The Internal Revenue Service Should Continue to Develop Its
Measures Program to Ensure That Its GPRA Measures Cover All of the Major
Components of Tax Administration
May 2002
Reference Number: 2002-10-097
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
May
30, 2002
MEMORANDUM FOR
CHIEF FINANCIAL OFFICER
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - The Internal Revenue
Service Should Continue to Develop Its Measures Program to Ensure That Its GPRA
Measures Cover All of the Major Components of Tax Administration (Audit #
200110031)
This
report presents the results of our review of the Internal Revenue Service’s
(IRS) Government Performance and Results Act of 1993 (GPRA) performance
measures. The overall objective of this
review was to determine if the performance measures in the IRS’ GPRA
submissions allow the IRS to adequately assess the success of its
operations. We conducted this review as
part of our ongoing coverage of the IRS’ compliance with the GPRA. With this report, we hope to assist the IRS
in providing the Congress a more complete picture of the success of the
IRS.
In
summary, we found that the IRS’ critical performance measures do not address
all of the strategies listed in the IRS Strategic Plan and do not support a
significant portion of the IRS’ budget request. We considered the IRS’ strategies and its budgeted areas as the
major components of tax administration.
The lack of performance measures for each of the IRS’ major strategies
and for each of the major areas of the IRS’ budget prevents the IRS from
reporting, in a single document to the Congress, its overall level of success
in achieving its mission. In addition,
we found two performance measures where the definition of the measure did not
match its use.
The
IRS Commissioner selected the critical performance measures based on their
direct relation to the taxpaying public.
This emphasis by the IRS on serving the taxpayer has resulted in a
recent customer satisfaction rating report which showed that the IRS’ customer satisfaction
rating has increased by 22 percentage points over the last 2 years. While we do not discount the IRS’ emphasis
on customer satisfaction, the IRS should also continue to develop its balanced
measures program to ensure that its critical performance measures cover all of
the major components of tax administration.
The
President’s Management Reform Agenda addresses integrating performance review
with budget decisions. This is designed
to produce performance-based budgets and, over time, agencies will be expected
to identify high quality outcome measures, accurately monitor the performance
of programs, and begin integrating this presentation with associated cost.
In
order to meet the President’s agenda, we recommend that the IRS develop new
performance measures or include existing performance measures in its list of
critical performance measures. The IRS
should use these additional critical measures to ensure that they address each
of the major strategies and budgeted areas of the IRS. In addition, we recommend the IRS verify
that the definition of each performance measure matches its use.
Management’s
Response: IRS management responded to this report with
a corrective action for each of our findings.
They will consider identifying existing measures or newly created
measures to align with the strategies identified in the strategic plan and
review the budget submission to determine if additional performance information
is needed. IRS management also recently
issued guidance requiring designated IRS officials to certify that performance
data reported on a monthly basis meets required procedures.
IRS
management commented that it has substantial reporting requirements to the
Oversight Board, the Congress, and the Office of Management and Budget beyond
the Budget and Annual Performance Plan. The IRS does not believe that it can provide this information in a
single document that would meet the needs of its various stakeholders. Management’s complete response to the draft
report is included as Appendix IV.
Office
of Audit Comment: While we acknowledge
the IRS’ extensive reporting requirements to the Congress, we believe that the
IRS is not complying with the requirements of GPRA if it does not address each
of the major strategies in the strategic plan and each of the major budget
areas in its annual performance plan and its annual performance report.
Copies
of this report are also being sent to the IRS managers who are affected by the
report recommendations. Please contact
me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant
Inspector General for Audit (Headquarters Operations and Exempt Organizations
Programs), at (202) 622-8500.
Some of the Critical Measures Definitions Do Not Match the Internal Revenue Service’s Use of Them
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
The Government Performance and Results Act of 1993 (GPRA) requires federal agencies to submit to the Congress a strategic plan every 3 years and an annual performance plan on a yearly basis. In addition, the Internal Revenue Service (IRS) submits its annual budget request to the Congress in its Congressional Justification. The strategic plan centers on those programs and activities that are key to carrying out an agency’s mission. The annual performance plan sets out measurable goals that define what will be accomplished during a fiscal year.
