Input:
	Background

The federal government invests more than $80 billion annually in IT, but  many of these investments fail to meet cost and schedule expectations or  make significant contributions to mission-related outcomes. We have  previously testified that the federal government has spent billions of  dollars on failed IT investments, such as  the Department of Defense’s (DOD) Expeditionary Combat Support  System, which was canceled in December 2012, after spending more  than a billion dollars and failing to deploy within 5 years of initially  obligating funds;  the Department of Homeland Security’s Secure Border Initiative  Network program, which was ended in January 2011, after the  department obligated more than $1 billion to the program, because it  did not meet cost-effectiveness and viability standards;  the Department of Veterans Affairs’ (VA) Financial and Logistics  Integrated Technology Enterprise program, which was intended to be  delivered by 2014 at a total estimated cost of $609 million, but was  terminated in October 2011 due to challenges in managing the  program;  the Farm Service Agency’s Modernize and Innovate the Delivery of  Agricultural Systems program, which was to replace aging hardware  and software applications that process benefits to farmers, was halted  after investing about 10 years and at least $423 million, while only  delivering about 20 percent of the functionality that was originally  planned.  the Office of Personnel Management’s Retirement Systems  Modernization program, which was canceled in February 2011, after  spending approximately $231 million on the agency’s third attempt to  automate the processing of federal employee retirement claims;  the National Oceanic and Atmospheric Administration, DOD, and the  National Aeronautics and Space Administration’s National Polar- orbiting Operational Environmental Satellite System, which was a tri- agency weather satellite program that the White House Office of  Science and Technology stopped in February 2010 after the program  spent 16 years and almost $5 billion; and  the VA Scheduling Replacement Project, which was terminated in  September 2009 after spending an estimated $127 million over 9  years.
These and other failed IT projects often suffered from a lack of disciplined  and effective management, such as project planning, requirements  definition, and program oversight and governance. In many instances,  agencies had not consistently applied best practices that are critical to  successfully acquiring IT investments.
Federal IT projects have also failed due to a lack of oversight and  governance. Executive-level governance and oversight across the  government has often been ineffective, specifically from chief information  officers (CIO). For example, we have reported that not all CIOs had the  authority to review and approve the entire agency IT portfolio and that  CIOs’ authority was limited.

	Recent Legislation Can Improve Agencies’ Management of IT

Recognizing the severity of issues related to government-wide  management of IT, in December 2014, Congress enacted IT reform  legislation, FITARA. The law holds promise for improving agencies’  acquisition of IT and enabling Congress to monitor agencies’ progress  and hold them accountable for reducing duplication and achieving cost  savings. FITARA includes specific requirements related to seven areas.
Agency CIO authority enhancements. Agency CIOs are required  to (1) approve the IT budget requests of their respective agencies, (2)  certify that IT investments are adequately implementing the Office of  Management and Budget’s (OMB) incremental development  guidance, (3) review and approve contracts for IT, and (4) approve the  appointment of other agency employees with the title of CIO.
Enhanced transparency and improved risk management. OMB  and agencies are to make publicly available detailed information on  federal IT investments, and agency CIOs are to categorize their IT  investments by risk. Additionally, in the case of major IT investments  rated as high risk for 4 consecutive quarters, the law requires that the  agency CIO and the investment’s program manager conduct a review  aimed at identifying and addressing the causes of the risk.
Portfolio review. Agencies are to annually review IT investment  portfolios in order to, among other things, increase efficiency and  effectiveness, and identify potential waste and duplication. In  developing the associated process, the law requires OMB to develop  standardized performance metrics, to include cost savings, and to  submit quarterly reports to Congress on cost savings.
Federal data center consolidation initiative (FDCCI). Agencies are  required to provide OMB with a data center inventory, a strategy for  consolidating and optimizing the data centers (to include planned cost  savings), and quarterly updates on progress made. The law also  requires OMB to develop a goal of how much is to be saved through  this initiative, and provide annual reports on cost savings achieved.
Expansion of training and use of IT cadres. Agencies are to update  their acquisition human capital plans to address supporting the timely  and effective acquisition of IT. In doing so, the law calls for agencies  to consider, among other things, establishing IT acquisition cadres or  developing agreements with other agencies that have such cadres.
Maximizing the benefit of the federal strategic sourcing initiative.  Federal agencies are required to compare their purchases of services  and supplies to what is offered under the Federal Strategic Sourcing  initiative. OMB is also required to issue related regulations.
Government-wide software purchasing program. The General  Services Administration is to develop a strategic sourcing initiative to  enhance government-wide acquisition and management of software.  In doing so, the law requires that, to the maximum extent practicable,  the General Services Administration should allow for the purchase of  a software license agreement that is available for use by all Executive  Branch agencies as a single user.
In addition, in June 2015, OMB released guidance describing how  agencies are to implement the law. OMB’s guidance states that it is  intended to, among other things: assist agencies in aligning their IT resources to statutory  requirements; establish government-wide IT management controls that will meet the  law’s requirements, while providing agencies with flexibility to adapt to  unique agency processes and requirements;  clarify the CIO’s role and strengthen the relationship between agency  CIOs and bureau CIOs; and  strengthen CIO accountability for IT cost, schedule, performance, and  security.
In this regard, the guidance reiterates OMB’s existing guidance on  PortfolioStat, the IT Dashboard, and the federal data center consolidation  initiative, and expands its existing guidance on TechStat sessions.
The guidance includes several actions agencies are to take to establish a  basic set of roles and responsibilities (referred to as the “common  baseline”) for CIOs and other senior agency officials that are needed to  implement the authorities described in the law. For example, agencies  were required to conduct a self-assessment and submit a plan describing  the changes they will make to ensure that common baseline  responsibilities are implemented. Agencies were to submit their plans to  OMB’s Office of E-Government and Information Technology by August  15, 2015, and make portions of the plans publicly available on agency  websites no later than 30 days after OMB approval. As of October 30,  2015, none of the 24 Chief Financial Officers Act agencies had made  their plans publicly available.
The guidance also noted that OMB will help support agency  implementation of the common baseline by, for example, requiring the  Federal CIO Council to, on quarterly basis, discuss topics related to the  implementation of the common baseline and to assist agencies by  sharing examples of agency governance processes and IT policies.  Further, by June 30, 2015, the President’s Management Council was to  select three members from the council to provide an update on  government-wide implementation of FITARA on a quarterly basis through  September 2016. However, as of October 28, 2015, OMB officials stated  that the President’s Management Council had not yet selected members  to provide these updates.
In addition, OMB recently issued a memorandum regarding commodity IT  acquisitions and noted that agencies buy and manage their IT in a  fragmented and inefficient manner which conflicts with the goals of  FITARA. Among other things, the memorandum directed agencies to  standardize laptop and desktop configurations for common requirements  and reduce the number of contracts for laptops and desktops by  consolidating purchasing. The memorandum notes that OMB intends for  agencies to implement standard configurations over time by using  approved contracts, with a government-wide goal of 75 percent of  agencies using approved contracts by fiscal year 2018. The  memorandum requires agencies to develop transition plans to achieve  this goal and submit them to OMB by February 28, 2016.

