The Accuracy of the Federal Activities Inventory Can Be
Improved
August 2003
Reference Number:
2003-10-181
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
August
27, 2003
MEMORANDUM FOR
DIRECTOR, COMPETITIVE SOURCING PROGRAM
FROM: for Gordon C. Milbourn III /s/ Daniel R. Devlin
Assistant Inspector General
for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report - The Accuracy of the
Federal Activities Inventory Can Be Improved (Audit # 200210049)
This
report presents the results of our review to evaluate the effectiveness of the
Internal Revenue Service’s (IRS) implementation of the Federal Activities
Inventory Reform (FAIR) Act of 1998.
Current Government-wide management initiatives include the need to
produce a more accurate FAIR Act inventory of commercial activities conducted
by Federal Government employees and to expand competitive sourcing.
Overall,
the IRS needs to improve its compliance with FAIR Act requirements. The IRS submitted its Fiscal Year (FY) 2002
inventory of commercial and inherently Governmental activities to the
Department of the Treasury as required. It did not, however, provide specific
guidelines to the business units for classifying activities as commercial or
inherently Governmental, applying Function Codes, and properly calculating Full-Time Equivalent (FTE) positions for the Fair Act inventory. As a result,
business units developed their own methodologies for compiling the inventory,
which led to inconsistencies and inaccurate inventories.
We recommended
that the Director, Competitive Sourcing Program, provide the business units
with specific
guidance for categorizing activities as commercial or inherently Governmental,
including supplemental definitions to assist business units in using Function
Codes properly and consistently IRS-wide.
We also recommended that the IRS develop an IRS-wide process for
assembling the Fair Act inventory and ensure business units retain
documentation used to compile the inventories.
Finally, we recommended that the IRS develop a methodology for properly
calculating FTEs for the Fair Act inventory.
Management’s
Response: The Director, Competitive Sourcing Program,
agreed with the methodology, findings and recommendations in the report and
will work to implement the corrective actions.
Specifically, the Office of the Competitive Sourcing Program will
conduct a workshop for FAIR Act Coordinators, focusing on process
consistencies. Concurrently, the Office
will provide the business units with specific guidance for categorizing
positions as commercial or inherently Governmental and using Function Codes
properly and consistently IRS-wide, and will also develop a standard IRS-wide
process for assembling the FAIR Act inventory that requires business units to
document the process. Finally, the
Director, Competitive Sourcing Program, will work closely with the Chief Financial
Officer and other officials to derive an empirically valid methodology for
computing and documenting full-time and part-time/seasonal positions as FTEs in
preparing the 2004 and future FAIR Act inventories. Management’s complete response to the draft report is included as
Appendix IV.
Please contact
me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant
Inspector General for Audit (Headquarters Operations and Exempt Organizations
Programs), at (202) 622-8500.
Better Guidelines and Documentation of the Process for Classifying
Activities Are Needed
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Management’s Response to the Draft Report
The Federal Activities Inventory Reform (FAIR) Act of 1998
requires the head of each executive agency to submit an annual inventory of
commercial activities (activities that are not inherently Governmental
functions) conducted by Federal Government employees to the Director of the
Office of Management and Budget (OMB) by June 30 of each Fiscal Year (FY). OMB Circular No.
A-76, Performance of Commercial Activities, established Federal policy
regarding the performance of commercial activities and implemented the
statutory requirements of the FAIR Act.
The purpose of the FAIR Act is to
ensure that activities that could be conducted by the private sector are
properly identified and open for competition.
The FAIR Act inventory of commercial activities identifies the
activities subject to competition with the private sector. Current
Government-wide management initiatives include the need to produce a more
accurate FAIR Act inventory of commercial activities conducted by Federal
Government employees and to expand competitive sourcing. Competitive sourcing is the process for
determining whether it is more efficient to perform commercial activities under
contract with commercial vendors or to use Federal Government facilities and
personnel. In September 2001,
the Internal Revenue Service (IRS) created the Office of the Competitive
Sourcing Program to support the IRS in using competition to produce cost
savings and efficiencies that benefit taxpayers and the IRS workforce.
For FY 2002, the OMB required
agencies to prepare a single inventory that included both inherently
Governmental and commercial activities.
The Department of the Treasury consolidated the inventories from its
various bureaus, including the IRS, and forwarded a department-wide inventory
to the OMB. Table 1 shows the IRS’
Full-Time Equivalent (FTE) positions for both categories as included in the FY
2002 FAIR Act inventory.
Table 1 – Summary of the IRS’ FAIR Act Inventory for FY 2002
|
Status |
Number of
|
|
Commercial
|
19,610 |
|
Inherently
Governmental |
81,105 |
|
Total |
100,715 |
Source: Department of the Treasury.