The Office of Management and Budget (OMB) provides agencies guidance on preparing strategic plans, annual performance plans, and annual program performance reports through its Circular A-11 and related material like the President’s Management Reform Agenda. One of the initiatives in the Fiscal Year (FY) 2002 President’s Management Reform Agenda is to provide a greater focus on performance by integrating performance review with budget decisions. This is designed to produce performance-based budgets starting with the FY 2003 budget submission. In addition, over time, agencies will be expected to identify high quality outcome measures, accurately monitor the performance of programs, and begin integrating this presentation with associated cost.
The IRS submitted to the Congress in January 2001 a strategic plan covering FYs 2000-2005. The IRS also submitted on April 9, 2001, its FY 2002 Annual Performance Plan and Congressional Justification to the Congress. The annual performance plan and the Congressional justification contain the critical performance measures that the IRS reports to the Congress addressing the success of its operations. For this review we looked at these critical performance measures to determine if they provided the Congress with a complete assessment of the IRS’ operations.
We conducted this review from June 2001 to February 2002 at the National Headquarters in Washington, D.C. The audit was conducted in accordance with Government Auditing Standards. We did not validate the performance data that the IRS sends to the Congress as a part of this review. This review was limited to determining whether the IRS performance measures cover all of the major components of tax administration and whether the performance measures are fairly presented. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
One of the methods that we used to identify the major components of tax administration was to identify the major strategies in the IRS’ strategic plan. The performance measures that the IRS reports to the Congress via its Congressional justification and annual performance plan do not address all of the strategies listed in the IRS’ FY 2000-2005 Strategic Plan.
We were unable to link the IRS’ critical measures to 5 of the 10 IRS strategies. The strategies with which we could not link critical performance measures were:
· Address Key Areas of Non-Compliance.
· Deal Effectively with the Global Economy.
· Recruit, Develop, Retain a Quality Workforce.
· Provide High Quality, Efficient, and Responsive Information Services and Shared Support Services.
· Promote Effective Asset Information Stewardship.
The IRS is in the process of developing measures that would address its strategies relating to compliance and the global economy. The IRS has recently developed a Globalization Index, which it may be able to use in the future to measure the strategy addressing the global economy. However, for the compliance strategy, the IRS has only recently determined how its compliance measures will be defined. The compliance performance measures will not be available for the FY 2003 budget submission.
The IRS does have performance measures addressing its Information and Support Services strategy. However, the IRS does not include any of these measures in its list of critical measures reported to the Congress as part of its GPRA submissions. In addition, we are not aware of any detailed plans by the IRS to develop performance measures to address either the workforce or asset stewardship strategies.
One reason there are no performance measures covering these strategies in the list of critical measures is that the IRS Commissioner selected the critical performance measures based on their direct effect on the taxpaying public. This emphasis on service to taxpayers has been successful. A recent report by the University of Michigan Business School shows that the customer satisfaction rating for the IRS has improved by 22 percentage points over the last 2 years. While we acknowledge the IRS’ effort and success in this area, the IRS’ critical performance measures should also address all of the major strategies of the IRS. This would allow the IRS to report to the Congress its progress in achieving its mission.
The Commissioner also relies on the individual business units to develop performance measures for their respective areas. These business units have just begun operation within the past year and have not yet developed performance measures addressing each of the individual business unit’s strategies. In most instances, the business unit strategies directly link to the IRS’ strategies.
The GPRA requires that agencies include in their strategic plans a description of how the performance goals included in the annual performance plans will be related to the general goals and objectives in the strategic plan. In addition, in its current strategic plan the IRS states that its major strategies are the approaches it will use to achieve progress on its strategic goals over a 2 to 3-year period. If the IRS’ GPRA submissions do not include critical performance measures addressing each of its major strategies, then the readers of the document cannot determine the level of the IRS’ success in achieving its strategic goals and, in turn, its mission. This is because they will not be able to determine the level of the IRS’ success in achieving its major strategies.