	IT Acquisitions and Operations Recently Added as a GAO High-Risk Area

Our government-wide high-risk area Improving the Management of IT  Acquisitions and Operations highlights critical IT initiatives, four of which  align with provisions in FITARA: (1) an emphasis on incremental  development, (2) a key transparency initiative, (3) efforts to consolidate  data centers, and (4) efforts to streamline agencies’ portfolios of IT  investments. Our high-risk report notes that implementation of these  initiatives had been inconsistent, and more work remained to demonstrate  progress in achieving IT acquisition outcomes. Implementing the  provisions from the law, along with our outstanding recommendations, will  be necessary for agencies to demonstrate progress in addressing this  high-risk area.
OMB has emphasized the need to deliver investments in smaller parts, or  increments, in order to reduce investment risk, deliver capabilities more  quickly, and facilitate the adoption of emerging technologies. In 2010, it  called for agencies’ major investments to deliver functionality every 12  months and, since 2012, every 6 months. However, we recently reported  that less than half of selected investments at five major agencies planned  to deliver capabilities in 12-month cycles. Accordingly, we  recommended that OMB develop and issue clearer guidance on  incremental development and that selected agencies update and  implement their associated policies. Most agencies agreed with our  recommendations or had no comment.
In January 2010, the Federal CIO began leading TechStat sessions— face-to-face meetings to terminate or turn around IT investments that are  failing or are not producing results. These meetings involve OMB and  agency leadership and are intended to increase accountability and  improve performance. OMB reported that federal agencies achieved over  $3 billion in cost savings or avoidances as a result of these sessions in  2010. Subsequently, OMB empowered agency CIOs to hold their own  TechStat sessions within their respective agencies.
We have since reported that OMB and selected agencies held multiple  TechStats, but additional OMB oversight was needed to ensure that these  meetings were having the appropriate impact on underperforming  projects and that resulting cost savings were valid. We concluded that  until OMB and agencies develop plans to address these investments, the  investments would likely remain at risk. Among other things, we  recommended that OMB require agencies to address high-risk  investments. OMB generally agreed with this recommendation.
However, as of October 28, 2015, OMB has only conducted one TechStat  review in the last 2 years. In particular, between March 2013 and October  2015, OMB held one TechStat on the Department of State’s legacy  consular systems investment in July 2015. Moreover, OMB has not listed  any savings from TechStats in any of its required quarterly reporting to  Congress since June 2012.
To help the government achieve transparency while managing legacy  investments, in June 2009, OMB established a public website (referred to  as the IT Dashboard) that provides detailed information on major IT  investments at 27 federal agencies, including ratings of their performance  against cost and schedule targets. Among other things, agencies are to  submit ratings from their CIOs, which, according to OMB’s instructions,  should reflect the level of risk facing an investment relative to that  investment’s ability to accomplish its goals.
As of August 2015, according to the IT Dashboard, 163 of the federal  government’s 738 major IT investments—totaling $9.8 billion—were in  need of management attention (rated “yellow” to indicate the need for  attention or “red” to indicate significant concerns). (See fig. 1.)
Over the past several years, we have made over 20 recommendations to  help improve the accuracy and reliability of the information on the IT  Dashboard and to increase its availability. Most agencies agreed with  our recommendations or had no comment.
In addition to spending money on new IT development, agencies also  plan to spend a significant amount of their fiscal year 2016 IT budgets on  the operations and maintenance (O&M) of legacy (i.e., steady-state)  systems. From fiscal year 2010 to fiscal year 2016, this amount has  increased, while the amount invested in developing new systems has  decreased by about $7.1 billion. (See figure 2.) This raises concerns  about agencies’ ability to replace systems that are no longer cost- effective or that fail to meet user needs.
Of the more than $79 billion budgeted for federal IT in fiscal year 2016,  26 federal agencies plan to spend about $60 billion, more than three- quarters of the total budgeted, on the O&M of legacy investments. Figure  3 provides a visual summary of the relative cost of major and nonmajor  investments, both in development and O&M.
Given the size and magnitude of these investments, it is important that  agencies effectively manage the O&M of existing investments to ensure  that they (1) continue to meet agency needs, (2) deliver value, and (3) do  not unnecessarily duplicate or overlap with other investments. To  accomplish this, agencies are required by OMB to perform annual  operational analyses of these investments, which are intended to serve  as periodic examination of an investment’s performance against, among  other things, established cost, schedule, and performance goals.
However, we have reported that agencies were not consistently  performing such analyses and that billions of dollars in O&M investments  had not undergone needed analyses. Specifically, as detailed in our  November 2013 report, only 1 of the government’s 10 largest O&M  investments underwent an OMB-required operational analysis. We  recommended that operational analyses be completed on the remaining 9  investments. Most agencies generally agreed with our recommendations.
To improve the efficiency, performance, and environmental footprint of  federal data center activities, OMB established the federal data center  consolidation initiative in February 2010. In a series of reports, we found  that, while data center consolidation could potentially save the federal  government billions of dollars, weaknesses existed in the execution and  oversight of the initiative.
Most recently, we reported that, as of May 2014, agencies collectively  reported that they had a total of 9,658 data centers; as of May 2015,  they had closed 1,684 data centers and were planning to close an  additional 2,431—for a total of 4,115—by the end of September 2015.  We also noted that between fiscal years 2011 and 2017, agencies  reported planning a total of about $5.3 billion in cost savings and  avoidances due to the consolidation of federal data centers. In  correspondence subsequent to the publication of our report, DOD’s Office  of the CIO identified an additional $2.1 billion in savings to be realized  beyond fiscal year 2017, which increased the total savings across the  federal government to about $7.4 billion. Further, since our May 2014  report we received additional information from other agencies about their  actual 2014 cost savings and revised plans for future savings. This  information is shown in table 1, which provides a summary of agencies’  total data center cost savings and cost avoidances between fiscal years  2011 and 2017, as well as DOD cost savings and cost avoidances to be  realized beyond 2017.
However, in our September 2014 report, we noted that planned savings  may be understated because of difficulties agencies encountered when  calculating savings and communicating their estimates to OMB. We made  recommendations to ensure the initiative improves efficiency and  achieves cost savings. Most agencies agreed with our recommendations  or did not comment.
To better manage existing IT systems, OMB launched the PortfolioStat  initiative, which requires agencies to conduct an annual, agency-wide IT  portfolio review to, among other things, reduce commodity IT spending  and demonstrate how their IT investments align with the agency’s mission  and business functions. In November 2013, we reported that agencies  continued to identify duplicative spending as part of PortfolioStat and that  this initiative had the potential to save at least $5.8 billion through fiscal  year 2015; however, weaknesses existed in agencies’ implementation of  the initiative, such as limitations in the CIOs’ authority. We made more  than 60 recommendations to improve OMB’s and agencies’  implementation of PortfolioStat. OMB partially agreed with our  recommendations, and responses from 21 of the agencies varied, with  some agreeing and others not.
In April 2015, we reported that agencies decreased their planned  PortfolioStat savings to approximately $2 billion—a 68 percent reduction  from the amount they reported to us in 2013. Additionally, although  agencies also reported having achieved approximately $1.1 billion in  savings, inconsistencies in OMB’s and agencies’ reporting made it difficult  to reliably measure progress in achieving savings. Among other things,  we made recommendations to OMB aimed at improving the reporting of  achieved savings, with which it agreed.
We have also recently reported on two additional key areas of agency’s  IT spending portfolio: software licensing and mobile devices.
Regarding software licensing, we recently reported that better  management was needed to achieve significant savings government- wide. In particular, 22 of the 24 major agencies we reviewed did not  have comprehensive license policies, and only 2 had comprehensive  license inventories. We recommended that OMB issue needed  guidance to agencies and made more than 130 recommendations to  the agencies to improve their policies and practices for managing  software licenses. OMB disagreed with the need for guidance.  However, we believe that without such guidance, agencies will likely  continue to lack the visibility into what needs to be managed. Most  agencies generally agreed with the recommendations or had no  comments.
We have also reported that most of the 15 agencies in our mobile  devices review did not have an inventory of mobile devices and  associated services, and only 1 of the 15 agencies we reviewed had  documented procedures for monitoring spending. Accordingly, we  recommended that the agencies take actions to improve their  inventories and control processes and that OMB measure and report  progress in achieving cost savings. OMB and 14 of the agencies  generally agreed with the recommendations or had no comment. The  Department of Defense partially agreed, and we maintained that  actions were needed.

