years (FY) 2000 and 2001 are $1.45 billion and $1.58 billion, respectively.

The objective of this audit was to determine whether the IS organization’s FP&B office has sufficient controls to provide for adequate budget development, program funding, and accurate accounting of IS operations and resources. We analyzed the processes, controls, and related record reviews used in the formulation, execution, and monitoring activities for the FY 2000 and 2001 IS budgets.

The FP&B office is currently part of the IS Office of Information Resources Management and is scheduled to complete its transfer to the IS Office of Strategic Planning and Client Services early in Calendar Year 2001. This change is intended to increase the FP&B office’s independence within IS and mirrors the structure of the CFO’s organization. The transfer will also facilitate coordination of strategic planning and support of IS operations with its financial planning and budgeting activities.

The FP&B office’s current processes and controls are not providing adequate analyses of incoming budget appropriation estimates, approval and processing of financial plan changes, and review and reporting of IS’ spending throughout the fiscal year.

IS needed to shift significant amounts of funds within its appropriation ($360 million in FY 2000, almost 1 dollar of every 4 dollars budgeted) and request an additional $40 million from another appropriation to meet its budget needs. While much of the fund shifting and transfer was due to the transition to a new IS organizational structure that began during the year, adjustments were also needed because of changes in program direction or divisional priorities, and revised or inaccurate plans. Improved controls for budget monitoring and review will help IS assess its future budget requirements and improve the efficiency and effectiveness of its budget execution.

Without adequate controls over IS budget appropriation formulation, execution, and review, the IRS does not have assurance that IS program initiatives are properly prioritized for approval and funding. In addition, records of prior year budget accomplishments cannot be relied upon and used to formulate subsequent year budgets.

The FP&B office’s Formulation Section does not formally document questioned data or discrepancies identified in the budget estimates received from IS divisions. It does not have any written guidelines or operating procedures documenting Formulation Section staff duties and responsibilities for soliciting, receiving, reviewing, and reporting IS budget estimates submitted from IS and IRS operations. Although Formulation Section staff stated they communicate with IS and IRS budget analysts to resolve problems identified, they do not maintain contact logs or reports to support the identification and resolution of these problems.

Without appropriate and consistent review and reporting processes, inaccurate IS budget estimates may not be identified. Additionally, without documenting, reporting and analyzing problems identified in budget estimate reviews, the Formulation Section cannot provide budget analysts direction to improve future year estimates.

Financial Plan Changes (FPC) are made to establish fund balances for program spending and to address budget shortages and surpluses that occur during the fiscal year due to changes in program direction, changes in divisional priorities, or adjustments to plans. We reviewed 13 FPCs involving a total of $20 million from the IS financial plan and found preparation and processing problems in all 13 FPCs.

Although the FP&B office has guidelines to ensure appropriate FPC processing, the Execution Section did not ensure the FPCs were appropriate and justified. The FP&B Chief stated that IS executives directed fund realignments requiring FPCs, but the Chief did not require formal documentation or approval to process FPCs resulting from the directed fund realignments.

Adequate internal controls are necessary to ensure FPC requests are properly documented, approved, and reviewed to prevent misapplication of funds. The absence of controls may also affect the accuracy of the amounts budgeted for program initiatives and can affect decisions involving the development of future year budget estimates.

The OMB requires that agencies review financial plan spending to assess the execution of budget plans. The review results enable the agencies to make funding adjustments when necessary. The FP&B Analysis Section reviewed IS spending throughout FY 2000 and reported its review results in four briefing documents in March, April, May, and June 2000, highlighting potential spending problems to IS executives. Also, the FP&B Chief presented information on spending plan status at monthly IS executive meetings. However, there was no indication that the spending concerns highlighted in the four briefings and monthly IS executive meetings were brought to the attention of the responsible budget analysts to timely correct imbalances in IS spending initiatives.

Analysis of the FY 2000 IS appropriation showed that, as of August 2000, financial plan balances varied from plans by as much as $216 million, or approximately 15 percent of the $1.45 billion FY 2000 IS budget. The FP&B staff did not contact budget analysts about correcting accumulated financial plan imbalances until the end of FY 2000.