We conducted audit work at the Office of the Competitive Sourcing Program in Washington, D.C., from October 2002 to May 2003. We interviewed the IRS-wide FAIR Act Coordinator, functional FAIR Act Coordinators, and selected managers in the four Operating Divisions, the Agency-Wide Shared Services office, and the Modernization, Information Technology and Security Services office. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objective, scope and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Overall, the IRS needs to improve its compliance with FAIR Act requirements. The IRS submitted its FY 2002 inventory of commercial and inherently Governmental activities to the Department of the Treasury as required. It did not, however, provide specific guidelines to the business units for classifying activities as commercial or inherently Governmental, applying Function Codes, and properly calculating FTEs for the inventory.
The OMB policy recognizes that determining whether a function is inherently Governmental is often difficult and depends upon an analysis of the factors of the case. However, the presence or absence of any one factor will not in itself determine the issue. The same emphasis will not necessarily be placed on any one factor at different times, due to the changing nature of the Federal Government’s requirements.
Because of the difficulties involved, it is important that Federal Government agencies provide adequate guidance and properly document the process and decisions made to compile the inventories. Without proper guidance and documentation, it is difficult to determine whether the FAIR Act inventories include activities in the proper category. It is especially important for activities that can be classified in either category, depending on the nature and scope of responsibilities for functions and jobs within that category.
In the IRS’ FAIR Act inventory for FY 2002, there were a number of activities within the IRS business units for which there were FTEs in the commercial and the inherently Governmental categories. The IRS business units categorized FTEs in 37 similar activities as both commercial and inherently Governmental. These activities represented 5,288 commercial and 18,069 inherently Governmental FTEs. Table 2 provides examples.
Table 2 – Examples of Activities That the Same Business Unit Classified as Both Commercial and Inherently Governmental
Activity
|
FTEs |
|
|
Commercial |
Inherently |
|
|
Systems
Design, Development, and Programming Services |
1,601 |
148 |
|
Information
Technology Management |
269 |
278 |
|
Facility
Security Management |
50 |
198 |
|
Program
Monitoring and Evaluation |
35 |
131 |
Source: IRS’ FAIR Act inventory for FY 2002.
In addition, there were 18 activities for which the classification as commercial or inherently Governmental for the same activity differed among the business units. For example, 1 business unit categorized 218 FTEs for Regulatory and Program Management Support Services, Compliance Operations, as commercial, while another business unit categorized 2,166 FTEs for the same activity as inherently Governmental. The 18 activities represented 2,044 commercial FTEs and 4,699 inherently Governmental FTEs.
The justification to support these classifications was not documented. Although FY 2002 was the fourth year in which agencies were required to submit FAIR Act inventories, the IRS business units did not document the process for compiling inventories or the decisions made in this process. The business units consulted with each other and attempted to reach a consensus about how to classify some of the activities; however, final decisions were left to the discretion of the individual business units.
The Office of the Competitive Sourcing Program provided the business units with general OMB and Department of the Treasury guidance for FY 2002 but did not develop and disseminate specific guidelines. The FAIR Act Coordinators requested additional assistance from the Office of the Competitive Sourcing Program; however, they were informed that because of resource, time, and other constraints, this Office could not provide guidance to the business units for the FY 2002 FAIR Act inventory. Additionally, there were differences in the number of FAIR Act Coordinators per business unit, their level in the organization, and the participation of business unit managers in the process.
Different Function Codes were applied to similar activities
The OMB published a list of Function Codes to provide a standardized way for an agency to describe those activities which the agency has determined are commercial in nature. Function Codes are the most descriptive elements that are included in the published FAIR Act inventory. Not all activities described by the Function Codes must be classified as commercial. The agency must evaluate the work and take into consideration the context in which the work is conducted. Agencies may augment these Function Codes for internal use, by adding to the existing alphanumeric codes provided, but may not create new codes or add additional codes in the submission to the OMB. The OMB instructions for FY 2002 direct agencies to also use the Function Codes for inherently Governmental functions.
The FAIR Act allows an interested party (such as a vendor) to challenge the omission of a particular activity from or inclusion of a particular activity in an agency’s inventory. Function Codes help an interested party identify and challenge the classification of the activity. It is important that this information is accurate to achieve the maximum benefits of competition.
Our analysis of data for 3 IRS business units showed that they did not consistently assign Function Codes to 11,324 FTEs representing similar job series and job titles. For example, 1 business unit used the “Data Processing Services” Function Code for its 5,062 data transcriber FTEs. Another business unit used the “Administrative Support” Function Code for its 1,671 data transcriber FTEs. The duties of data transcribers, which include entering data from tax returns and documents into IRS computer systems, have many similarities from one business unit to the next.
