Treasury Releases Fiscal 2007 Budget in Brief

                           Table of Contents

The United States Department of Treasury's budget priorities reflect the Department's dedication to promoting economic opportunity, strengthening national security and exercising fiscal discipline while steadily improving the Department's operations to ensure it remains a world-class organization.

The FY 2007 performance budget identifies the resources required to support Treasury's role as the steward of U.S. economic and financial systems, and as an influential participant in the international economy. Treasury's FY 2007 performance budget emphasizes initiatives that directly support its five strategic goals:

• Promote Prosperous U.S. and World Economies

• Promote Stable U.S. and World Economies

• Preserve the Integrity of Financial Systems

• Manage the U.S. Government's Finances Effectively

• Ensure Professionalism, Excellence, Integrity, and Accountability in the Management and Conduct of the Department of the Treasury

The Department administers America's tax laws and collects revenues that fund most government operations and public services.

 FY 2007 President's Budget by Function

FY 2007 Budget Request by Function

 

 

 

The Department of Treasury's FY 2007 budget request of $11.61 billion focuses resources on key programs necessary to fight the war on terror and to promote economic growth. The request is $24.7 million above the FY 2006 level, reflecting Treasury's commitment to the fiscal restraint necessary to achieve the President's goal of reducing the nation's deficit in half by FY 2009. While the majority of the Department's budget is funded each fiscal year through the Department of the Treasury Appropriations Act, $1.5 billion for the Department's international programs is funded through the Foreign Operations, Export Financing, and Related Programs Appropriations Act.

Promoting Economic Growth and Security

The Secretary of the Treasury is the Administration's principal economic spokesman. Treasury's Departmental Offices, including the Offices of International Affairs, Tax Policy, Economic Policy, Domestic Finance and Financial Education, support the Secretary in this role through the provision of technical analysis, economic forecasting, and policy guidance on issues ranging from changes in tax policy to responding to international financial crises.

Treasury's FY 2007 budget request provides the Office of Tax Policy with an additional $.5 million, the necessary resources to enable the Department to build effective models for the dynamic analysis of revenue proposals. Better models that accurately capture the full effect of tax policies on economic growth will lead to improved information for decision makers.

Treasury supports the President's domestic economic priorities of promoting financial literacy and stimulating economic growth through a variety of programs. The MyMoney.gov website and a toll-free hotline give all Americans access to basic financial literacy tools. Treasury also directed more than 100 financial education events in the last 12 months.

Treasury administers the New Markets Tax Credit program, which stimulates growth in economically distressed communities within the U.S. By providing tax credits to private investors in exchange for investments in Community Development Entities, the program harnesses the power of the private sector to lift Americans out of poverty.

The FY 2007 budget request funds Treasury's efforts to promote international economic growth through financial diplomacy. Treasury stimulates international economic growth and job creation by working to open trade and investment, encouraging growth in developing countries, and promoting responsible policies regarding international debt, finance, and economics. Treasury supports trade liberalization and budget discipline through its role in negotiating and implementing international agreements pertaining to export subsidies. These agreements open markets, level the playing field for U.S. exporters, and provide effective subsidy reductions that save the U.S. taxpayer millions annually. Cumulative budget savings from these arrangements are estimated at over $10 billion since 1991.

Treasury, through the Office of International Affairs, monitors the economies of more than 160 countries worldwide to ensure stability and transparency in the global marketplace and works with more than 20 International Financial Institutions and organizations to target development assistance. Treasury's efforts include the development and negotiation of the Multilateral Debt Relief Initiative, endorsed by President Bush and other G8 leaders, providing 100 percent debt relief for Highly Indebted Poor Countries. Treasury's efforts also include continuing dialogue and cooperation with Chinese leaders to achieve the goal of greater Chinese exchange rate flexibility.

The $9.4 million requested to increase Treasury's overseas presence will enable the Department to more effectively meet its international mission in the global economy. While supporting the war on terror, attaches will also develop close relationships with international financial institutions and acquire 'on the ground' knowledge of the financial markets.

Strengthening National Security

The Office of Terrorism and Financial Intelligence (TFI) supports Treasury's national security efforts by safeguarding the U.S. financial systems against illicit use. TFI provides financial intelligence analysis, develops and implements anti-money laundering measures, administers the Bank Secrecy Act, conducts criminal investigations and enforces sanctions.

Financial intelligence exposes the infrastructure of terrorist and criminal organizations. It provides a roadmap to those who facilitate criminal activity, such as broker-dealers, bankers, lawyers, and accountants. These investigations lead to the recovery and forfeiture of illegally obtained assets and create broad deterrence against criminal activity. Treasury plays a unique role of linking law enforcement and intelligence communities with financial institutions and regulators. To support these efforts, Treasury requests an increase of $12.5 million for the Financial Crimes Enforcement Network to enhance its regulatory outreach and strengthen analytical capabilities, upgrade the BSA Direct reporting and retrieval component, and, pending the Treasury Secretary's approval of the feasibility study, begin development of a crossborder wire transfer reporting system.

Treasury exercises a full range of intelligence, regulatory, policy, and enforcement tools in tracking and disrupting terrorists' support networks, proliferators of weapons of mass destruction (WMD), rogue regimes and international narco-traffickers, both as a vital source of intelligence and as a means of degrading the terrorists' ability to function. Treasury's actions include:

• Freezing the assets of terrorists, drug kingpins, and support networks

• Cutting off corrupt foreign jurisdictions and financial institutions from the U.S. financial system

• Developing and enforcing regulations to reduce terrorist financing and money laundering

• Tracing and repatriating assets looted by corrupt foreign officials

• Promoting a meaningful exchange of information with the private financial sector to help detect and address threats to the financial system

This budget request funds Treasury's national and homeland security mission at a level that provides increasingly effective support to the war on terror. This support will be further enhanced by the increased international presence funded in this request. Treasury attachés located at critical embassies throughout the world will enable close liaison with the international financial institutions and foreign government to promote the national and economic security interests of the U.S.

