Executive Summary

Objectives and Scope

Background

Results

Conclusion

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Information Systems Organization Phase IIB Transition Initiatives

Executive Summary

The budget cycle at the Internal Revenue Service (IRS) begins with estimates of the budget needed to operate its programs in a designated fiscal year. The IRS presents the budget proposal to the Department of the Treasury, the Office of Management and Budget, and the Congress.

The IRS finances most of its operations through the five annual appropriations that comprise its operating budget for the fiscal year. One of these five appropriations is the Information Systems (IS) Appropriation, which provides the resources to manage, maintain, and operate the information systems supporting Federal tax administration. The IRS’ business activities rely on these information systems to process tax and related documents, to account for tax revenues collected, to send out bills for taxes owed, and to issue refunds. The President’s Budget for the IS Appropriation is $1.45 billion for Fiscal Year (FY) 2000 and $1.58 billion for FY 2001.

In January 1998, the IRS undertook an ambitious program to modernize all aspects of the agency. The IRS refers to this whole process of change as "modernization." IS modernization plans include a multi-year transition to a shared services structure designed to improve services provided to internal and external customers. In addition to restructuring the IS organization, the IRS plans to move groups of employees working in other divisions who perform key computer support work, such as systems development, systems operations, network management, telecommunications, and desktop support, to IS before October 2000.

The overall objectives of this review were to determine whether the IRS’ transition plan adequately accounted for IS resources and whether the plan is sufficiently funded to achieve FYs 2000 and 2001 transition milestones.

In September 1998, IS appointed teams to plan the transition to a shared services structure. Their efforts resulted in detailed reports which contained blueprints for the IS organization and its new processes for FY 2000 and beyond. However, our review of IS transition planning determined that these teams did not adequately address transition initiatives in the IRS’ budget submissions.

If the IRS does not address transition-related budget requirements, the IS budget may result in a shortfall in funding for FY 2000. Also, limited funding to support the transition to the IS shared services structure may affect the IRS restructuring by not providing the business units all services expected.

Transition team efforts included detailed research on best practices and benefit information for shared services organizations. However, the teams included cost considerations for only one transition initiative. Transition teams did not develop business cases or consider costs for 23 of 24 transition-related initiatives. Also, the IRS transition planning process was not properly aligned with the budget cycle, and IS did not consider transition-related costs for inclusion in the budget formulation.

The absence of proper planning to provide sufficient transition funding has resulted in:

• An immediate shortfall of IS funds that must be addressed to avoid potential Antideficiency Act penalties.
• A potential inability to implement transition initiatives due to inadequate funding.

Because of an absence of cost consideration in transition planning, the budget submission to fund the IS organization’s transition initiatives understated IS needs by an estimated $2.5 and $9.8 million for FYs 2000 and 2001, respectively.

The CIO needs to provide direction ensuring inclusion of transition-related funding to allow the IS organization to reach its goal of operating in a shared services structure. To manage the potential FY 2000 budget shortfall, IS needs to ensure financial plan changes and inter-appropriation transfers are completed. For future transition planning, the CIO should coordinate with transition team executives to attempt to align planning efforts with budget cycle requirements.

Management's response was due on September 25, 2000, but was still in the process of being finalized as of the date of this report.

Objectives and Scope

The overall objectives of this review were to determine whether the Internal Revenue Service’s (IRS) transition plan adequately accounted for Information Systems (IS) organization resources and whether the plan is sufficiently funded to achieve Fiscal Years (FY) 2000 and 2001 transition milestones.

To accomplish these objectives, we reviewed the IRS’ budgeting policies and procedures. We met with members of the IS Office of Information Resources Management staff, the Chief Financial Officer’s management staff, Transition Design Team members, and Booz-Allen & Hamilton personnel. We reviewed transition-related documents and the methodology used to account for the transition. We performed these reviews between February and June 2000. Fieldwork was conducted in the National Headquarters and the New Carrollton, Maryland Information Systems Headquarters Office. This audit was performed in accordance with Government Auditing Standards.