		Actions Needed to Address High-Risk Area

In our February 2015 high-risk report, we identified actions that OMB and  the agencies need to take to make progress in this area. These include  implementing the recently enacted statutory requirements promoting IT  acquisition reform, as well as implementing our previous  recommendations, such as updating the public version of the IT  Dashboard throughout the year. As noted in that report, we have made  multiple recommendations to improve agencies’ management of their IT  acquisitions, many of which have been discussed in this statement. In the  last 6 years we made approximately 800 recommendations to multiple  agencies. As of October 2015, about 32 percent of these  recommendations had been implemented.
Also in our high-risk report, we stated that OMB and agencies will need to  demonstrate measurable government-wide progress in the following key  areas:  implement at least 80 percent of GAO’s recommendations related to  the management of IT acquisitions and operations within 4 years. ensure that a minimum of 80 percent of the government’s major  acquisitions deliver functionality every 12 months. achieve no less than 80 percent of the planned PortfolioStat savings  and 80 percent of the planned savings planned for data center  consolidation.
In conclusion, with the recent passage of IT reform legislation, the federal  government has an opportunity to improve the transparency and  management of IT acquisition and operations, and strengthen the  authority of CIOs to provide needed direction and oversight. Further, by  identifying the management of IT acquisitions and operations as a new  government-wide high-risk area we are bringing necessary attention to  several critical IT initiatives in need of additional congressional oversight.  OMB and federal agencies should expeditiously implement the  requirements of the legislation and continue to implement our previous  recommendations. To help ensure that these improvements are achieved,  continued congressional oversight of OMB’s and agencies’  implementation efforts is essential.
Chairmen Meadows and Hurd, Ranking Members Connolly and Kelly,  and Members of the Subcommittees, this completes my prepared  statement. I would be pleased to respond to any questions that you may  have at this time.

	GAO Contacts and Staff Acknowledgments

For additional information about this high-risk area, contact David A.  Powner at (202) 512-9286 or pownerd@gao.gov, Carol Cha at (202) 512- 4456 or chac@gao.gov, or Valerie Melvin at (202) 512-6304 or  melvinv@gao.gov. Individuals who made key contributions to this  testimony are Kevin Walsh (Assistant Director), Chris Businsky, Rebecca  Eyler, Kaelin Kuhn, and Jessica Waselkow.