Collecting Taxes

Collecting taxes in a fair and consistent manner is a core mission of the Treasury. This past year, Treasury collected $2.267 trillion in federal tax revenue from individual and corporate income taxes, a 12.3 percent increase over the previous year. An additional $14.71 billion in excise taxes was collected from producers and sellers of alcohol, tobacco, firearms, and ammunition.

Treasury's priorities in tax administration are enforcing the nation's tax laws fairly and efficiently while balancing service and education to promote voluntary compliance and reduce taxpayer burden. Treasury's enforcement efforts resulted in the record level of $47.3 billion in enforcement revenue.

Reducing the tax gap -- which is the difference between what taxpayers should pay and what they actually pay on a timely basis -- is at the heart of Treasury's tax enforcement programs. This budget request includes proposed changes in the tax law that will improve the ability of the Internal Revenue Service to identify underreporting and collect unpaid taxes, while minimizing the burden imposed on compliant taxpayers. These proposals include:

• Clarify the circumstances in which employee leasing companies and their clients can be held jointly liable for federal employment taxes.

• Increase information reporting on payment card transactions.

• Expand information reporting to certain payments made by Federal, state and local governments to procure property and services.

• Amend Collection Due Process procedures for employment tax liabilities.

• Expand to non-income tax returns the requirement that paid return preparers identify themselves on such returns and expand the related penalty provision.

Treasury also dedicates resources to educating taxpayers and stakeholders on the benefits of electronic filing. These efforts resulted in an electronic filing rate for individuals in 2005 above 50 percent for the first time, significant progress toward Treasury's goal of receiving 80 percent of returns via e-file by 2007. Higher electronic filing rates greatly reduce the resources necessary to process tax returns.

The FY 2007 budget request includes funding necessary to continue to meet the challenge of balancing both the enforcement and taxpayer service elements in tax collection. Treasury requests an increase of $137 million for tax law enforcement activities.

Treasury regulates the manufacture and sale of alcohol, tobacco, firearms and ammunition, and collects excise taxes on the sale of these products. The Alcohol and Tobacco Tax and Trade Bureau collected $14.7 billion in excise taxes and processed over 400,000 tax returns in 2005, at a cost of only one dollar for every $367 collected. The Bureau has audited 113 of the 200 largest taxpayers, and will complete audits of the remaining 87 taxpayers in 2007 and 2008. These 200 taxpayers account for 98 percent of all excise taxes paid. Through 2005, these audits have resulted in the collection of an additional $4.3 million of revenue and $10.2 million in tax penalties and interest.

Managing the Government's Finances

In the face of the fiscal pressures generated by the war on terror and the response to natural disasters, sound management of the government's finances is more important than ever. The FY 2007 budget request provides the funds necessary for Treasury to meet its responsibilities as the federal government's financial manager.

Treasury's management of the federal government's finances includes making payments, collecting revenue, issuing debt and preparing public financial statements. Treasury oversees a daily cash flow in excess of $50 billion and disburses 85 percent of all federal payments. The Department is working to improve its payments and collections processes by moving toward an all-electronic Treasury. In FY 2005, Treasury issued 725 million electronic payments including income tax refunds, Social Security benefits, and veterans' benefits. Another step toward an all electronic Treasury is the Department's Go Direct Campaign. This campaign encourages Social Security and Supplemental Security Income recipients to switch to direct deposit. Direct Deposit represents a cost savings to the taxpayer of 75 cents per transaction. The percentage of Treasury's electronic collections increased 10.2 percent in FY 2005 from the previous year.

Treasury manages more than $7.9 trillion of public debt. The public debt includes marketable securities, savings bonds and other instruments held by state and local governments, federal agencies, foreign governments, corporations, and individuals. To improve debt management and offer better customer service, Treasury offers Treasury Direct, an electronic, web-based system that electronically issues securities to retail customers and enables investors to manage their accounts on-line. A major initiative this past year encouraged investors to convert paper savings bonds into electronic form making their investments easier to manage and to avoid potential loss or theft of the paper bonds. More than 700 million paper savings bonds are currently outstanding and could eventually be converted.

Treasury assisted the victims of hurricane Katrina by providing financial relief to disaster victims. Treasury issued 1,267,000 FEMA disaster assistance payments valued at $2.6 billion. Treasury also established a debit card program that issued 11,374 FEMA Assistance Cards valued at $22.7 million to evacuees in three Texas cities.

Treasury's 2007 budget request includes an increase of $2.4 million necessary to manage the government's finances more effectively and efficiently. The activities included in this funding are:

• Improving the efficiency of the securities services to retail customers,

• Integrating e-commerce technologies to streamline collections and payments processes to move toward an all-electronic Treasury,

• Improving forecasting accuracy to reduce borrowing cost and increase return on investments,

• Enhancing business processes and systems, including producing daily financial statements, to support public investors in Treasury securities and government agencies, and

• Strengthening accounting operations through the continued rollout of the Government-wide accounting system, and implementation of FedDebt and Debt Check

Treasury, through the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), maintains the integrity of the financial system of the United States by chartering, regulating, and supervising national banks and savings associations. In FY 2005, OCC and OTS oversaw financial assets held by these financial institutions totaling $7.3 trillion.

The U.S. Mint (Mint) and the Bureau of Engraving and Printing (BEP) are responsible for producing the nation's coins and currency. In FY 2005, the Mint and BEP produced 14.2 billion coins and 8.6 billion paper currency notes, respectively. Also during 2005, these agencies introduced new designs for both coins and currency. The Mint issued five new quarters from the 50 State Quarters® program and the two new nickels as part of the Westward Journey Nickel Series™. BEP introduced a new $10 currency note, representing the third denomination in a new currency series that incorporates state-of-the-art anti-counterfeiting technology.