Details of our audit objectives, 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 estimates to operate its programs in a designated fiscal year. The IRS presents the budget proposal to the Department of the Treasury, the Office of Management and Budget (OMB), and the Congress.

The IRS finances most of its operations through the five annual appropriations that comprise its operating budget for the fiscal year. One of these five appropriations is the IS Appropriation, which provides the resources to manage, maintain, and operate the information systems supporting Federal tax administration. The President’s Budget for the IS Appropriation is $1.45 billion for FY 2000 and $1.58 billion for FY 2001.

In determining the IRS’ financial plan allocations, the budget staff works with IRS program staffs to balance work planning with resource planning. These staffs ensure that they distribute resources to match business priorities, allowing the IRS to deliver on the work promises it makes in the budget to the Treasury, the OMB, and the Congress.

In January 1998, the IRS undertook an ambitious program to modernize all aspects of the agency. The IRS refers to this whole process of change as "modernization." IS modernization plans include a multi-year transition to a shared services structure designed to improve external customer service and more effectively serve its internal customers. In addition to restructuring the IS organization, the IRS plans to move groups of employees in other divisions (non-IS employees) performing key computer support work, such as systems development, systems operations, network management, telecommunications, and desktop support, to IS before October 2000.

Results

In September 1998, IS appointed teams to plan the transition to a shared services structure. Their efforts resulted in detailed reports from Phases IIA and IIB transition teams in April 1999 and January 2000, respectively. These reports contained blueprints for the IS organization and its new processes for FY 2000 and beyond. However, our review of IS transition planning and accounting determined that none of the organizational initiatives and changes were adequately addressed in the IRS’ budget submissions.

If the IRS does not address transition-related budget requirements, the IS budget may result in a shortfall in funding for FY 2000. Also, limited funding to support the transition to the IS shared services structure may affect the IRS restructuring by not providing the business units with expected services.

The Information Systems Fiscal Year 2000 and 2001 Budgets Did Not Include Transition-Related Initiatives and Changes

The annual budget cycle requires the IRS to consider budget proposals, for the fiscal year beginning October 1 of the following calendar year, in April of the current year. The IRS submits its proposal to the Treasury in June of the current year. IRS organizations need to identify initiatives and changes formulated after each April to ensure the IRS requests sufficient funds for inclusion in each June budget submission. Organizations need to prepare a business case identifying costs, benefits, dependencies, and alternatives for initiatives requiring additional funding. Formal approval of an initiative should be based on the detailed information in the business case. The Treasury subsequently forwards these budget proposals to the OMB and the Congress for approval.

Transition team efforts included detailed research on best practices and benefit information for shared services organizations. However, the teams included cost considerations for only one transition initiative during the Phase IIA or IIB planning. Business cases were not developed and costs were not considered for preliminary approval for 23 of 24 transition-related initiatives and changes. Also, the IRS transition planning process was not properly aligned with the budget cycle, and IS did not consider transition-related costs for inclusion in the budget formulation.

A review of budget formulation and execution data for the past 3 fiscal years, and interviews with IS budget section employees, showed an absence of emphasis on developing requirements supporting the annual budget submissions. Rather, IS used a "rollover figure" from the previous year’s budget and made adjustments as needed throughout the year to fund operations. IS moved money to the under-funded areas from both within the IS Appropriation (intra-appropriation transfers) and the Compliance Appropriation (inter-appropriation transfers), as it conducted business.

While inter-appropriation transfers require formal tracking and requests from the Congress, the IRS does not have the ability to track the number or amounts of intra-appropriation transfers made during the year. The absence of this historical information inhibits IS’ ability to consider funding needs from prior years in developing future year budget estimates.

The absence of proper planning to provide sufficient funding for transition initiatives has resulted in:

• An immediate shortfall of IS funds that must be addressed to avoid potential Antideficiency Act penalties.
• A potential inability to implement the transition initiatives due to inadequate funding.