Related GAO Products

Telecommunications: Agencies Need Better Controls to Achieve  Significant Savings on Mobile Devices and Services. GAO-15-431. May  21, 2015.
Information Technology: Additional OMB and Agency Actions Needed to  Ensure Portfolio Savings Are Realized and Effectively Tracked.  GAO-15-296. April 16, 2015.
Federal Chief Information Officers: Reporting to OMB Can Be Improved  by Further Streamlining and Better Focusing on Priorities. GAO-15-106.  April 2, 2015.
High-Risk Series: An Update. GAO-15-290. February 11, 2015.
Data Center Consolidation: Reporting Can be Improved to Reflect  Substantial Planned Savings. GAO-14-713. September 25, 2014.
Federal Software Licenses: Better Management Needed to Achieve  Significant Savings Government-Wide. GAO-14-413. May 22, 2014.
Information Technology: Agencies Need to Establish and Implement  Incremental Development Policies. GAO-14-361. May 1, 2014.
IT Dashboard: Agencies Are Managing Investment Risk, but Related  Ratings Need to Be More Accurate and Available. GAO-14-64. December  12, 2013.
Information Technology: Agencies Need to Strengthen Oversight of  Multibillion Dollar Investments in Operations and Maintenance.  GAO-14-66. November 6, 2013.
Information Technology: Additional OMB and Agency Actions Are Needed  to Achieve Portfolio Savings. GAO-14-65. November 6, 2013.
Information Technology: Additional Executive Review Sessions Needed  to Address Troubled Projects. GAO-13-524. June 13, 2013.
Information Technology: Agencies Need to Strengthen Oversight of  Billions of Dollars in Operations and Maintenance Investments.  GAO-13-87. October 16, 2012.
IT Dashboard: Accuracy Has Improved, and Additional Efforts Are Under  Way to Better Inform Decision Making. GAO-12-210. November 7, 2011.
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Output:
Why GAO Did This Study

The federal government invests more than $80 billion annually in IT. However, these investments frequently fail, incur cost overruns and schedule slippages, or contribute little to mission-related outcomes. As GAO has previously reported, this underperformance of federal IT projects can be traced to a lack of disciplined and effective management and inadequate executive-level oversight. Accordingly, in December 2014, IT reform legislation was enacted, aimed at improving agencies' acquisition of IT. Further, earlier this year GAO added improving the management of IT acquisitions and operations to its high-risk list—a list of agencies and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, and mismanagement, or are most in need of transformation.
This statement provides information on FITARA and GAO's designation of IT acquisitions and operations as a high-risk area. In preparing this statement, GAO relied on its previously published work in these areas.

What GAO Found

The law commonly known as the Federal Information Technology Acquisition Reform Act (FITARA) was enacted in December 2014 and aims to improve federal information technology (IT) acquisition and operations. The law includes specific requirements related to seven areas. For example, it addresses
Agency Chief Information Officer (CIO) authority enhancements . Among other things, agency CIOs are required to approve the IT budget requests of their respective agencies and certify that IT investments are adequately implementing the Office of Management and Budget's (OMB) incremental development guidance.
Enhanced transparency and improved risk management . OMB and agencies are to make publicly available detailed information on federal IT investments, and agency CIOs are to categorize IT investments by risk. Additionally, if major IT investments are rated as high risk for 4 consecutive quarters, the agencies are to conduct a review of the investment.
Portfolio review. Agencies are to annually review IT investment portfolios in order to, among other things, increase efficiency and effectiveness, and identify potential waste and duplication. OMB is required to develop standardized performance metrics, to include cost savings, and to submit quarterly reports to Congress on cost savings.
Federal data center consolidation initiative. Agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing the data centers (to include planned cost savings), and quarterly updates on progress made. OMB is required to develop a goal of how much is to be saved through this initiative, and report on progress annually.
Maximizing the benefit of the federal strategic sourcing initiative . Federal agencies are required to compare their purchases of services and supplies to what is offered under the Federal Strategic Sourcing initiative.
OMB has released guidance for agencies to implement provisions of FITARA, which includes actions agencies are to take regarding responsibilities for CIOs. The guidance also reiterates OMB's existing guidance on IT portfolio management, a key transparency website, and the federal data center consolidation initiative; and expands its existing guidance on reviews of at-risk investments. Agencies were to conduct a self-assessment and submit a plan to OMB by August 2015 describing the changes they will make to ensure that responsibilities are implemented. Further, portions of these plans are required to be made publicly available 30 days after OMB's approval; as of October 30, 2015, none of the 24 Chief Financial Officers Act agencies had done so.
Further, FITARA's provisions are similar to areas covered by GAO's high-risk area to improve the management of IT acquisitions and operations. For example, GAO has noted that improvements are needed in federal efforts to enhance transparency, consolidate data centers, and streamline agencies' IT investment portfolios. To demonstrate progress in addressing this high-risk area, agencies will need to implement the legislation's provisions and GAO's outstanding recommendations.

What GAO Recommends

Over the last 6 years, GAO made about 800 recommendations to OMB and agencies to improve acquisition and operations of IT. As of October 2015, about 32 percent of these had been implemented. It will be critical for agencies to implement the remaining GAO recommendations and the requirements of FITARA to achieve improvements.
, Carol Cha at (202) 512-4456 or chac@gao.gov , or Valerie Melvin at (202) 512-6304 or melvinv@gao.gov .