The CFO is required to report financial plan balances to the IRS, Treasury, and OMB monthly. These entities rely on accurate financial plan balances for use in planning and monitoring budget appropriations. The absence of sufficient spending plan reviews and timely reporting of review results precludes the meaningful analysis of current year budget status and future year planning.

To ensure that the IS budget is appropriately accounted for and managed, the Chief Information Officer (CIO) needs to develop and implement formal processes in the FP&B office to: 1) review and report problems and discrepancies with IS budget estimate submissions to IS and IRS operations budget analysts; 2) allow only FPCs that are clearly documented, appropriately reviewed, and approved to be processed; and 3) conduct the FP&B office spending reviews, timely correct imbalances, and report financial plan status to IS and IRS operations budget analysts.

These processes should include feedback developed by the FP&B office to Financial Plan Managers about trends in problems with initiative budget estimates, FPC requests, and initiative spending reviews. This feedback can serve as a means to improve the effectiveness and efficiency of future year budget formulation and program management.

Management’s Response: Management agreed with the audit recommendations and believes it is critical for the IS organization to implement processes to effectively manage the IS appropriation under its restructured Office of Strategic Planning and Client Services. Specifically, the CIO is working to develop and/or improve processes for budget estimation, financial plan changes, and appropriation spending reviews. Management’s complete response to the draft report is included as Appendix IV.

Objective and Scope

The objective of this audit was to determine whether the Information Systems (IS) organization’s Financial Planning and Budget (FP&B) office has sufficient controls to provide for adequate budget development, program funding, and accurate accounting of IS operations and resources. We analyzed the processes, controls, and related record reviews used in the formulation, execution, and monitoring activities for the Fiscal Year (FY) 2000 and 2001 IS budgets.

We conducted our audit work in the Internal Revenue Service (IRS) National Headquarters Office and IS offices in New Carrollton, Maryland, from August through November 2000. This audit was performed in accordance with Government Auditing Standards. Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

The budget cycle at the IRS begins with the formulation process wherein the IRS estimates the budget needed to operate its programs in a designated fiscal year. The IRS presents these estimates to the Department of the Treasury, the Office of Management and Budget (OMB), and the Congress. The next step in the budget process is financial plan development. In this stage, the IRS allocates funds to its various functions and organizations to operate its programs. The budget cycle concludes with the execution of the authorized budget during the fiscal year. The execution phase of the budget process consists of tracking and reporting budgeted resources versus actual expenditures. This process continues for 5 years after the availability of the appropriation ends.

The IRS’ budget at year-end may differ from its originally enacted budget due to its ability to shift funds between appropriations. The IRS may shift up to 5 percent of its funds between its appropriations but only with advance approval of Congressional Appropriations subcommittees.

The Chief Financial Officer (CFO) primarily controls the IRS’ budget. Each appropriation, and offices within, has a Financial Plan Manager (FPM) who assists the CFO in administering his/her particular share of the budget.

IS has a FP&B office that works with the CFO and the FPMs from the various IS divisions. The FP&B office’s duties include assisting the CFO in formulating the IS budget, developing the IS financial plan, and monitoring the execution of the IS budget. The IS budget appropriations for FYs 2000 and 2001 are $1.45 billion and $1.58 billion, respectively.

The FP&B office uses staff in three sections to manage the IS budget:

• The Formulation Section is responsible for soliciting, receiving, reviewing, and processing budget estimates from IS offices and the IRS operating divisions supported by IS.
• The Analysis Section is responsible for developing the IS financial plan and monitoring IS non-labor spending throughout the fiscal year.
• The Execution Section is responsible for executing IS’ financial transactions and monitoring labor spending throughout the fiscal year.

The FY 2000 IS budget appropriation included budget estimates for 80 initiatives. These initiatives included funding for management, operating and maintenance activities and application support for existing and emerging programs. The FY 2001 IS budget appropriation included budget estimates for 74 initiatives.