The Mint has streamlined processes and leveraged technology to produce the nation's coin and currency at significant cost savings. The Mint was able to increase margins by shipping more coins, improving time to market and reducing manufacturing and selling, general and administrative costs. Because of improved operating results and profits, the Mint returned $775 million to the Treasury General Fund in FY 2005.

Funding for OCC, OTS, Mint, and BEP is not included in the Department's annual budget request, because they have non-appropriated funding sources. OCC's operations are funded primarily by semi-annual assessments levied on national banks. Revenue from licensing, other fees, and investments in U.S. Treasury securities provides the remaining revenue. OTS's operations are funded from assessments on thrifts and savings and loan holding companies; examination, application, and security filing fees; interest on investments in U.S. Government obligations; and rent and other sources. The Mint's operations are financed by proceeds from the sales of circulating coins to the Federal Reserve Bank System and numismatic items to the public. BEP operations are financed primarily by the printing of currency for the Federal Reserve Bank System. Other BEP revenues are derived from the printing of securities for the Public Debt and commissions, certificates, invitations for various government agencies, and space rental fees.

Managing Treasury Effectively

Treasury is committed to using the resources provided by taxpayers in the most efficient manner possible. Funding requested in Treasury's Departmental Offices and Department-wide Systems and Capital Investments Program (DSCIP) seeks to build a strong management infrastructure, including critical national security investments such as the Treasury Foreign Intelligence Network. These investments ensure that Treasury remains a world-class organization that meets the President's standard of a citizen-centered, results-oriented government.

In FY 2006, Treasury plans to complete a comprehensive investment in the repair and restoration of its historic facilities, including the Treasury building located at 1500 Pennsylvania Avenue, NW. To protect and maintain this investment, the FY 2007 budget request includes $1 million in the Departmental Offices budget for ongoing facilities repair and restoration projects.

In FY 2007, Treasury requests $1.8 million to fund Department-wide performance management training. This training will provide Treasury leadership with the tools to link accomplishments in achieving the goals of the Department to individual performance.

The DSCIP account funds technology investments to modernize business processes throughout Treasury, helping the Department improve efficiency. In FY 2007, Treasury requests $34 million for ongoing modernization and critical information technology infrastructure projects, and to invest in other new technologies that will improve efficiency and service to the American people. The budget request includes:

• Upgrading and enhancing the Treasury Foreign Intelligence Network (TFIN) and the Treasury Secure Data Network (TSDN). TFIN and TSDN are classified systems that are critical to support Treasury's expanding financial intelligence mission and leadership role in the financial war on terror,

• Continuing modernization of the DO IT infrastructure which will provide enhanced functionality, performance, and security for DO customers,

• Continuing to improve Treasury's Federal Information Security Management Act (FISMA) performance and strengthen the Department's overall security posture, and

• Completing required milestones as part of Treasury's Presidential E-Government Implementation Plan.

President's Management Agenda (PMA)

Treasury is meeting the President's challenge to improve the management of the Department's people and resources. On the most recent PMA scorecard, the Department achieved a Green progress score in five out of six initiative areas, indicating that plans are in place and implementation is progressing to accomplish the PMA objectives. The PMA originally identified five key government-wide areas. In FY 2005, the Administration added an initiative on eliminating improper payments that applies to a more limited number of agencies including Treasury.

 

President's Management Agenda

 

 

Competitive Sourcing Treasury's Competitive Sourcing score remained Green for both status and progress in the first quarter of FY 2006. The Department maintained its green status by completing studies on time, establishing the process, procedures, and framework for Most Efficient Organization (MEO) o o use of sub-contracts, and managing and monitoring post-implementation of competitive sourcing studies.

Improved Financial Performance Treasury's score for Financial Performance was red in FY 2005 but Green for progress. Treasury continues to implement corrective actions to resolve material weaknesses. Treasury has an established schedule of planned actions in place to address its material weaknesses.

Expanded E-Government Progress in Treasury's process and policy initiatives allowed it to move to Yellow in status and Green in progress for E-government in the first quarter of FY 2006. The Department continues to stress performance in complying with the Federal Information Security Management Act, continue to integrate and utilize the Treasury Enterprise Architecture and, most importantly, standardize implementation of Earned Value Management analysis within the IT capital planning process.

Budget and Performance Integration Treasury's Budget and Performance Integration initiative is yellow in status and green in progress. Treasury will get to Green during FY 2006 by developing marginal cost measures for the remaining four core mission areas of Treasury and resolving past PART evaluations that were scored "Results Not Demonstrated." Treasury's efforts to achieve a Green status score will be supported by the comprehensive performance framework implemented this year. The framework will guide future budget and performance integration efforts. Treasury will also implement marginal cost metrics for the remaining mission areas.

Eliminating Improper Payments Treasury's score is Red in status and Yellow in progress. This PMA initiative is tied to the Improper Payments Information Act of 2002. Treasury is committed to ensuring accurate and appropriate federal payments. Accordingly, Treasury sets performance targets to track progress on eliminating improper payments. Treasury is working with the Office of Management and Budget to develop a risk assessment plan to identify vulnerable programs and create measurement systems and corrective action plans that include aggressive, yet feasible, reduction targets across the Department.

Program Rating and Assessment Tool (PART) Summary

Program evaluation is a core management tool used by Treasury to allocate resources and promote efficiency and effectiveness. In addition to regular independent program evaluations conducted by Treasury bureaus, Treasury also works with OMB to evaluate 20 percent of its programs each year through the PART process. All programs that undergo a PART evaluation receive weighted scores in four categories: program purpose and design, strategic planning, program management, and program results and accountability.