The Phase IIB transition team’s Final Report included 24 change initiatives to facilitate IS’ transition to a shared services structure. The Phase IIB Final Report did not include associated costs for these initiatives. We were able to estimate budget requirements for 2 of these 24 initiatives. Budget formulation information was not available for 21 of the remaining 22 change initiatives, some of which may not require additional funding. IS did not include additional funding for any of these transition-related change initiatives in the budget submission for FY 2000 or 2001.

This absence of budget planning may result in an immediate shortfall of funds for these initiatives.

• Consolidation of non-IS staff into the IS organization: IS and non-IS organizations work together to prepare financial plan changes to provide funding for the positions that are transferred to IS. Currently, there have been five non-IS groups that have officially transferred employees to IS. The funding for these groups was transferred to IS between 1 and 6 months after the employees were actually reassigned. IS is still awaiting the transfer of approximately $350,000 of miscellaneous employee costs (awards, travel, training, and overtime) for FY 2000. Additionally, IS needs to provide funding for four new management positions that it agreed to establish. IS will need approximately $345,000 annually, beginning in FY 2001, to fund these four positions.

• Establishing the Offices of Strategic Planning and Client Services (SP&CS) and the Division Information Officer (DIO): The IS restructuring in FY 2000 includes the addition of the SP&CS and DIO staffs. The SP&CS staff will develop strategic plans for future IS activities. The SP&CS office will also coordinate with the DIOs to incorporate the needs of the IRS’ business operating divisions and functional units into IS’ strategic plans. The SP&CS and DIO staffs consist of 156 employees (114 of which are not funded). However, IS did not request funds for the new SP&CS or DIO offices in the FYs 2000 or 2001 budget submissions.

• Implementing all IS transition-related initiatives: IS has 22 other change initiatives that may involve additional costs for which it has not planned funding in its budget. IS is attempting to reprogram funds from other areas of IS and from other IRS appropriations to implement as many of these transition initiatives and changes as possible.

Since IS did not include funds for the staffing of and related costs for these transition initiatives in its budget estimates, the budget submission for FY 2000 does not accurately reflect the IS organization’s requirements. In addition, IS did not include the funding requirements for these initiatives in future year budget estimates.

The absence of adequate planning to provide sufficient funding may result in an inability to implement some transition initiatives. Also, if the potential FY 2000 budget shortfall of almost $2.9 million is not funded, IRS officials may be subject to Antideficiency Act sanctions. The provisions of this law require that violations be reported when an officer or employee of the United States Government has made or authorized an expenditure from or created or authorized an obligation against any appropriation or fund in excess of the amount available in the account.

If IRS officials do not comply with these provisions, the laws provide sanctions where an officer or employee shall be subject to administrative discipline, including written reprimand, suspension from duty without pay, or removal from office. In addition, an officer or employee convicted of willfully and knowingly violating the Act will be fined not more than $5,000, imprisoned for not more than 2 years, or both.

The CIO needs to provide direction ensuring inclusion of transition-related funding to allow the IS organization to reach its goal of operating in a shared services structure. This direction involves coordination of IS’ Financial Management Branch with the Chief Financial Officer’s Strategic Planning and Budget Division and various budget offices within the IRS operating divisions.

1. To manage the potential FY 2000 budget shortfall, IS needs to ensure financial plan changes and inter-appropriation transfers are completed. IS needs to complete these budget adjustments before October 1, 2000, to avoid Antideficiency Act violations and sanctions.
2. For future transition planning, the Director, SP&CS, should coordinate with transition team executives to attempt to align planning efforts with budget cycle requirements. In planning the transition initiatives, they need to consider and estimate funding requirements at the earliest point possible. To develop complete and comprehensive funding requirements, planning efforts should incorporate the Chief Financial Officer’s business case development criteria.

Management’s response: Management's response was due on September 25, 2000, but was still in the process of being finalized as of the date of this report.

Conclusion

IS transition team efforts to move to a shared services structure may not reach the intended goal because of an absence of budgeting considerations. The lack of budgeting considerations has made the IS organization:

• Face a potential shortfall of an estimated $2.9 million in FY 2000.
• Consider alternatives for reprogramming funds to meet additional annual transition-related costs of over $9.8 million to fund the offices of SP&CS and the DIO and costs related to the remaining 22 initiatives.
• Continue to adjust budget plans because of the migration of non-IS staff to IS. This migration could amount to an estimated $84.5 million in staffing costs annually.