Results

The FP&B office is currently part of the IS Office of Information Resources Management and is scheduled to complete its transfer to the IS Office of Strategic Planning and Client Services early in Calendar Year 2001. This change is intended to increase the FP&B office’s independence within IS and mirrors the structure of the CFO’s Office of FP&B. The transfer will also facilitate coordination of strategic planning and support of IS operations with its financial planning and budgeting activities.

The FP&B office has recognized the need to perform reviews of the execution of the IS organization’s budget appropriation. To do this, it has performed periodic reviews of spending activity. However, the FP&B office’s controls could be improved to help ensure IS properly manages its budget appropriation. Specifically, it can improve and formalize processes to:

• Analyze incoming budget appropriation estimates.
• Control the approval and processing of financial plan changes.
• Review IS spending throughout the fiscal year and report the results of those reviews to appropriate managers.

Without adequate controls over IS budget appropriation formulation, execution, and review, the IRS does not have assurance that IS program initiatives are properly prioritized for approval and funding. IS needed to shift significant amounts of funds within its appropriation ($360 million) and request additional funds from another appropriation ($40 million) to meet its FY 2000 budget needs. While much of the fund shifting and transfer was due to the transition to a new IS organizational structure that began during the year, adjustments were also needed because of changes in program direction or divisional priorities, and revised or inaccurate plans. Improved controls for budget monitoring and review will help IS assess its future budget requirements and improve the efficiency and effectiveness of its budget execution.

Problems Identified During Budget Estimate Reviews Were Not Formally Documented and Reported

The Formulation Section staff reviews the IS budget estimates for completeness, accuracy, and validity, and compiles the data for submission to the CFO. The process is initiated by sending a "call memorandum" requesting the estimated IS resource requirements for a designated fiscal year to FPMs and budget analysts within IS and the IRS operating divisions. The "call memorandum" includes instructions and formats for preparing and submitting the IS budget estimates. The staff communicates with IS and IRS operations budget analysts by telephone or e-mail to resolve questionable issues about the budget estimate before submitting the data to the CFO. However, the Formulation Section does not maintain contact logs or reports to support the identification and resolution of issues raised through this process.

The General Accounting Office’s Standards for Internal Control in the Federal Government suggest that significant actions be clearly documented to maintain their relevance and value to management in controlling operations and making decisions. Documented procedures should be included in management directives, administrative policies, or operating manuals.

When the FP&B office was established in 1998, it did not have any formal guidelines to direct its operations. The Formulation Section subsequently developed the informal process described above to obtain budget estimates from the IS divisions. However, management never formalized the process to better assure the accuracy and reliability of the IS budget submissions and reviews.

Without appropriate and consistent review and reporting processes, inaccurate IS budget estimates may not be identified. Additionally, without documenting, reporting and analyzing problems identified in budget estimate reviews, the Formulation Section cannot provide budget analysts direction to improve future year estimates.

To help ensure the accuracy and reliability of the IS budget submission to the CFO and ensure program analysts perform timely, consistent, and appropriate reviews of IS budget estimates, the Chief Information Officer (CIO) should:

1. Develop a formal process to review and report problems and discrepancies with IS budget estimates submitted by IS and IRS operations budget analysts to the Formulation Section. This process should require documenting and reporting review results. This documentation can provide the basis for trending problems and discrepancies in the budget estimates. The Formulation Section should provide its budget analysts with feedback about problem trends to prevent them from being repeated in the future. It should also report these trends to IS executives for their consideration in directing the development of future budget estimates.

Management’s Response: IS management agreed with the audit recommendation and is working with the CFO to develop a process to ensure the IS organization develops budget estimates in compliance with guidelines from the Commissioner and CFO, and appropriately documents development of the IS organization’s budget estimates.