While some results are still pending, Treasury expects a 36 percent increase in its score compared to last year's aggregate result. Treasury's improved PART scores in 2005 were a result of: (1) significant improvements in goals and measures; (2) training that included an exchange of lessons learned across bureaus; and (3) solid evidentiary procedures. All seven PART programs evaluated in 2005 (for the 2007 budget year) received effective or moderately effective ratings, demonstrating Treasury's commitment to focusing on program results. Treasury's progress in improved program performance is indicated in the two charts below.

 

PART Scoring History

 

 

 

 

Percentage Treasury Programs Passing PART Evaluations (adequate or

 

better score)

 

 

Treasury's FY 2007 budget request reflects the Department's commitment to fiscal discipline and sound management while supporting the Administration's security, economic, and financial policy goals.

The tables that follow show a summary of program changes for FY 2007, a summary of budget increases and decreases for FY 2007, a fiscal year comparison for FTEs, and total funding levels for the FY 2007 budget.

Programs evaluated for the FY 2006 budget cycle include:

 Program                       Bureau    Rating

 Program                       Bureau    Rating

To provide audit and investigative services that promote economy, efficiency, and integrity in the administration of the internal revenue laws.

 Program Summary by Appropriations Account

The Treasury Inspector General for Tax Administration (TIGTA) was created by Congress to provide independent oversight of the Internal Revenue Service. TIGTA's audits and investigative services protect and promote the fair administration of the American tax system. It ensures that the IRS is accountable for more than $2 trillion in tax revenue received each year. TIGTA conducts audits that keep Congress, the Secretary of the Treasury and IRS management informed on issues, problems and deficiencies related to the administration of IRS programs and operations. Audit recommendations improve IRS systems and operations, while ensuring fair and equitable treatment of taxpayers. TIGTA's investigations ensure the integrity of IRS employees, contractors and other tax professionals; employee and infrastructure security; and protect the IRS against external attempts to corrupt tax administration. TIGTA serves taxpayers by ensuring that the tax system is overseen by an independent audit and investigative organization.

In FY 2005, TIGTA:

• Produced 180 audit reports that identified $46.7 million in potential cost savings and $83.3 billion in potential revenue enhancements,

• Developed significant audit results that refuted allegations against the IRS of political motivation in the conduct of charitable organizations during the Presidential election; identified shortcomings in the IRS' process to identify and investigate improper tax refunds to prisoners; and reported project failings in the execution of the HR Connect System,

• Addressed 8,012 complaints of alleged criminal wrongdoing or administrative misconduct, and

• Conducted investigations that led to significant prosecutions such as the indictment of six former employees of Mellon Financial Service for destroying approximately 80,000 tax return documents; and another lockbox employee who stole tax remittance checks totaling more than $2.7 million from an IRS lockbox facility.

This request includes a funding transfer from the IRS to support shared services costs and funding to cover normal program cost increases and will be used to conduct audits and investigations that focus on IRS' high risk areas.

 

TIGTA Funding by Budget Activity

 

(Dollars in Thousands)

 

 

In FY 2007, TIGTA's audit program will strike a balance between statutory audit coverage and discretionary audit work. The statutory coverage will include audits mandated by the IRS Restructuring and Reform Act of 1998 (RRA 98), as well as reviews that address computer security, taxpayer privacy and rights and financial matters. In addition, TIGTA will continue to monitor the IRS' modernization efforts to identify problems that the IRS may encounter as it implements new programs and information systems. Discretionary audit coverage will focus on the major management challenges facing the IRS, the IRS' response to the President's Management Agenda initiatives and the IRS' progress in achieving strategic goals and eliminating identified material weaknesses. TIGTA will also audit the IRS' evolving private debt collection initiative. In spite of the increasing complexity in audit reports, it is anticipated that auditing efforts will produce performance results at the same level or better than in FY 2005 when TIGTA issued 180 final reports, averaged 358 calendar days for report issuance, and potentially impacted 2.8 million taxpayer accounts.

TIGTA protects the ability of the IRS to collect revenue for the federal government and will continue to investigate complaints of wrongdoing that could potentially impact the integrity of tax administration. Investigations will concentrate on three core areas: (1) employee integrity; (2) employee and infrastructure security; and (3) external attempts to corrupt tax administration. In FY 2005 TIGTA opened 3,513 investigations and closed 3,468, with 82 percent of its final closed cases having a positive outcome (investigative reports resulting in criminal, civil or administrative adjudication or the identification of matters of security or investigative interest). TIGTA also delivered approximately 1,400 integrity awareness presentations to approximately 46,000 attendees composed of IRS employees, tax practitioners, community groups, and others.

TIGTA Performance by Budget Activity

                                      FY     FY        FY         FY    FY

TIGTA requests $136,469,000 from direct appropriations. TIGTA's budget also includes $1,200,000 from reimbursable agreements.

 

TIGTA Funding History

 

(Dollars in Thousands)

 

 

Salaries and Expenses

Office of Audit ($51,521,000 from direct appropriations and $725,000 from reimbursements) TIGTA's Office of Audit promotes the sound administration of the nation's tax laws through comprehensive, independent performance and financial audits of IRS programs and operations. Audit emphasis is placed on the mandatory coverage imposed by the IRS Restructuring and Reform Act of 1998 (RRA 98) and other statutory authorities and standards involving computer security, taxpayer rights and privacy issues, and financial audits. The balance of TIGTA's audit work will focus on the IRS' progress in achieving its strategic goals, the IRS' response to the President's Management Agenda initiatives and the major management issues facing the IRS including tax compliance initiatives; use of performance and financial management information; taxpayer protection and rights; processing returns and implementing tax law changes; providing quality taxpayer service operations, and complexity of the tax law.