Input:
	Background

The federal government levies excise taxes on entities and individuals for the purpose of financing general federal activities and specific government programs. Several different bureaus and offices within Treasury collected about $59 billion of excise taxes in fiscal year 1997. The Bureau of Alcohol, Tobacco, and Firearms accounted for about $13 billion in excise taxes on alcohol, tobacco products, and firearms while the U.S. Customs Service accounted for about $1 billion in excise taxes on imported and exported goods and services.
However, the majority of excise taxes are accounted for by IRS. In fiscal year 1997, IRS collected about $45 billion in excise taxes on the purchase, use, or inventory of various types of goods or services, such as gasoline and airline tickets. The various excise taxes accounted for by IRS are deposited into the general fund of the Treasury and into nine different trust funds, which are administered by six agencies or federal entities. The trust funds that received fiscal year 1997 tax revenues are shown in table 1. A list of excise taxes by trust fund is included in appendix II.
Administering agencies for the trust funds receiving excise tax revenue rely on the Treasury to accurately collect and distribute federal tax revenue to the appropriate trust funds. Because it collects federal tax revenue and then distributes it to government trust funds, Treasury is considered a servicing organization by agencies administering the trust funds as well as by the auditors of these agencies. Consequently, the administering agencies and their auditors need to rely on Treasury, through its various bureaus and offices, including IRS, to properly account for and distribute the amounts transferred from the government’s general fund to the applicable trust funds.
Excise taxes are deposited into the general fund as received. However, the information that ultimately determines how these receipts are actually distributed is generally submitted via the Form 720, Quarterly Federal Excise Tax Return. Because data are not available to allocate excise taxes to the appropriate trust funds when deposits are made, Treasury uses a process to estimate the initial distribution of excise taxes. This process involves the use of economic models prepared by the Office of Tax Analysis (OTA) to estimate the initial distribution of tax receipts. Treasury’s Financial Management Service (FMS) uses these estimates to prepare entries for the initial distributions to the trust funds, which are recorded by the Bureau of the Public Debt (BPD) in the books and records of the trust funds maintained by Treasury. Subsequent to this initial distribution, IRS certifies quarterly the amounts that should have been distributed to the excise tax-related trust funds based on the tax returns. FMS uses these certifications to prepare adjustments to the initial trust fund distributions. These adjustments are recorded by BPD. There is typically a 6-month lag between the quarter end and the excise tax certification by IRS. Figure 1 provides an overview of the entire process of collecting, distributing, and certifying excise tax revenue reported to the trust funds.
IRS relies on a combination of manual and automated procedures to prepare its certification of excise taxes to be distributed to the trust funds. IRS calculates the trust fund distributions based on assessment information in the master file. As quarterly excise tax returns are received, IRS personnel input the liability amounts by type of excise tax, such as Diesel Fuel Tax, into its master file. The tax types are identified by IRS numbers, or abstract numbers, which are preprinted on the Form 720. It is these abstract numbers that ultimately determine how amounts are distributed to the appropriate trust funds.
The assessment information by type of excise tax is electronically transmitted from the master file to IRS’ Automated Quarterly Excise Tax Listing (AQETL) system. An IRS analyst, who has sole responsibility for preparing the excise tax certifications, accesses this system, analyzes the data for reasonableness by, for example, comparing current period assessments to amounts reported in prior periods, and makes adjustments, as necessary. The analyst may identify necessary adjustments by analyzing significant variations from prior quarter reported assessment amounts. After making any needed adjustments, the analyst generates a report from the AQETL system which summarizes the assessment data by excise tax type. The analyst uses this report to prepare the certifications for all tax distributions other than taxes related to the Highway, Airport & Airway, and Inland Waterways Trust Funds.
For the Highway, Airport & Airway, and Inland Waterways Trust Funds, the analyst manually enters the assessment data from the report generated from the AQETL system onto electronic spreadsheets. These spreadsheets contain distribution rates to allocate the assessments between the trust funds and the general fund based on the assessment data entered by the analyst. The distributions from these spreadsheets, and the AQETL-system report for the other taxes, become the basis for preparing the quarterly excise tax certification letters. IRS submits the certification letters to FMS, which uses it to prepare adjustments to the initial distributions based on the OTA estimates to bring them in line with the IRS certified amounts. These adjustments are sent to BPD, which records the entries in the books and records of the trust funds maintained by Treasury. Figure 2 shows IRS’ process for certifying the trust fund distributions.
Excise Tax Section  (Cincinnati Service  Center)
Review Master File   and AQETL data.   Research apparent  errors and correct  data in Master File  as necessary.
Review assessment  information, make any  adjustments in AQETL,  generate AQETL  report.
Enter assessment data  for Highway Trust  Fund into electronic  spreadsheet.

	Objectives, Scope, and Methodology

The objective of the agreed-upon procedures work was to assist the Inspectors General of the Department of Transportation and Department of Labor in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 1997, were supported by the underlying records. The objectives of this report are to discuss the underlying internal control weaknesses that allowed errors identified in the agreed-upon procedures work to occur and to provide recommendations for correcting these weaknesses. See appendix I for a detailed discussion on the scope and methodology used to accomplish the objectives.
We conducted our work primarily from October 1997 through February 1998, with some follow-up work through June 1998, in accordance with generally accepted government auditing standards.