Addressing these transition-related budget requirements is necessary for IS and the IRS to reach the structure of the new organization. Without appropriate business case development to enable cost identification, IS will not have an adequate means to prioritize and implement transition-related initiatives. The absence of quantifiable business case information may also result in postponing implementation of some initiatives because of funding limitations.

Detailed Objectives, Scope, and Methodology

The overall objectives of this review were to determine whether the Internal Revenue Service’s (IRS) transition plan adequately accounted for Information System (IS) organization resources and whether the plan is sufficiently funded to achieve Fiscal Years (FY) 2000 and 2001 transition milestones. To achieve this objective, we performed the following analyses and tests:

1. To determine whether the IRS’ budgeting policies and procedures provide for comprehensive cross-functional planning and require sufficient justification documentation, we:

1. Reviewed FYs 2000 and 2001 IS initiatives and operational changes to determine whether all program parameters (personnel, computers and equipment, space, support, and training) were considered for inclusion in the budget. We analyzed IS Transition Blueprints and budget databases to determine if they adequately addressed FYs 2000 and 2001 initiatives in the budget submissions.
2. Determined the methodology used to develop the budget estimates for FYs 2000 and 2001 IS initiatives and organization structures. Ascertained whether guidance for a consistent methodology and review was available.

1. Interviewed Booz-Allen & Hamilton personnel and Transition Design Team members to determine whether budget formulation guidance for the Design Team methodology was developed and adequately communicated to the Design Team and Office of Information Resources Management (OIRM).
2. Obtained available Design Team documentation related to IS initiatives, projects, and significant operational changes to review the Booz-Allen & Hamilton methodology and interaction with Design Teams.

1. Obtained and reviewed December 1999 Chief Financial Officer (CFO) guidance on the use of business cases. Compared the CFO guidance with the OIRM guidance to the IS organization on use of business cases for IS budgeting to determine if IS guidance was sufficient.

1. Determined the evaluation and approval process for the OIRM, CFO directors, and IS executives for IS initiatives and operational changes.
2. Reviewed the IRS’ zero-based budgeting guidelines to identify requirements for the FY 2001 budget cycle, including the rejection resolution process, and determined whether IS implemented zero-based budgeting guidelines for FY 2001 budget estimates.

1. To determine whether IS adequately accounted for all employees and their corresponding Full Time Equivalents (FTE), contractors, space, and transition-related equipment, both before the transition and in the transition plans, and whether it requested sufficient funds for FYs 2000 and 2001 transition milestones, we:

1. Identified the process used by the OIRM to account for employees, contractors, space, and equipment before the transition.
2. Identified the OIRM’s process to identify transition-related IS resources (FTEs, contractors, space, and related equipment) for both IS and non-IS employees being moved.
3. Determined the extent of IS’ use of Memoranda of Understanding (MOU) for transition-related changes.

1. Interviewed Centralization Design Team members to determine which situations during the transition required MOUs.
2. Identified all MOUs developed for both non-IS and IS employees who are being moved. Reviewed the MOUs and identified relevant budget information.

1. Determined whether MOUs accurately account for resources.

1. Obtained a Treasury Integrated Management Information System (TIMIS) extract of information containing all IS employees and other employees with a computer-related job series or job title for Calendar Year 1999, Pay Periods 19 and 20 (end of FY 1999 and beginning of FY 2000).
2. Reviewed MOUs to determine if resources (contractors, space, computer equipment, support staff) were included for IS and non-IS transitioning employees being moved.

1. Determined the process used by the OIRM to review the MOU and initiative information and assessed the adequacy of its review and consideration in the budget process.

1. Determined whether the OIRM accumulated and used adequate/accurate information to account for both current and future transition-related resources.