Office of Investigations ($84,948,000 from direct appropriations and $475,000 from reimbursements) TIGTA has the statutory responsibility to protect the integrity of tax administration and to protect the ability of the IRS to collect revenue for the Federal Government. To accomplish this, TIGTA's Office of Investigations (OI) investigates allegations of criminal violations and administrative misconduct by IRS employees, ensures IRS employee and infrastructure security and protects the IRS against external attempts to corrupt tax administration. OI accomplishes its mission by conducting professional criminal and administrative investigations that lead to criminal prosecutions for both employee and non-employee perpetrators, and administrative disciplinary actions for IRS employees. These investigations are supported by TIGTA's Forensic Laboratory that processes physical evidence for fingerprints, indications of forged or fraudulent documents, digital imaging, document chemistry, etc., and prepares presentational material for the courtroom. The Technical and Firearms Support Division supports investigations with state-of-the-art electronic equipment. The Strategic Enforcement Division administers a program to detect unauthorized invasion of taxpayers' privacy by IRS employees and it combats external attempts of computer intrusion that threaten to compromise the integrity of the IRS data infrastructure. The Criminal Intelligence Program coordinates with the FBI, CIA, DOJ and other government agencies to protect IRS personnel and facilities from external threats. OI maintains a Procurement Fraud Group that oversees the $1.6 billion Business Systems Modernization (BSM) contract and identifies fraud and procurement irregularities among the approximately 655 IRS contracts with a combined value of approximately $21.9 billion.

                    TIGTA FY 2007 Budget Highlights

FY 2006 Enacted

In FY 2006 TIGTA was appropriated $131,953,000.

Current Services

Adjustments to Maintain Current Levels +$4,516,000/0 FTE Funds are requested for the FY 2007 cost of the January 2006 pay increase of $845,000, the proposed January 2007 pay raise of $2,120,000; other labor related benefits; and non-labor related items such as contracts, travel, supplies and equipment of $610,000. Also included is a $941,000 transfer from the IRS to fund TIGTA's Working Capital Fund operating costs.

To provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

               Program Summary by Appropriations Account

The Internal Revenue Service (IRS) administers America's tax laws and collects the revenue that funds most government operations and public services. The IRS and its employees represent the face of government to more U.S. citizens than any other agency. The IRS' taxpayer service programs provide assistance to millions of taxpayers to help them understand and meet their tax obligations. The IRS' enforcement programs are aimed at deterring taxpayers inclined to evade their responsibilities while vigorously pursuing those who violate tax laws.

The IRS budget request for FY 2007 supports the IRS' five-year strategic plan. This plan underscores the IRS' commitment to provide quality service to taxpayers while enforcing America's tax laws in a balanced manner. The IRS strategic plan goals guiding the future direction of the Service are:

• Improve Taxpayer Service - Improve service to taxpayers to help them understand their tax obligations,

• Enhance Enforcement of the Tax Laws - Ensure taxpayers meet their tax obligations so when Americans pay their taxes, they can be confident their neighbors and competitors are doing the same, and

• Modernize the IRS Through Its People, Processes, and Technology - Strategically manage resources, associated business processes, and technology systems to meet service and enforcement goals.

The Internal Revenue Service FY 2007 budget request is $10,591,837,000 in direct appropriations, supplemented by $135,000,000 in new user fee revenue, $99,627,000 in existing user fee revenue, and $182,643,000 in reimbursable resources for a total program operating level of $11,009,107,000.

Performance Highlights

The following is a summary, outlined by the IRS' strategic goals, of significant program performance improvements:

Improve Taxpayer Service

Assisting the public to understand their tax reporting and payment obligations is the cornerstone of taxpayer compliance and is vital for maintaining public confidence in the tax system. The IRS continues to meet this challenge by improving the quality and accuracy of responses from its call centers and expanding taxpayer service through increased electronic self-service transactions. The following information highlights the IRS' taxpayer service achievements in FY 2005:

• Survey results from the American Customer Satisfaction Index and the IRS Oversight Board Taxpayer Attitude Survey reveal that most taxpayers are satisfied with the levels of service they receive over the telephone. In FY 2005, the IRS' customer assistance call centers answered 59.1 million calls. The IRS exceeded its FY 2005 target of 82 percent toll-free telephone level-of-service and improved its toll-free tax law accuracy rate to 89 percent, an increase from 80 percent in FY 2004.

• The newly redesigned IRS website, www.irs.gov, provides 24- hour assistance, seven days a week, with improved site navigation and an enhanced search engine, increasing search result accuracy and usability. New and improved features for www.irs.gov in 2006 include 1040 Central, Free File, Alternative Minimum Tax Assistant, Earned Income Tax Credit (EITC) Assistant, "Where's My Refund?", and electronic application and receipt of Employer Identification Number.

• The IRS provided and staffed toll-free phone assistance lines for hurricane victims. The IRS also implemented numerous tax law changes to help the victims of hurricanes Katrina and Rita, businesses located in the disaster areas, and individuals donating to charities to support the victims. The IRS will continue to implement recent tax law changes designed to encourage investment in areas affected by hurricane Katrina, including the Administration's Gulf Opportunity (GO) Zone proposals for bonus depreciation and additional small business expensing.

• The number of taxpayers filing electronically continues to increase. In 2005, for the first time, more than half of all individual taxpayer returns (68 million) were filed electronically with more than five million of these taxpayers filing for free through the Free File Alliance. This is a 43 percent increase in Free File Alliance filings over the previous year. Increased electronic filing benefits the taxpayer and the IRS. The American Customer Satisfaction Index shows that e-file taxpayers are significantly more satisfied with their interaction with the IRS than are paper filers. In addition, electronic filing processes refunds more quickly and eliminates most common filing errors (math errors, number transposition, etc.).