	Taxpayer Errors Not Identified

For the majority of excise taxes reported on the Form 720, taxpayers are required to provide the purchase, use, or inventory amounts of the goods or services (e.g., number of gallons of fuel) used in determining the tax assessment. The taxpayer multiplies these amounts against the preprinted tax rates on the Form 720 to report the excise tax assessment. Thus, information contained on the tax form allows IRS to mathematically verify liability amounts reported by the taxpayer.
However, we found that IRS did not require its personnel to verify that the tax assessment amounts calculated by the taxpayers and reported on the returns agree with the supporting information provided on the tax returns. This led to inconsistencies between the assessed amount and supporting information provided by taxpayers, which IRS did not detect and correct. In 13 of the 230 taxpayer returns we reviewed, either assessment amounts we recalculated based on information contained in the return differed from the tax assessment reported on the return or all the required information was not included on the return to verify the assessment amount calculated by the taxpayer.
IRS procedure manuals required that IRS personnel review tax returns that contain $1 million or more in excise tax assessments for reasonableness and accuracy. The manuals provided guidance for performing the reviews; however, this guidance was too general. As a result, the types of reviews performed by IRS analysts varied. In some cases, tax calculations were verified and taxpayers were contacted if data were missing, while in other cases, the return was only scanned for reasonableness.
The lack of adequate and consistent review procedures increases the likelihood that incorrect assessment amounts reported by the taxpayer on the tax return would not be detected and corrected by IRS.
As a result of our agreed upon procedures work, IRS officials indicated that IRS has acted to address the internal control weaknesses discussed above.
Specifically, these officials indicated that IRS implemented procedures to improve the review of tax returns over $1 million. Also, IRS now requires the math verification of all tax assessments, as applicable, and analysts are required to follow-up with taxpayers to clarify inconsistent information on tax returns.
We also noted that IRS centralized its excise tax processing in the Cincinnati Service Center to improve the consistency of processing and reviewing excise tax returns and to more closely monitor refund claims. Within that center, IRS established an Excise Program Section that specializes in reviewing excise tax returns and refund claims. It is significant that many of the errors we identified during our agreed upon procedures work related to tax returns processed at other service centers prior to IRS centralizing its excise tax processing.

	Inputting Errors Not Caught Through Review

As discussed above, taxpayers report the majority of excise taxes to IRS quarterly using the Form 720. Taxpayers record on the Form 720 assessment amounts owed for each abstract number listed on the form.  IRS uses the Form 720 to input assessment information into the master files.
We found errors in this input process in fiscal year 1997. Specifically, we found that all or a portion of the assessment amounts for 13 of the 230 taxpayer returns reviewed were recorded in incorrect abstract numbers in the master file. In one case, IRS incorrectly recorded assessments of $176 million from the tax return in one abstract, yet the tax return indicated that this amount should have been divided among eight different abstracts. Because the abstract numbers identify the type of excise tax (for example, Diesel Fuel Tax) to which the assessment applies and are used in the certification of amounts ultimately distributed to the various trust funds, this directly affected the accuracy of IRS’ certifications. IRS officials indicated that these errors would be corrected in subsequent certifications made in fiscal year 1998.
The structure of the Form 720 itself contributed to several errors. The Form 720 tax return is a complex tax form consisting of three distinct parts and two additional schedules. Information on the schedules includes details on excise tax assessments by semimonthly period (Schedule A), and adjustments to correct errors in previously filed Form 720s and claims against previously paid taxes (Schedule C). The information on Schedule C containing the claim and adjustment data is broken down by abstract number; however, it is aggregated into one total line on page 2 of the Form 720. Consequently, taxpayers record on the Form 720 assessment amounts owed for each abstract number listed on the form but do not reflect claims and adjustments, by abstract, on pages 1 and 2 of the Form 720. To assist in processing the tax return, IRS requires its staff to copy claims and adjustments listed on Schedule C, by abstract, to pages 1 and 2 of the Form 720. This procedure provides the data entry staff with the capability of inputting assessment, claim, and adjustment amounts, by abstract, directly off the first two pages of the tax return form without having to scan the schedules for claim and adjustment amounts to be input. However, the procedure of IRS staff manually copying claim and adjustment amounts from the schedules prepared by taxpayers increases the risk of errors, and consequently the likelihood that assessment, claim, and adjustment amounts will be incorrectly recorded in the master files.
Nine of the 13 errors that we identified were the result of (1) IRS personnel incorrectly copying the adjustment information from the Schedule C to pages 1 and 2 of the tax return, (2) IRS personnel failing to copy adjustment information from the Schedule C to pages 1 and 2 of the tax return, or (3) data entry personnel misreading the handwritten adjustments made by other IRS staff on the Form 720 when inputting this information into the master files. For example, in one case, a taxpayer claimed a credit of $683,000, consisting of a $685,000 decrease for gasoline tax and a $2,000 increase for aviation fuel tax. However, IRS staff incorrectly recopied the credit amounts from the Schedule C to page 1 of the Form 720, resulting in the entire amount being recorded as gasoline tax. In another case, a taxpayer claimed a credit for $681,000 for taxed diesel fuel. An IRS employee copied the abstract number unclearly to page 1 of the Form 720, and the amount was erroneously recorded as a credit to tax on dyed diesel fuel used in trains.
In total, in the 13 cases, we identified $179 million of IRS errors in inputting excise tax return information to the master files. The Comptroller General’s Standards for Internal Controls in the Federal Government specifies that transactions are to be promptly recorded and properly classified. The identified errors may have been avoided had procedures been in place to verify the input process. Also, errors resulting from the need for IRS staff to transfer information from the attached schedules to pages 1 and 2 of the Form 720 for each abstract could be avoided by revising the tax return form so that taxpayers, and not IRS personnel, enter the claim and adjustment amounts by abstract from Schedule C to pages 1 and 2 of the tax return.

	Certification Errors Not Prevented or Detected

As discussed previously, one analyst is responsible for compiling the quarterly certifications. This involves accessing quarterly the assessment information from the AQETL system, analyzing and adjusting these data as necessary and, for the Highway Trust Fund, inputting these data into an electronic spreadsheet, provided by OTA, to derive the quarterly certifications. We found that there is no supervisory review of the analyst’s work until the certification letters are prepared, at which point they are forwarded to the Branch Chief for a high-level review and signature. We found no evidence that a detailed supervisory review is performed of the documentation supporting the certifications at any point during the certification process. Finally, we found that IRS does not review the distribution rates contained on the OTA-provided spreadsheet used to allocate certain assessments between the general fund and the Highway Trust Fund. The absence of such reviews was a factor in not detecting numerous errors in the certifications performed in fiscal year 1997 with respect to the Highway Trust Fund and the general fund.