1. Interviewed OIRM staff and reviewed documentation to identify the process used by the OIRM for budget formulation, including how changes to the baseline are determined, documented, verified, and approved.
2. Determined if all IS employees were included in the Design Teams’ organization charts by comparing these charts to TIMIS information. We used TIMIS information for Pay Period 19 (September 12 – 25, 1999).

6. Determined whether the appropriate documentation was completed to properly transfer to IS computers/equipment and space of non-IS employees being moved, as identified in the MOUs.

1. Verified the process used to change the responsible function in the following inventory systems:

1. Equipment over $100 - Property Assets Tracking System.
2. Automated data processing equipment - Integrated Network and Operations Management System.
3. Space - Space Management and Rent Tracking System.

1. Determined whether the responsible function (per corresponding MOUs) for the equipment/space was correctly identified in the systems listed above when a change was to occur.

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

Glen Rhoades, Senior Auditor

Beverly Tamanaha, Auditor

Report Distribution List

Deputy Commissioner Operations C:DO

Deputy Commissioner Modernization C:DM

Chief Financial Officer M:CFO

Chief Information Officer IS

Director, Office of Information Resources Management IS:IR

Director, Strategic Planning and Budget Division M:SPB

Team Leader, Information Systems Organization Modernization IS:SP

Director, Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis M:O

Office of Management Controls CFO:A:M

Office of Chief Counsel CC

National Taxpayer Advocate TA

Audit Liaisons:

Chief Financial Officer M:CFO

Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.

Finding and recommendation:
The Information Systems (IS) Fiscal Year (FY) 2000 and 2001 budgets did not include transition-related initiatives and changes.

Transition team efforts included detailed research on best practices and benefit information for shared services organizations. However, the teams did not include cost considerations for transition initiatives during the Phase IIA or IIB planning. Business cases were not developed and costs were not considered for preliminary approval of transition-related initiatives and changes. Also, the Internal Revenue Service (IRS) transition planning process was not properly aligned with the budget cycle, and IS did not anticipate or allow for early identification of transition-related costs for inclusion in the budget formulation.

The absence of proper planning to provide sufficient funding for transition initiatives has resulted in:

• An immediate shortfall of IS funds that must be addressed to avoid potential Antideficiency Act penalties.
• A potential inability to implement the transition initiatives due to inadequate funding.

The Director, Strategic Planning and Client Services (SP&CS), needs to provide direction ensuring inclusion of transition-related funding to allow IS to reach its goal of operating in a shared services structure.

1. To manage the potential FY 2000 budget shortfall, IS needs to ensure financial plan changes and inter-appropriation transfers are completed.
2. For future transition planning, the Director, SP&CS, should coordinate with transition team executives to attempt to align planning efforts with budget cycle requirements.

Type of Outcome Measure:
Protection of Resources/Reliability of Information - Potential

Value of the Benefit:
The Phase IIB transition team’s Final Report included 24 change initiatives to facilitate the IS organization’s transition to a shared services structure. The Phase IIB Final Report did not include associated costs for these initiatives. We were able to estimate budget requirements for 2 of these initiatives at $2.9 and $94.7 million for FYs 2000 and 2001, respectively. Budget formulation information was not available for 21 of the other 22 change initiatives, some of which may not require additional funding. These initiatives are being approved without business case justification, which would include identifying costs, benefits, dependencies, and alternatives for the initiatives.

IS did not include additional funding or Full Time Equivalents (FTE) for any of the above mentioned transition-related change initiatives in the budget submissions for FYs 2000 and 2001 or future years. Therefore, the submissions did not accurately reflect the operating costs of the IS organization. The deficiencies in the FYs 2000 and 2001 budget submissions are an estimated $2.5 and $9.8 million, respectively.

Methodology Used to Measure the Reported Benefit:
To determine the budget shortfall and cost of initiatives not adequately addressed in budget submissions, we identified the additional FTEs committed to the initiatives by interviewing Design Team members and reviewing Phase IIA and IIB Blueprints and Memoranda of Understanding. We then multiplied the number of FTEs by IRS unit cost rates for FYs 2000 and 2001.

Information Systems Organization Phase IIB Transition Initiatives