Financial Plan Changes Were Processed Without Supporting Documentation or Managerial Approval

Financial Plan Changes (FPC) are used to establish fund balances for program spending and to address budget shortages and surpluses that occur during the fiscal year due to inadequate planning, changes in program direction, or changes in divisional priorities. FPMs, Division Information Officers, and program executives move money to under-funded areas from both within the IS appropriation (intra-appropriation transfers) and the Compliance appropriation (inter-appropriation transfers). From January through August 2000, the FP&B office processed 1,164 FPCs, totaling almost $360 million, to adjust the deficits and surpluses that developed during the execution of the IS budget.

FPC requests should be initiated by the office requiring the additional funding and approved by the executive requiring the change. The request is submitted to the FP&B office and is processed in the Execution Section. The Execution Section requires review and approval by the Analysis Section to confirm the availability of funds.

The FPC requests should be limited to 10 percent of the initiative balance or $500,000, whichever is less, and contain sufficient documentation to justify the changes. The FP&B office is required to process the FPCs at least weekly.

We reviewed 13 FPCs involving $20 million in fund transfers from the IS financial plan (see Appendix I for details on sample selection). We found preparation and processing problems in all 13 FPCs. The problems included:

• Changes initiated by offices not responsible for the project initiative.
• Absence of managerial approval or review.
• Absence of review and approval by the FP&B Analysis Section.
• Insufficient documentation to support reasons for the change.
• Amounts exceeding levels authorized by the CIO.
• Untimely processing of the FPCs (3 FPCs were processed 12 to 19 days after their approval dates, and 1 was dated 19 days before the FPC initiation date).

We could not determine the propriety of these 13 FPCs because narrative descriptions accompanying the requests did not provide adequate support to make change approval decisions. The FP&B office processed these FPCs without requesting additional support.

Adequate internal controls are necessary to ensure FPC requests are properly documented, approved, and reviewed to prevent misapplication of funds. These controls also prevent furthering the effects of a shortage or surplus in a program initiative. Incorrect FPCs can create discrepancies in other financial plans, requiring additional FPCs to correct the errors. Although the FP&B office has guidelines to ensure appropriate FPC processing, the Execution Section did not ensure the FPC requests were appropriate and justified. In discussions with the FP&B Chief, we learned that IS executives directed fund realignments requiring FPCs, but the Chief did not require formal documentation or approval to process FPCs resulting from the directed fund realignments.

The absence of controls over FPCs may affect the accuracy of the amounts budgeted for program initiatives and can affect decisions involving the development of future year budget estimates.

To ensure changes to the IS financial plan are appropriate and to improve future year budget estimates, the CIO should:

2. Implement managerial controls in the FP&B office that allow only those FPCs that are clearly documented, appropriately reviewed, and approved to be processed and posted to the Automated Financial System and the Project Cost Accounting System.

Management’s Response: The CIO will issue financial operating guidelines to ensure FPCs are processed with appropriate reviews and approvals.

3. Capture the number and dollar amounts of FPCs made during the fiscal year. Capturing this information can provide a basis for identifying trends within those initiatives requiring significant adjustments to their budgets. Identifying these programs can lead to improvements in planning and developing future year budget estimates.

Management’s Response: IS management has developed a log to capture FPC amounts, and information to identify trends and improve planning of future year budget estimates.

The Spending Review Process Could Be Improved for Planning and Monitoring Budget Appropriations

The OMB requires that agencies review financial plan spending to assess the execution of budget plans. The review results enable the agencies to make funding adjustments when necessary.

The FP&B Analysis Section reviewed IS spending throughout FY 2000 and reported its review results in four briefing documents in March, April, May, and June 2000, highlighting potential spending problems to IS executives. Also, the FP&B Chief presented information on spending plan status at monthly IS executive meetings. However, there was no indication that the spending concerns highlighted in the four briefings and monthly IS executive meetings were brought to the attention of the responsible budget analysts to timely correct imbalances in IS spending initiatives.

Analysis of the FY 2000 IS appropriation showed that, as of August 2000, financial plan balances varied from plans by as much as $216 million, or approximately 15 percent of the $1.45 billion FY 2000 IS budget. The FP&B staff did not contact budget analysts about correcting accumulated financial plan imbalances until the end of FY 2000.