		Support for Certifications Not Adequately Reviewed

IRS’ AQETL system contains the assessment data electronically transmitted from the master file. Because it is not integrated with the electronic spreadsheet used to prepare the certifications for the Highway Trust Fund, manual data entry is necessary to accomplish the calculations and summarize the information. This information is a basis for preparing the certifications. Without adequate supervisory review of these tasks, all of which are performed by one individual, there is a high risk that errors will be made and not detected and corrected. The Comptroller General’s Standards for Internal Controls in the Federal Government specifies that qualified and continuous supervision is to be provided to ensure that internal control objectives are achieved. The lack of adequate supervisory review can lead to incorrect certifications and inaccurate distributions to the trust funds.
We found a number of such errors that occurred in fiscal year 1997. For example, we found that assessment amounts were (1) inadvertently omitted from the certifications and (2) did not agree with supporting documentation. In one case related to heavy vehicle use tax, the supporting schedule summarizing the tax return information reflected an assessment amount of $195 million but the amount certified was $128 million. As a result, the certified amount for the Highway Trust Fund was understated by $67 million. In another case, assessments for compressed natural gas totaling over $500,000 were omitted from the Highway Trust Fund certification. IRS officials indicated that both of these errors were corrected in a subsequent certification that was made in fiscal year 1998. However, proper supervisory review of the analyst’s work would likely have detected these errors and prevented these inaccurate distributions.

		Distribution Rate Problems Affected Highway Trust Fund Distributions

IRS does not have procedures for verifying the accuracy of distribution rates contained on the electronic spreadsheet provided by OTA. These rates, many of which are based on complex formulas derived from provisions of laws, are used to allocate assessments between the general fund and the Highway Trust Fund. The lack of IRS review of the distribution rates on this spreadsheet resulted in errors in the excise tax certifications for the Highway Trust Fund going undetected. For example, we found the following problems in the electronic spreadsheet provided by OTA: incorrect application rates to allocate gasohol taxes, which resulted in an overstatement to the Highway Trust Fund and a corresponding understatement to the general fund of $89,000; misapplied application rates between the Highway Account and Mass Transit Account for diesel fuel inventory in the certifications for the quarters ending December 1996 and March 1997, which resulted in a net understatement of the Highway Account and a corresponding net overstatement of the Mass Transit Account of $19,000; and missing distribution rate formulas from the spreadsheet, which resulted in tax assessment amounts of $1,000 and $7,000 being excluded from the Highway Trust Fund certification.
An IRS review of the distribution rates contained on the spreadsheet could have identified these problems and prevented the distribution errors.

	Conclusions

The errors we found in the review of the fiscal year 1997 excise tax certification process are the direct result of weaknesses in fundamental internal controls, specifically the lack of appropriate verification and review procedures, at all critical points in the excise tax certification process. These weaknesses led to taxpayer, IRS, and OTA errors going undetected and directly resulted in inaccurate distributions of excise tax revenue to the trust funds in fiscal year 1997.

	Recommendations

To strengthen internal controls over IRS’ process of inputting tax return information into the master file, we recommend that IRS:
Determine if it would be cost effective to develop and implement procedures requiring either key verification of the assessment amount by excise tax type before final processing or to implement other post-input controls to verify the accuracy of assessment amounts by excise tax type on the master file. In making this determination, IRS should consider establishing a dollar threshold that would ensure coverage of 90 percent of total excise tax assessments from the tax returns.
Revise the Form 720 tax return to reflect a separate column adjacent to the column for entering the tax assessment, by abstract number, for the taxpayer to report on pages 1 and 2 of the tax return claims and adjustments, by abstract number, based on the information the taxpayer reports on Schedule C.
To strengthen internal controls over IRS’ process of certifying excise tax distributions to the general fund and federal trust funds, we recommend that IRS:
Develop, document, and implement review procedures over the adjustment and summarization of assessment data used in the certifications. Specifically, IRS should require detailed supervisory review be performed and documented to ensure that adjustments are reasonable and adequately supported, calculations are appropriately performed, and the certification letter agrees with the supporting schedules. IRS recently changed its procedures to certify excise taxes based on estimated collections. Despite this change, review procedures are still necessary.
Establish and implement specific procedures requiring that IRS personnel review the distribution rates provided by OTA prior to those rates being used in the certification of Highway Trust Fund distributions and document evidence of these reviews.

	Agency Comments and Our Evaluation

In commenting on this report, the IRS Commissioner stated that overall he agreed with our findings and recommendations. The Commissioner noted actions either planned or already in process or implemented to address most of the issues raised in this report. These include (1) implementing post-input controls to include a 100 percent review of all returns with tax assessments of $1 million or more, (2) developing review procedures over the adjustment and summarization of collection data used in the certifications, including supervisory reviews prior to final certification, and (3) reviewing, as part of a recently-formed Intra-Treasury Working Group, distribution rate charts provided by OTA prior to using these rates in the certification of Highway Trust Fund distributions.
However, the Commissioner disagreed with our recommendation to revise the Form 720 tax return to require taxpayers to report claims and adjustments information on pages 1 and 2 of the tax return form. He expressed concern with how the draft report characterized the tax return form and the accompanying Schedules A and C of the form. Additionally, he noted it would be inappropriate to require the taxpayer to net the tax liability by the claim and adjustment amounts reported on the accompanying Schedule C.
We have modified the report to more appropriately reflect the nature of the Form 720 and its accompanying schedules. Consistent with these changes, we modified the recommendation to eliminate the reference to having the taxpayer net the tax liability, by abstract number, for any adjustments or claims, by abstract number, as reported on the accompanying Schedule C. However, we believe that revisions to the tax return form are needed because of the frequency of errors made by IRS in either copying claim and adjustment information from Schedule C to pages 1 and 2 of the tax return or in inputting information copied from the tax return to the master files. Specifically, the Form 720 tax return should be revised to reflect a separate column in which the taxpayer would report claims and adjustments from the Schedule C, by abstract number, adjacent to the column reflecting the tax assessment, by abstract number, on pages 1 and 2 of the Form 720. The complete text of the IRS Commissioner’s response to our draft report is presented in appendix IV.
This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight within 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made over 60 days after the date of this letter.
We are sending copies of this report to Director of the Office of Management and Budget, the Secretary of the Treasury, the Secretary of Transportation, the Secretary of Labor, and the Inspectors’ General of the Department of Transportation and Department of Labor. Copies of this letter will be made available to others upon request.
If you have any questions, please call me at (202) 512-9505 or Steven J. Sebastian, Assistant Director, at (202) 512-9521.