                                 FY 2003 FY 2004 FY 2005       FY 2006 FY 2007

The IRS made significant progress towards achieving its enforcement-related goals in FY 2005. These improvements were achieved through efforts such as streamlining and centralizing work processes, improving workload selection techniques, increasing managerial involvement in casework, and implementing initiatives to reduce cycle time by refining case selection criteria. The IRS also expanded its compliance coverage through increased efficiency in its examination program. The Service's examination coverage technique encourages examiners to pursue significant tax issues and to use their professional judgment when asking taxpayers for supplemental documentation. As a result the IRS:

• Collected more than two trillion dollars in revenue with $47.3 billion collected through enforcement activities, a 10 percent increase from FY 2004,

• Increased high-income audits (taxpayers earning $100,000 or more) by 33 percent from FY 2004,

• Increased individual audits completed by 20 percent from FY 2004,

• Increased small business audits (< $10 million) by 81 percent, and increased corporate audits (> $10 million) by 15 percent from FY 2004,

• Generated more than $4.7 billion in revenue in FY 2005 through two prominent settlement initiatives aimed at reducing examination and litigation expenses while deterring the use of abusive tax shelters,

• Increased collection case closures by 12 percent and dollars collected by 14 percent from FY 2004, and

• Increased convictions to 2,151 in 2005 (from 1,926 in 2002) through increased productivity.

Modernize the IRS through its People, Processes and Technology

The IRS must ensure its employees have the tools and skills necessary to increase organizational effectiveness and support its mission. In addition, employees need challenging work and appropriate compensation. To achieve these objectives, the IRS recently developed a new Human Capital Strategic Plan. Once finalized, the plan will communicate the direction the IRS will take to hire, train, and retain employees while ensuring retention of organizational knowledge, leadership competency and continuity.

Within the past two years, the IRS Business Systems Modernization (BSM) program has begun to improve its performance on delivering projects and releases on time, on budget, and meeting or exceeding scope expectations. After several years of not achieving project cost, scheduling, and performance goals, the IRS is realizing benefits to taxpayers and enhanced BSM program management capabilities.

In FY 2006 and continuing in FY 2007, BSM is revising its modernization strategy to emphasize the incremental release of projects to deliver business value sooner and at a lower risk. The FY 2005 IRS modernization efforts focused on three key tax administration systems that provide additional benefits to taxpayers and IRS employees: the Customer Account Data Engine (CADE) project; Modernized e-File (MeF); and Filing and Payment Compliance (F&PC).

• CADE will ultimately replace the IRS' antiquated Master File system, which is the repository of taxpayer information. CADE allows faster refunds (processing refunds on a daily basis), improved taxpayer service, faster issue detection, more timely account settlement, and a robust foundation for integrated and flexible modernized systems. CADE posted more than 1.4 million returns and generated more than $427 million in refunds. In FY 2006, CADE will process 4 million returns (with an anticipated 33 million by the following year) and will be the single authoritative repository for account and return data for those returns.

• MeF deployed Form 7004 (filing extension for corporations) as well as Form 990PF (information returns for private foundations). This enabled the IRS to establish regulations requiring large corporations and tax-exempt organizations to file their income tax or annual information returns electronically. MeF processed Forms 1120 and 990 at higher-than-expected volumes while still achieving performance goals -- a significant reduction in burden and time for corporate and tax-exempt taxpayers.

• F&PC, Release 1.1 completed the architecture engineering analysis and development needed to separate complex cases requiring direct IRS involvement from those that private collection agencies can handle. This release will provide initial capabilities for routing collection cases to private collection agencies in FY 2006.

 

IRS Funding by Appropriation Source of Funds

 

 

 

The Internal Revenue Service (IRS) budget request for FY 2007 is $10,591,837,000 in direct appropriations, supplemented by $135,000,000 in new user fee revenue, for a total operating level of $10,726,837,000. This represents an increase of 1.4 percent from the FY 2006 enacted level. This Budget supports the following FY 2007 priorities:

• Maintain balance between service and enforcement,

• Maintain the tax enforcement funding increase provided in FY 2006 to improve tax compliance,

• Focus on areas in need of closer scrutiny by IRS, including tax strategies involving international elements for both corporations and high-income individuals,

• Continue the examination of tax-exempt charities used to violate federal income tax laws, and

• Focus on technology issues to ensure the IRS is utilizing technological advances to optimize both taxpayer service and enforcement programs.

              Strategic Alignment of Taxpayer Service

• Taxpayer Service at $3,448 million in direct appropriations and $135 million from new user fee revenues, for a combined operating level of $3,583 million, a 1.4 percent increase from the FY 2006 enacted level. The IRS will maintain its commitment to provide high-quality taxpayer services through improvements to information technology and other targeted efficiencies. The growth in electronic filings also improves efficiency and accuracy, ultimately reducing tax administration costs. The IRS will continue to identify other opportunities to provide quality taxpayer service at a lower cost, such as providing and marketing expanded services to increase use of the Internet.

• Enforcement at $6,961 million, a 2 percent increase from the FY 2006 enacted level. The IRS continues to emphasize compliance with tax laws and the importance of enhanced enforcement to increase collections through productivity improvements, such as the implementation of legislative changes, streamlining operating procedures, and deploying improved technology. The FY 2006 Budget provided increased budget authority as part of a government-wide program integrity "cap adjustment" for IRS enforcement programs in FY 2006. This was proposed as part of the BudgetEnforcement Act (BEA) reauthorization (not yet enacted) but provided in the 2006 Budget Resolution. The IRS FY 2007 Budget request reflects a two percent increase in enforcement funding. The Administration is again proposing to fund this increase (+$137.275 million) as a BEA program integrity cap adjustment (see Chapter 15, Budget Reform Proposals of the Analytical Perspectives volume of the FY 2007 President's Budget).

FY 2006 Enacted

The FY 2006 enacted level for IRS is $10,573,706,000 in direct appropriations, supporting 95,386 FTE.