There was also inconsistency in the number of Function Codes used to describe activities. For example, to describe program manager activities, 1 business unit used 5 different Function Codes for its 123 FTEs, while another unit used 1 completely different Function Code to describe its 409 program manager FTEs.
The IRS did not have specific procedures or definitions to guide the business units in applying Function Codes to activities. FAIR Act Coordinators acknowledged that applying a Function Code to a particular job or activity was subjective. The IRS used 147 of the approximately 700 Function Codes that were available for FY 2002. However, OMB provided definitions for only 44 of the 147 Function Codes that the IRS used.
Many of the Function Codes are similar and not clearly defined. One FAIR Act Coordinator provided an example of four Function Codes that could be used to describe the activities conducted by employees in the program analyst series. Any of the Codes could be, and were, applied to positions in that series. In some cases, a Function Code was used because it had been used in the FY 2001 inventory.
The Office of the Competitive Sourcing Program recognized that the business units needed guidance in classifying activities and selecting Function Codes. Consequently, the Office issued the IRS’ 2003 supplemental guidance, which specifically states that administrative support services activities will be classified as commercial and provides the Function Code for those activities. The guidance also:
· Provides examples of functions that are considered inherently Governmental.
· Prohibits the use of “other” Function Codes for commercial activities because they are too general.
While these efforts should help to reduce inconsistencies in future inventories, additional guidance is needed to address other activities and Function Codes.
The Director, Competitive Sourcing Program, should:
1. Provide the business units with specific guidance for categorizing activities as commercial or inherently Governmental for all types of activities. The Director should include guidance and supplemental definitions to assist the business units in using Function Codes properly and consistently IRS-wide.
Management’s Response: The Director, Competitive Sourcing Program, will conduct a workshop for FAIR Act Coordinators, focusing on process consistencies. Concurrently, the Office of Competitive Sourcing Program will provide the business units with specific guidance for categorizing positions as commercial or inherently Governmental and using Function Codes properly and consistently IRS-wide.
2. Develop an IRS-wide process for assembling the FAIR Act inventory, and require business units to document the process for categorizing the inventory and to retain the documentation.
Management’s Response: The Director, Competitive Sourcing Program, will develop a standard IRS-wide process for assembling the FAIR Act inventory that will require business units to document the process for categorizing the inventory and to retain the documentation. This process will be shared with the business units at the December 2003 coordinators conference.
The OMB required each agency to report the same number of FTEs on its FAIR Act inventory as it had reported in its annual budget. The number of IRS on-rolls employees varies significantly from the number of budgeted FTEs throughout the year because of the seasonal nature of certain tax return processing operations at the IRS. The number of actual on-rolls employees at the time the FAIR Act Coordinators prepared the FY 2002 inventory was higher than the number of budgeted FTEs for some business units. The FAIR Act Coordinators for those business units used their own methods for adjusting the number of on-rolls employees to match the FTEs in the budget.
The number of on-rolls employees included permanent and seasonal employees. The majority of seasonal employees work in the two largest business units, the Wage and Investment (W&I) Division and the Small Business/Self-Employed (SB/SE) Division. These 2 business units represented approximately 66 percent of the FY 2002 IRS FAIR Act inventory. Both of these business units had a higher number of on-rolls employees than the budgeted FTEs at the time the inventories were prepared. However, instead of separately adjusting the numbers of permanent and seasonal employees, both the W&I and SB/SE Divisions adjusted the on-rolls numbers of FTEs by dividing the budgeted FTEs by the actual number of on-rolls employees. This adjustment did not properly weight seasonal and permanent employees.
The SB/SE Division retained supporting documentation that showed how many seasonal and permanent employees were on-rolls at the time the inventories were prepared. The SB/SE Division used the following computation to adjust its on-rolls positions:
(Budgeted
FTEs)/(On-rolls) = Conversion Factor
37,389/44,544 = 0.84
The SB/SE Division applied this 0.84 conversion factor to every line item on its inventory.
The IRS’ CFO Guidance on Calculating FTE provides an IRS-wide average factor of .54 for seasonal employees and 1.00 for permanent employees. Table 3 provides examples of certain line items on the FAIR Act inventory to show the effect of using the SB/SE Division’s adjustment factor, which weighted all employees equally in calculating FTEs, compared with using the CFO rate for the seasonal employees.