Objectives, Scope, and Methodology

The objective of the agreed-upon procedures work was to assist the Inspectors General of the Department of Transportation and Department of Labor in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 1997, were supported by the underlying records. We did not perform work on excise taxes collected by other Treasury bureaus, such as the Customs Service and the Bureau of Alcohol, Tobacco, and Firearms. We did include in our review the Federal Aid to Wildlife Restoration Fund because IRS uses different procedures to certify this trust fund.
In performing the agreed-upon procedures, we gained an understanding of the internal controls over the excise tax collection and certification process. The objectives of this report were to discuss the underlying internal control weaknesses that allowed errors identified in the agreed upon procedures work to occur and to provide recommendations for correcting these internal control weaknesses.
To accomplish our objectives, we examined, on a test basis, evidence supporting the net excise tax collection amounts reported on the fiscal year 1997 Custodial Financial Statements; specifically, we used Dollar Unit Sampling to select a sample of 396 combined excise tax collection and refund transactions from the master file for the first 9 months of fiscal year 1997, using a confidence level of 80 percent, a test materiality of $400 million, and an expected error amount of $200 million. Of this total, 390 transactions represented collections and six transactions represented refunds; verified sampled excise tax transactions to source documents to determine if the transactions were accurately recorded, posted to the proper tax class, and reported in the appropriate period; performed a predictive test of excise tax revenue collections for the final 3 months of the fiscal year to determine if reported fiscal year 1997 revenue appears consistent and reasonable; reviewed IRS’ revenue receipts and refund reconciliations between its records and Treasury for fiscal year 1997, to determine whether year-end excise tax collection balances from the general ledger materially agree with IRS’ master files and Treasury records; and obtained an understanding of internal controls related to safeguarding assets, compliance with laws and regulations, and financial reporting.
In addition, to assess the reliability of key data inputs and assumptions used in the excise tax certification, we:
Recalculated the excise tax assessments on the 230 tax returns associated with the sample of 390 excise tax collections based on the information provided on the returns (e.g., number of gallons of fuel multiplied by the tax rate equals the assessed tax). We reviewed only 230 returns because in some instances more than one receipt transaction related to the same return. Because the sample was selected based on excise tax collections, we were not able to project any errors identified on the corresponding tax assessment amounts.
Verified that the excise tax assessment amounts by abstract number on the 230 tax returns were accurately recorded in the IRS master file and in the AQETL report.
Determined if the rates used to allocate assessments between selected trust funds and the general fund for the final quarter of fiscal year 1997 were adequately supported. verified the mathematical accuracy for selected excise tax certifications and traced, on a selected basis, excise tax certifications to supporting schedules.
We conducted our work primarily from October 1997 through February 1998, with some follow-up work through June 1998, in accordance with generally accepted government auditing standards.

Types of Excise Taxes by Trust Fund

	Highway Trust Fund

	Airport and Airways Trust Fund

Ticket tax
Facilities use
Air freight
Aviation gasoline
Aviation fuel (other than gasoline)
Aviation fuel (other than gasoline) for use in commercial aviation
Aviation fuel (floor stocks)
Aviation gasoline (floor stocks)

	Oil Spill Liability (Expired December 31, 1994)

	Aquatic Resources

	Hazardous Substance Superfund

	Leaking Underground Storage Tank (Not in Effect During Fiscal Year 1997)

	Black Lung Disability

	Vaccine Injury Compensation

	Inland Waterways

Quarterly Federal Excise Tax Return, Form 720

Comments From the Internal Revenue Service

The following are GAO’s comments on the Internal Revenue Service’s letter dated September 25, 1998.

	GAO Comments

1. The technical comments from the Chief Counsel have been incorporated as appropriate, but the enclosure has not been included in this appendix. 2. Discussed in “Agency Comments and Our Evaluation” section.

Major Contributors to This Report

	Accounting and Information Management Division, Washington, D.C.

	Los Angeles Field Office

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Output:
Why GAO Did This Study

Pursuant to a legislative requirement, GAO conducted a follow-up review of the Internal Revenue Service's (IRS) controls over its process for certifying excise taxes for distribution to the federal trust funds.

What GAO Found

GAO noted that: (1) IRS does not have adequate controls over its process for certifying excise taxes for distribution to the federal government trust funds; (2) the lack of fundamental internal controls resulted in errors in the certifications going undetected; (3) these errors ultimately affected the amounts distributed to the trust funds during fiscal year 1997; (4) IRS' ineffective controls over the certification process resulted in undetected: (a) mistakes by taxpayers in preparing excise tax returns; (b) input errors by IRS when entering excise tax return information in its master files; and (c) errors by IRS in preparing the excise tax certifications; (5) as a result of these errors, trust funds did not receive the appropriate amount of excise tax revenue; (6) these errors are particularly important to the Highway Trust Fund, which receives over half of the excise taxes that are accounted for by IRS; (7) these weaknesses were a contributing factor in the Department of Transportation's (DOT) Inspectors General's: (a) qualified opinion on the Highway Trust Fund financial statements; (b) disclaimer of opinion on the Federal Aviation Administration's financial statements; and (c) disclaimer of opinion on DOT's consolidated financial statements; (8) the errors GAO found relating to taxpayer mistakes, IRS data input, and certification preparation could have been detected or prevented by effective IRS procedures; and (9) IRS has taken some actions to improve certain controls over the excise tax certification process.