Current Services

Adjustments Necessary to Maintain Current Levels +$272,231,000/0 FTE Funds are requested for the proposed January 2007 pay raise ($149,819,000), the FY 2007 cost of the January 2006 pay increase ($61,994,000), and non-pay inflation for items such as contracts, travel, supplies, equipment, and rent adjustments ($60,418,000).

Program Reductions

Business Systems Modernization (BSM) Program Reduction -$29,700,000/0 FTE This reduced level of funding continues support for the development and deployment of the Customer Account Data Engine, the Filing and Payment Compliance project, and the Modernized e-Filing project.

Base Reinvestments

Increase Returns Processing Efficiencies +12,237,000/ +11 FTE This initiative requests funding to continue consolidating the processing of Individual Master File returns into fewer submission processing sites. These resources fund the ramp down of the Philadelphia submission processing site in FY 2007 and prepare for the ramp down of the Andover submission processing site in FY 2009. The initial ramp down of the Andover site requires funding to secure swing space, ship equipment, and begin preliminary infrastructure support. The estimated costs to ramp down the Philadelphia submission processing site include severance costs and information technology support.

                     IRS FY 2007 Budget Highlights

E-File Savings -$6,760,000/-174 FTE This savings results from increased electronic filing (e-file) and a reduction in Individual Master File paper returns. Estimated e-file savings are based on the projected reduction in the number of paper returns processed each year, offset by the cost of processing e-filed returns. In FY 2007, the IRS expects to process million fewer paper filed returns than in FY 2006. The savings from reduced paper returns is 230 FTE and the corresponding cost for supporting increased e- filed returns is 56 FTE, resulting in a net savings of 174 FTE and $6.8 million.

Improvement Project Savings -$8,215,000 / -135 FTE This savings result from operational improvements generated by the Contact Recording, Queuing Management (Q-Matic), Correspondence Imaging Systems, and End-to-End Publishing improvement projects already in progress. Contact Recording will enable managers at toll-free sites and Taxpayer Assistance Centers (TACs) to improve the quality of taxpayer assistance on incoming and outgoing telephone calls/interviews. Q-Matic is an on-line system available at TACs to facilitate workload and resource distribution for improved workflow and timeliness of service. The Correspondence Imaging System will allow customer service representatives to work from a stored image to streamline case resolution. End-to-End Publishing will provide technology solutions to streamline business processes associated with publishing and distribution.

Competitive Sourcing Savings -$17,000,000/0 FTE The IRS expects to achieve efficiencies and savings through competitive sourcing resulting from six different projects in various phases of implementation. These projects reduce operational costs through the establishment of a most efficient organization or through private vendor efficiencies. The National Distribution Center (centralization of nationwide tax forms distribution operation) and Integrated Document Solutions Enterprise (formerly Campus Operations, which provides information systems computer operations at the 10 IRS Campus Facilities) reach full implementation in FY 2007 and achieve the last increment of savings.

Program Efficiencies -$84,121,000/-2,096 FTE The IRS continues to improve the efficiency of taxpayer service and enforcement programs. This initiative eliminates duplicative overhead in the operations support organizations, without having an adverse impact on taxpayer service and enforcement operations. Taxpayer service operations will be improved through a variety of efforts, including the judicious distribution of workload and the automation of certain taxpayer assistance functions, such as the centralized monitoring of case inventories. The IRS will enhance productivity and efficiency of its enforcement programs by consolidating, reducing and redirecting some of the resources allocated to overhead and internal support functions to frontline compliance activities. In addition, the IRS will identify processes that can be reengineered and centralized, as well as improve workload selection techniques in examination and collection.

Reduction to Health Insurance Tax Credit Administration (HITCA) Program -$5,500,000/0 FTE This funding adjustment reflects the program's effort to align fiscal year costs with contract year expenditures. In addition, HITCA is using a comprehensive plan outlining cost reduction initiatives to improve customer service and reduce information technology support to achieve these savings.

Transfers Out

Transfer to Treasury Inspector General for Tax Administration (TIGTA) -$941,000/0 FTE This base transfer is comprised of (1) TIGTA's portion of the Working Capital Fund, which is currently paid directly by the IRS (-$926,000) and (2) printing funds currently paid directly by the IRS to the Government Printing Office for TIGTA activities (-$15,000).

Program Increases

Consolidation of Philadelphia Campus +$20,900,000/0 FTE This initiative requests funding for the information technology related costs to relocate multiple IRS activities from the remaining nine satellite sites located throughout Philadelphia into a single facility in the United States Postal Service (USPS) main building located in Philadelphia, PA. These activities include compliance and customer account services, operations support, taxpayer advocate services, and appeals. Relocation to the USPS site presents several benefits, including rent stability, improved employee access to public transportation, and a quality work environment.

 

IRS Funding History

 

(Dollars in Thousands)

 

 

 

Processing, Assistance and Management (PAM)

The FY 2007 request level is $4,045,122,000 in direct appropriation, supplemented by $114,771,000 in new user fee revenue, for a total operating level of $4,159,893,000. This is an increase of 1.6 percent from the FY 2006 enacted level. This appropriation funds the following budget activities:

Pre-Filing Taxpayer Assistance and Education ($329,557,000 from direct appropriation and $4,120,000 from new user fees) provides services to assist with tax return filing and includes interpretation of the tax laws, media, and publications. The IRS continues to emphasize taxpayer education, outreach, increased volunteer support time and locations, expanding prefiling agreements and rulings, and enhancing prefiling taxpayer support through electronic media.

Filing and Account Services ($1,618,784,000 from direct appropriation and $110,651,000 from new user fees) funds taxpayer services, issuing refunds, and maintaining taxpayer accounts in addition to the processing of all paper and electronically submitted tax returns. The IRS continues to make progress in decreasing paper returns and increasing the use of electronic filing and payment methods. The IRS is increasing both the capacity and effectiveness of its telephone and in-person taxpayer support.