The FP&B management does not have formal guidance to ensure consistent, adequate, and timely IS spending reviews. Also, the FP&B office can improve the method by which it reports its review results to responsible budget analysts and FPMs. Specifically, the FP&B office spending reviews did not:

• Provide analysis of the expenditures versus the budget throughout the fiscal year to assess the adequacy of the spending plans.
• Timely and consistently identify and alert management and budget contacts about initiatives that required more funds than originally obligated.

The CFO is required to report financial plan balances to the IRS, Treasury, and OMB monthly. These entities rely on accurate financial plan balances for use in planning and monitoring budget appropriations. The absence of sufficient spending plan reviews and timely reporting of review results precludes the meaningful analysis of current year budget status and future year planning.

To improve the accuracy of financial plan balances and monthly fund balance reports to oversight agencies, the CIO should:

2. Develop detailed procedures for the FP&B spending reviews, reporting results of those reviews, and ensuring imbalances are corrected in a timely manner. These procedures should include a process for recording plan changes that were required throughout the year. Plan change data should be communicated to the Analysis and Formulation Sections, as well as to budget analysts and FPMs affected by the plan changes, for consideration in future year planning and financial plan development. This process will help ensure future year plans are adjusted accordingly. The procedures should also include appropriate managerial controls that ensure reviews and reports are timely, accurate, and complete.

Management’s Response: The IS office of FP&B will implement guidelines for spending reviews for the balance of FY 2001. These guidelines will contain feedback mechanisms to ensure review results include approved spending levels, the need for timely financial plan changes to realign funds, and potential subsequent year impacts. The guidelines will direct that review results be communicated to FP&B, IS Executives, and business partners.

Conclusion

As the budget process in the IRS evolves into one that is focused around strategic planning and budget, it is critical that IS establish and maintain sufficient controls to ensure spending levels are supported in the financial plan balances, providing sound management of the IS appropriation. Proper financial plan balances are imperative since the IRS, Treasury, OMB, and Congress continually monitor these balances to evaluate current program status and to plan future budget requests.

The development of sufficient processes to formulate budget estimates, execute FPCs, and monitor spending would improve the FP&B office’s ability to manage the IS budget. Linking these processes among the three FP&B Sections will also provide IS the ability to improve support to the IRS through more efficient and effective budget formulation and program management.

Detailed Objective, Scope, and Methodology

The objective of this audit was to determine whether controls over the Information Systems (IS) organization’s Office of Financial Planning and Budget (FP&B) are sufficient to provide for adequate budget development, program funding, and accurate accounting of IS operations and resources. To achieve this objective, we:

1. Determined whether the FP&B office policies and procedures allow achievement of its mission of formulating, developing, and monitoring the execution of the IS budget.
1. Determined the processes and controls the FP&B office uses to accomplish its IS budget activities.
1. Identified and obtained the FP&B office procedures and guidelines related to performing IS budget activities through Internet research and from FP&B management.
2. Interviewed FP&B and Strategic Planning and Client Services management to determine:
1. The responsibilities and status for developing the FP&B mission statement, policies and procedures.
2. Whether IS documented and communicated these policies and procedures to all appropriate employees, including budget contact points.
2. Obtained and reviewed guidelines and directives developed through November 2000 to assess whether the FP&B office provided sufficient direction to adequately account and budget for IS operations.
2. Determined whether the FP&B office’s budget formulation controls included appropriate processing and reviews of budget estimates provided by IS offices and the Internal Revenue Service (IRS) operating divisions supported by IS.
1. Determined whether the FP&B office’s processes and controls were effective to analyze budget estimate information prepared by Divisional Information Officers (DIO) and IS Division executives prior to submission to the Chief Financial Officer (CFO).
1. Interviewed appropriate FP&B Formulation Section program analysts to determine if:
1. Budget estimate format instructions and due dates were provided to the budget analysts within IS offices and the IRS operating divisions.
2. Follow-up actions taken to ensure budget estimates were submitted timely.
3. IS budget estimate review processes were adequate.
2. Assessed whether budget estimate reviews were performed by the FP&B office employees for Fiscal Year (FY) 2001 budget estimates to determine whether the reviews adequately explained and documented the exception issues and the actions for resolving the budget estimate issues.
2. Determined whether the FP&B office provided sufficient guidance to budget control contacts, i.e., Divisional Budget Analysts, DIOs, Financial Plan Managers (FPM), to facilitate the budget estimation process.
1. Interviewed FP&B management and employees to determine the guidance and instructions that were provided to the budget analysts to assist them with the budget estimation process.
2. Interviewed budget analysts from the Deputy Chief Information Officers for Operations and Systems to determine the type of guidance and procedures they received from the FP&B office to assist them with the budget estimation process and reviews.
3. Obtained and reviewed procedural documents provided to the budget analysts to aid them in the formulation of the budget estimates.
3. Assessed the amount of training FP&B employees had received to perform their budget activities.
1. Reviewed the Office of Management and Budget (OMB) Circular A-11 to identify any OMB-mandated training and/or skills required to develop, formulate, and execute a budget.
2. Obtained the FP&B employee training record information to determine the amount of the required training delivered.
4. Assessed the potential impact and resolution of issues identified with the budget formulation process by interviewing FP&B and CFO management.