In addition, OMB Circular A-11 requires that performance goals and performance indicators in an agency’s annual performance plan be based on the general goals and objectives in its strategic plan. The OMB defines general goals as those which define how an agency will carry out its mission over time. The general objectives are paired with a general goal and can be used to help assess whether a general goal was or is being achieved. In addition, OMB Circular A-11 states that the annual plan should include a performance goal(s) covering the major human resources strategies, such as recruitment, retention, skill development and training, and appraisals linked to program performance that help support the agency’s programs.
The lack of critical performance measures prevents the IRS from reporting to the Congress in its GPRA submissions on the success of its major strategies and, consequently, the degree to which it is achieving its mission. OMB Circular A-11 states that strategic plans, annual performance plans, and annual performance reports comprise the main elements of the GPRA. Together these elements create a recurring cycle of planning, program execution, and reporting.
1. The Commissioner should ensure that the IRS develops meaningful critical performance measures to address all strategies in its strategic plan.
Management’s Response: IRS management agreed to consider identifying existing measures or newly created measures to align with the strategies identified in its strategic plan.
Office of Audit Comment: In the IRS’ overall comments to our report, the CFO stated that the IRS would not be able to provide all the critical measures data as well as other performance data regularly provided to the IRS Oversight Board, the Congress, OMB, Treasury and other stakeholders in a single document. Nonetheless, we believe that the IRS is not complying with the requirements of GPRA if it does not address each of the major strategies in the strategic plan and each of the major budget areas in its annual performance plan and its annual performance report.
The second method that we used to identify the major components of tax administration was to identify the major budgeted areas of the IRS. The IRS does not have performance measures supporting 41 percent of its FY 2002 Congressional Justification (budget request).
The IRS breaks down its budget by appropriation and within some of the appropriations by Budget Activity Code (BAC). We found that three of the five appropriations do not have performance measures linking results to the funds requested. In the remaining two appropriations, there were no performance measures for three of the six BACs within those appropriations. The combination of the 3 appropriations and the 3 BACs equals $3.9 billion of the $9.4 billion (41 percent) requested by the IRS.
This same condition was brought to the IRS’ attention in a report dated December 1999. In his response, the Commissioner agreed with the condition but added that the balanced measurement system had only recently been implemented and the linkage of measures in the performance plan to the budget was not yet fully defined. The Commissioner went on to state that the measures that most affect taxpayers were developed in 1999. He expected that all other measures would be developed in FY 2000.
The appropriations that do not have performance measures are Information Systems, Business Systems Modernization (BSM), and Earned Income Tax Credit. The IRS routinely briefs the Congress on its progress in implementing the BSM and its efforts to address the Earned Income Tax Credit. However, the IRS should also include measurements or benchmarks in its Annual Performance Plan and Congressional Justification so that this information is available to interested parties, such as the IRS Oversight Board and taxpayers, and so that the Congress can use it as part of its annual budget decisions relating to the IRS.
The IRS footnotes its BSM appropriation in its budget request acknowledging that the appropriation does not have any performance measures. The footnote goes on to state that the resources budgeted for this appropriation contribute to the meeting of the targets listed in the other appropriations of the IRS’ budget request. However, the IRS should also develop measures for the funds used to update its outdated business systems.
The BACs without performance measures represent areas of the budget addressing Shared Services Support, General Management and Administration, and Research. These three BACs, along with the appropriation for Information Systems, can be considered overhead and may not be easily measured. However, the funds budgeted to these areas should have performance measures to justify the budgeted amount or the costs should be associated with the program that it benefits, thus giving a truer cost of that particular program. These areas represent $3.3 billion or 85 percent of the IRS’ $3.9 billion budget that does not have performance measures associated with it.
The current Administration is considering legislation relating to agencies’ assignment of overhead costs. Under the proposed legislation, agency programs would be charged for all the support services and capital assets they use. Under current law, such overhead costs are budgeted separately and not linked to agency programs, meaning that most program managers have little knowledge of what their operations actually cost.