Shared Services Support ($1,504,247,000 from direct appropriation) provides administrative services to all IRS employees. Included in this activity are facilities services, rent payments, printing, postage, and security.

General Management and Administration ($592,534,000 from direct appropriation) includes resources for top-level management and IRS-wide support for strategic planning, communications and liaison, finance, human resources, legal services, and specific benefits programs.

Tax Law Enforcement (TLE)

The FY 2007 request level is $4,762,327,000 in direct appropriation, supplemented by $2,627,000 in new user fee revenue, for a total operating level of $4,764,954,000. This is an increase of 1.8 percent from the enacted level. This appropriation funds the following budget activities:

Compliance Services ($4,496,735,000 from direct appropriation and $2,627,000 from new user fees) provides services to the taxpayer after a return is filed and identifies and corrects possible errors or underpayment. These programs enforce the tax laws and compliance through examination and collection activities, criminal investigations, and appeals. Funding also provides for the Taxpayer Advocate Service.

Research and Statistics of Income ($97,542,000 from direct appropriation) provides resources for researching annual income, financial, and tax data from tax returns filed by individuals, corporations, and taxexempt organizations. It also provides resources for market-based research to identify compliance issues, for conducting tests of treatments to address noncompliance, and for the implementation of successful treatments of taxpayer non- compliant behavior.

Earned Income Tax Credit ($168,050,000 from direct appropriation) funds customer service and public outreach programs, strengthened enforcement activities, and enhanced research efforts aimed at reducing erroneous claims and filings associated with the Earned Income Tax Credit (EITC).

Information Systems (IS)

The FY 2007 request level is $1,602,232,000 in direct appropriation, and by $17,602,000 in new user fee revenue, for a total operating level of $1,619,834,000. This is a 2.3 percent increase from the FY 2006 enacted level. This appropriation funds the following budget activities:

Information Systems Improvement Programs ($49,302,000 from direct appropriation) funds improvements or enhancements to business applications or internal management systems that conform to the modernized IRS architecture on which IRS operations depend.

Information Services ($1,552,930,000 from direct appropriation, and $17,602,000 from new user fees) provides funding for salaries, benefits, and related costs to manage, maintain, and operate the information systems critical to the support of tax administration programs. The IRS' business programs rely on these systems to process tax and information returns, account for tax revenues collected, send bills for taxes owed, issue refunds, assist in the selection of tax returns for audit, and provide telecommunications services for all business activities including the public's toll-free access to tax information.

Business Systems Modernization (BSM)

The FY 2007 request level is $167,310,000, 15.1 percent less than the FY 2006 enacted level.

Business Systems Modernization ($167,310,000 from direct appropriation) provides resources for the planning and capital asset acquisition of information technology to modernize the IRS' business systems. The program combines best practices and expertise in business solutions and internal management from IRS, business, and technology to develop a world-class tax administration system that fulfills the revenue collection requirements of the United States as well as taxpayers' needs and expectations.

Health Insurance Tax Credit Administration (HITCA)

The FY 2007 request level is $14,846,000, a decrease of 25.8 percent from the FY 2006 enacted level.

Health Insurance Tax Credit Administration (HITCA) ($14,846,000 from direct appropriation) provides resources to administer a refundable tax credit for health insurance to qualified individuals, which was enacted as part of the Trade Adjustment Assistance Reform Act of 2002.

Legislative Proposals

The Administration proposes five new legislative changes to reduce the tax gap and re-proposes four legislative changes to improve tax administration efficiency. In addition, the Administration will study the standards used to distinguish between employees and independent contractors for purposes of withholding and paying federal employment taxes. The nine legislative changes are:

Closing the Tax Gap

• Clarify the circumstances in which employee leasingcompanies and their clients can be held jointly liablefor federal employment taxes. This proposal would facilitate the effective use of third party employee leasing companies by small businesses to pay employment taxes. In addition to clarifying joint liability, it would also provide standards for holding employee leasing companies solely liable for such taxes, if they meet specified requirements.

• Increase information reporting on payment cardtransactions. In order to improve compliance, payment card issuers would be required to report to the IRS annually the aggregate reimbursement payments made to certain businesses in a calendar year.

• Expand information reporting to certain paymentsmade by federal, state and local governments toprocure property and services. This proposal would improve tax compliance of those taxpayers who do business with government agencies.

• Amend Collection Due Process procedures foremployment tax liabilities. For Collection Due Process purposes, this proposal would align the treatment of levies to collect employment taxes with the treatment of levies to collect federal taxes from state tax refunds. The proposal would curtail delinquent employers' ability to pyramid multiple periods of unpaid employment tax liabilities. Taxpayers would retain the ability to seek managerial appeal and to participate in the formal Collection Appeals Process.

• Expand to non-income tax returns the requirementthat paid return preparers identify themselves on suchreturns and expand the related penalty provision. This proposal would address the growing problem of return preparers who assist in the preparation and submission of improper excise, employment tax, and other non-income tax returns and related documents.

• Implement administrative reforms to improve theefficiency of IRS operations such as: (a) adopt measures to reduce frivolous submissions made solely to delay or impede tax administration; (b) allow the IRS to terminate installment agreements if the taxpayer is not paying as agreed; and (c) streamline jurisdiction over collection due process cases in the Tax Court.

• Initiate cost savings measures such as: (a) Reduce transaction costs by changing the way the Treasury Department's Financial Management Service is reimbursed for offsetting collections, and (b) expand IRS' authority to require electronic filing.

• Authorize the IRS to access employment data in the HHS' National Directory of New Hires for tax administration purposes, including data matching, verification of taxpayer claims during return processing, preparation of substitute returns for non-compliant taxpayers, and identification of levy sources.

• Extend IRS' authority to fund undercover operations, which expires on December 31, 2006, to permit the IRS to fund certain necessary and reasonable expenses of undercover operations, including international and domestic money laundering and narcotics operations.