3. Reviewed controls in the FP&B Execution Section to determine whether it implemented all critical controls and provided for accurate accounting of IS operations.

1. Reviewed OMB Circular A-34 and IRS Budget Cycle documentation to identify criteria for federal budget execution controls.
2. Determined whether the FP&B office’s controls provided for adequate budget and spending reviews and whether these controls were implemented.
0. Obtained documentation of the FP&B office’s spending reviews from August 1999 to August 2000 to identify potential spending problems.
1. Assessed whether the FP&B office’s guidance and communication to FPMs provided sufficient detail for self-review and monitoring.
3. Interviewed the Deputy CFO, Strategic Planning and Budget, and obtained documentation of IS execution results for FY 2000 to identify trends and incidents of irregular spending and ascertain the impact mid-year reprogramming and financial plan adjustments have had on strategic planning and subsequent budgets.
4. Reviewed current Automated Financial System (AFS) data for unliquidated prior year obligations.
0. Identified unliquidated obligations showing no activity for 9 months or longer and determined whether they were identified, investigated, and deobligated as necessary.
1. Identified whether Divisional Budget Analysts and FP&B Analysis and Execution Section employees performed reviews to identify unliquidated obligations.
5. Determined if budget execution controls provided for adherence to OMB reprogramming guidelines. Assessed these controls by reviewing the Financial Plan Changes (FPC) performed during FY 2000 to determine if they were properly coordinated with and approved by the initiative owners. Requested a judgmental sample of 30 FPC request forms from the FP&B office. The FP&B office provided documentation for only 13 of the FPCs requested. Reviewed all 13 of the FPCs provided.
6. Determined whether FPCs were input and posted to the AFS in a timely manner to reflect the actual state of the financial plan throughout the fiscal year. Analyzed Authorized Spending Level reports, Project Cost Accounting System reports, and historical IS financial data for August 1999 through August 2000.
7. Determined if budget execution controls provided adherence to OMB inter-appropriation transfer guidelines by reviewing all FYs 1999 and 2000 inter-appropriation transfers and corresponding memoranda from IS to the CFO.

Major Contributors to This Report

Scott E. Wilson, Associate Inspector General for Audit (Information Systems Programs)

Scott A. Macfarlane, Director

Edward A. Neuwirth, Audit Manager

Michael Garcia, Senior Auditor

Glen Rhoades, Senior Auditor

Perrin Gleaton, Auditor

Report Distribution List

Commissioner N:C

Chief Counsel CC

Chief Financial Officer N:CFO

Deputy Chief Financial Officer, Strategic Planning and Budgeting N:CFO:SPB

National Taxpayer Advocate TA

Director, Information Resources Management IS:IR

Director, Strategic Planning and Client Services IS:SP

Director, Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O

Office of Management Controls N:CFO:F:M

Audit Liaisons:

Management’s Response to the Draft Report

The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.