Full knowledge of a program’s costs enables agency officials and lawmakers to make informed choices about how increasing or decreasing funding would affect program results. At present, many agencies are unable to account for the overhead, support, and indirect costs associated with their programs.
The Commissioner selected the IRS’ critical performance measures based on their effect on the taxpaying public. Because of this, there are no critical measures covering the overhead-related portions of the IRS’ budget. The IRS is taking steps that may address this by revamping its cost accounting; however, these steps will not be completed in the near future.
OMB Circular A-11 requires that a performance goal or indicator cover each program activity in the annual plan. It also requires that budget resources align with performance goals. By identifying how much an agency will spend to achieve its performance goals, the annual performance plan forms the integral link between budget and program results.
Because major components of the requested budget for the IRS lack critical performance measures, subsequent evaluation and negotiation of the President’s Budget that goes forward for consideration and approval may not be judged appropriately based on the budget document alone and may require supplemental information.
2.
The Commissioner should ensure that the IRS includes
performance measures or benchmarks for each of the major areas of its
budget. The IRS can use existing
measures, develop new measures, or, in the case of overhead-related costs,
associate the costs with the program receiving the benefit.
Management’s Response: IRS management agreed to review its budget
submission and determine if additional performance information is needed.
The IRS defines its critical performance measures in its data dictionary. The definitions detail what data are included in each performance measure. The data dictionary also identifies any limitations that the IRS has identified with the data. The IRS associates this dictionary with its Annual Performance Plans and makes it available on its public web site.
We identified two of the IRS’ critical performance measures where the definition of the measure did not match its use. In one instance the performance measure definition was inaccurate, and in the other instance the data included in the measure did not match the name of the measure. As a result, the Congress may be making budgetary decisions on information that may be either incomplete or misleading. We found the following:
· The definition for the Office of Chief Counsel’s performance measure “Tax Court Cases” states that the measure represents Counsel’s beginning inventory plus its receipts for the period. However, we determined that the performance measure reported to the Congress did not include the beginning inventory. The number of cases reported (13,698) is understated by 22,264 cases, the volume of the beginning inventory. This condition does not exist in the FY 2003 Congressional Justification because the IRS broke this measure down into two separate measures, one measure addressing tax court cases and one addressing tax court receipts.
· The performance measure addressing business returns includes the Form 1040ES, which we consider to be a non-business form. In addition, the Form 1040ES is an information document, which we do not consider to be a return. For FY 2000, the Form 1040ES represented 48 percent of the 81,588 documents in this performance measure.
The problems that we identified with the performance measure definitions occurred because the IRS did not have procedures to verify the accuracy of the definitions. In its response to a Treasury Inspector General for Tax Administration audit report dated November 2001, the IRS stated that new procedures for issuing year-end data were issued to the operating divisions and functional units on September 26, 2001. These procedures require the units to submit supporting documentation that includes copies of reports and workpapers that identify the reported values for all critical performance measures. The supporting documentation must also include a discussion of any changes that have been made to the measure definition.
The new procedures only address changes to the measure definitions and do not address existing definitions. These new procedures were not in place when the FY 2002 Congressional Justification was sent to the Congress and the related data dictionary was made available on the IRS’ public web site.
The GPRA requires each agency to prepare an annual performance plan covering each program activity set forth in the budget. The plan shall establish performance indicators to be used to measure or assess the relevant outputs, levels, and outcomes of each activity; provide a basis for comparing actual program results; and describe the means to be used to verify and validate measured values.
3.
The Chief Financial Officer should include in the IRS’
measures verification and validation process assurance that the definition of
each measure matches its use. The new
procedures should not only address those definitions that have changed but all
of the critical performance measures.
Management’s Response: IRS management recently issued guidelines requiring designated
officials to certify that performance data meet the validation and verification
procedures contained in the data dictionary.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of
the review was to determine if the performance measures in the Internal Revenue
Service’s (IRS) Government Performance and Results Act of 1993 (GPRA)
submissions allow the IRS to adequately assess the success of its
operations. To accomplish this
objective, we attempted to link the IRS’ critical performance measures with the
major portions of tax administration.