Table 3 – Examples of the Effect of Using Different Factors for Permanent and Seasonal Employees
|
|
FTEs |
||
|
Inventory Item |
SB/SE Factor (Reported) |
CFO Guidance |
Difference |
|
Data
transcribers at one submission processing center |
760 |
467 |
-293 |
|
Contact
representatives at one location |
194 |
119 |
-75 |
|
Tax examining
assistants at one location |
86 |
98 |
+12 |
Source: The SB/SE Division’s reported FTEs and IRS-wide FTE averages as reported by the CFO.
Using the CFO Guidance on Calculating FTE as a baseline in its FY 2002 inventory, the SB/SE Division overstated the number of seasonal employees and understated its permanent employees by 3,765 FTEs based on misstatements by line item. The effect of the conversion on the SB/SE Division’s FTE classification in the overall inventory was an overstatement on the commercial inventory and an understatement of the inherently Governmental inventory of 561 FTEs.
The W&I Division was unable to provide us with the documentation needed to recalculate and quantify revised FTE data. However, the effect on the number of permanent employees would have been greater because the W&I Division used a factor of 0.64, as opposed to the 0.84 factor used by the SB/SE Division. For example, for every 1,000 FTEs for permanent employees that it should have reported, the SB/SE Division reported 840 FTEs, while the W&I Division reported 640 FTEs.
Adjusting the number of on-rolls employees is a valid step in arriving at the FTEs for the FAIR Act inventory. However, business units must use separate factors for seasonal and permanent employees when making the adjustment. The CFO conversion factor for seasonal employees is based on an IRS-wide average; therefore, each business unit must determine the proper factor for seasonal employees to ensure an accurate calculation. Applying a single factor to both seasonal and permanent employees causes significant misstatements on the FAIR Act inventory.
3. The Director, Competitive Sourcing Program, should develop a methodology for each business unit to use to properly calculate FTEs for the FAIR Act inventory.
Management’s Response: The Director, Competitive Sourcing Program, will work closely with the Chief Financial Officer and other officials to derive an empirically valid methodology for computing and documenting full-time and part-time/seasonal positions as FTEs in preparing the 2004 and future FAIR Act inventories.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall objective of our review was to evaluate the effectiveness of the Internal Revenue Service’s (IRS) implementation of the Federal Activities Inventory Reform (FAIR) Act of 1998. To accomplish this objective, we completed the following sub-objectives and steps:
I. To determine whether the FAIR Act inventory was complete and prepared in accordance with Office of Management and Budget (OMB) guidance, we:
A. Interviewed FAIR Act Coordinators and some managers in 6 different business units, which represented approximately 87 percent of the IRS’ Fiscal Year (FY) 2002 FAIR Act inventory.
B. Reviewed guidance documents.
C. Reviewed methodologies used to categorize activities, assign Function Codes, and calculate Full-Time Equivalent (FTE) positions for the FY 2002 FAIR Act inventory.
D. Verified whether the IRS used Function Codes approved by the OMB, prepared the inventory in the format required by the OMB, and reported the correct FTE count.
II. To determine whether the FY 2002 FAIR Act inventory was accurate, we:
A.
Identified business units that categorized FTEs with
the same Function Code as both commercial and inherently Governmental and
requested supporting documentation.
B.
Identified instances in which a business unit
categorized FTEs with a Function Code as commercial and another division
categorized FTEs with the same Function Code as inherently Governmental and
requested supporting documentation.
C.
Reviewed the OMB requests for changes to the IRS’ FY
2001 FAIR Act inventory and any resulting adjustments the IRS made to the FY
2002 FAIR Act inventory.
III. Evaluated whether the IRS timely decided and responded to any challenges and appeals to the FY 2002 FAIR Act inventory.
Appendix II
Major Contributors to This Report
Daniel R. Devlin, Assistant Inspector General
for Audit (Headquarters Operations and Exempt Organizations Programs)
Michael E. McKenney, Director
Carl L. Aley, Audit Manager
Joan R. Floyd, Senior Auditor
Timothy F. Greiner, Senior Auditor
Donna L. Saranchak, Senior Auditor
Michael J. Della Ripa, Auditor
Appendix III
Commissioner N:C
Deputy Commissioner for Operations Support N:OS
Deputy Commissioner for Services and Enforcement N:SE
Commissioner, Large and Mid-Size Business Division LM
Commissioner, Small Business/Self-Employed Division S
Commissioner, Tax Exempt and Government Entities Division T
Commissioner, Wage and Investment Division W
Chief, Agency-Wide
Shared Services A
Chief Information Officer CIO
Chief Counsel CC
National Taxpayer
Advocate TA
Director, Office of Legislative
Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
Office of
Management Controls N:CFO:AR:M
Audit
Liaison: Director, Competitive Sourcing
Program CS
Appendix IV
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.