We defined the major components of tax administration as the strategies
listed in the IRS’ Strategic Plan and the major budgeted items listed in its
Congressional Justification. In
addition, we verified the accuracy of the definitions of the performance
measures. We did not verify the
accuracy of the performance data as a part of this review. This review was limited to determining
whether the types of data listed in the measures definition were also present
in the performance measures. To
accomplish this objective, we:
I.
Identified the 507
measures/indicators that the IRS currently uses to assess its operations at all
levels.
A. Identified
the total population of performance measures/indicators that the IRS has access
to and can use to monitor its performance.
This list included measures and indicators that the IRS submits to the
Congress through either the Fiscal Year (FY) 2002 budget justification, FY
2000-2005 Strategic Plan, or FY 2002 Annual Performance Plan or uses internally
like the Business Performance Review System and the Commissioner’s Monthly Data
Report.
II.
Determined if the
IRS’ 65 performance measures/indicators for FY 2002 cover all of the major
budgeted items listed in the IRS’ FY 2002 Congressional Justification.
A. Identified
the business activities in the IRS’ FY 2002 Congressional Justification.
B. Linked
the 65 performance measures/indicators to the business activities and dollars
budgeted in the Congressional Justification.
C. For
those business activities or large budget activities without performance
measures, attempted to identify a measure from the total population of measures
(step I.A.) that would allow the IRS to assess the success of the activity.
III.
Determined if the
65 performance measures/indicators covered all of the major components of tax
administration and strategies listed in the IRS’ Strategic Plan
A. Identified
the IRS’ objectives from its strategic plan and the related strategies for
achieving the objectives.
B. Identified
the major components of tax administration from the IRS’ Strategic Plan.
C. Linked
the IRS’ 65 performance measures/indicators to its strategies and components of
tax administration to determine whether the IRS is able to assess its success
through its performance measures.
D. For
those areas with no related performance measure, attempted to identify a
measure that would allow the IRS to assess the success of the strategy.
IV.
Determined if the
definitions of the 65 performance measures logically matched the use(s) of the
measures.
A. Reviewed
the definition of each of the 65 performance measures found in the data
dictionary. Determined whether the
definition of the measure matched the name of the measure and its use.
B. Determined whether the data definitions excluded
significant populations of data from the measure.
C. For
those measures that have a general definition, determined from the Office of
Performance Development or from the appropriate operating or functional units
the detailed definition. We determined
whether this detailed definition matched the title and use of the measure.
Appendix II
Major Contributors to This Report
Daniel R. Devlin, Assistant Inspector General
for Audit (Headquarters Operations and Exempt Organizations Programs)
John R. Wright, Director
Kevin Riley, Audit Manager
Kenneth Henderson, Senior Auditor
Rosemarie Maribello, Senior Auditor
David Robben, Senior Auditor
Thomas Burroughs, Auditor
Gene Luevano, Auditor
Appendix III
Commissioner, Large and Mid-Size Business Division LM
Commissioner, Small Business/Self Employed Division S
Commissioner, Wage and Investment Division W
Chief, Agency-Wide Shared Services A
Deputy Commissioner
for Modernization & Chief Information Officer M
Chief, Information Technology Services M:I
Associate Commissioner, Business Systems Modernization M:B
Director, Organizational Performance Division N:CFO:O
Assistant to
the Deputy Chief Financial Officer, Strategic Planning and Budgeting N:CFO:O
Chief Counsel CC
National Taxpayer Advocate
TA
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
Deputy
Commissioner for Modernization & Chief Information Officer M
Chief, Information Technology Services M:I
Associate Commissioner, Business Systems Modernization M:B
Chief, Agency-Wide Shared Services A
Commissioner, Large and Mid-Size Business Division LM
Commissioner, Small Business/Self Employed Division S
Commissioner, Wage and Investment Division W
Chief Counsel CC
Director, Organizational Performance Division N:CFO:O
Director, Legislative Affairs CL:LA
Appendix IV
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.