# Provide America’s taxpayers top-quality service (2023) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Acfab996f8ebef642 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 2023 AGENCY FINANCIAL REPORT MISSION STATEMENT MISSION Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. VALUES Honesty and Integrity: We uphold the public trust in all that we do; we are honest and forthright in all of our internal and external dealings. Respect: We treat each colleague, employee and taxpayer with dignity and respect. Continuous Improvement: We seek to perform the best that we can today, while embracing change, so that we can perform even better in the future. Inclusion: We embrace diversity of background, experience, and perspective. Openness and Collaboration: We share information and collaborate, recognizing that we are a team. Personal Accountability: We take responsibility for our actions and decisions and learn and grow from our achievements and mistakes. Table of Contents II INTRODUCTION 107 OTHER INFORMATION ii About This Report iii Certificate of Excellence in Accountability Reporting 108 Section A: Summary of Financial Statement Audit and Management Assurances iv Message from the Commissioner 1 MANAGEMENT'S DISCUSSION AND ANALYSIS 110 Section B: Tax Burden, Tax Gap and Tax Expenditures 115 Section C: Management and Performance Challenges 149 Section D: Grants Programs 2 About the IRS 5 Performance Overview 32 Enterprise Risk Management 34 Analysis of Financial Statements 43 Analysis of Systems, Controls and Legal Compliance 159 APPENDICES 47 Management Assurances 161 Appendix B: How to Contact Us 49 Forward-Looking Information 162 Appendix C: Acknowledgements 150 Section E: Refundable Tax Credits and Other Outlays and Social Security and Medicare Taxes 160 Appendix A: Glossary of Acronyms 51 FINANCIAL INFORMATION 52 Message from the Chief Financial Officer 54 Independent Auditor's Report 63 Enclosure: IRS Response to the Independent Auditor's Report 65 Financial Statements 72 Notes to the Financial Statements 102 Required Supplementary Information IRS FY 2023 | AGENCY FINANCIAL REPORT i Introduction INTRODUCTION ABOUT THIS REPORT This Agency Financial Report presents the Internal Revenue Service’s (IRS) financial information in relation to its mission and resources entrusted to it for the Fiscal Year (FY) 2023 (October 1, 2022, to September 30, 2023) reporting period. This report also highlights select accomplishments and challenges in implementing programs that promote the IRS’s mission. Although the IRS is a bureau within the Department of the Treasury (Treasury), this report is titled Agency Financial Report to be consistent with similar reports in the federal government. The IRS presents this report in accordance with Office of Management and Budget’s Circular A-136, Financial Reporting Requirements, as a component of Treasury. This report includes Circular A-136 core principles and requirements applicable to a component entity. This financial report is available on www. irs.gov/about-irs/irs-financial-reports. How This Report is Organized The Agency Financial Report consists of the following sections: Section 1: Management’s Discussion and Analysis (Unaudited) Provides a high-level overview of the IRS’s history, mission and organizational structure; strategic framework; programmatic performance; enterprise risks; analysis of financial statements; analysis of systems, controls and legal compliance; management assurances related to the IRS’s internal controls; and forward-looking information. United States (U.S.) generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board require the Management’s Discussion and Analysis be presented as required supplementary information to the financial statements. Section 2: Financial Information Includes a message from the Chief Financial Officer (CFO), Independent Auditor’s Report and IRS response, audited financial statements and accompanying notes, and unaudited required supplementary information. Section 3: Other Information (Unaudited) Contains a summary of the Financial Statement Audit and Management Assurances; Tax Burden, Tax Gap and Tax Expenditures; Management and Performance Challenges; Grants Programs; and Refundable Tax Credits and Other Outlays. Treasury reports on Payment Integrity and Climate–Related Financial Risk in its Agency Financial Report (home.treasury.gov/about/budget-financialreporting-planning-and-performance/agency-financial-report). For information on Payment Integrity, see PaymentAccuracy.gov (www.paymentaccuracy.gov). ii IRS FY 2023 | AGENCY FINANCIAL REPORT Introduction CERTIFICATE OF EXCELLENCE IN ACCOUNTABILITY REPORTING In May 2023, AGA presented the IRS its first Certificate of Excellence in Accountability Reporting award for its FY 2022 Agency Financial Report (www.irs.gov/pub/irs-prior/p5456--2022.pdf). The Certificate of Excellence is the highest form of recognition in federal government financial management and performance accountability reporting. As a first-time winner of this distinguished award, the IRS is honored to be recognized for demonstrating the highest standards in financial and performance accountability reporting. It is a significant accomplishment that showcases our reporting excellence in the financial management community. Additionally, the IRS received recognition with a Best-In-Class award for Most Improved Presentation of Management’s Discussion and Analysis for outstanding explanation of the strategic plan, providing performance measures for all goals and effectively addressing prior year comments provided by the AGA’s review panel. Certificate of Excellence in Accountability Reporting Certificate of Excellence in Accountability Reporting presented to the BEST-IN-CLASS AWARD ® ® presented to the Internal Revenue Service Internal Revenue Service in recognition of in recognition of outstanding effort in preparing the Agency Financial Report for fiscal year 2022 most improved presentation of performance in an MD&A in the Agency Financial Report for fiscal year 2022 Andrew Lewis, CGFM, CPA Chair, CEAR Board Andrew Lewis, CGFM, CPA Chair, CEAR Board Ann M. Ebberts, MS, PMP Chief Executive Officer, AGA Ann M. Ebberts, MS, PMP Chief Executive Officer, AGA AGA is an association for professionals who work in the areas of financial management, accounting, auditing, information technology, budgeting, policy, grants management, performance management and other business operations areas to help the government work more efficiently and effectively. The Certificate of Excellence in Accountability Reporting Program was established by the AGA, in conjunction with the Chief Financial Officers Council and the Office of Management and Budget, to further performance and accountability reporting. IRS FY 2023 | AGENCY FINANCIAL REPORT iii Introduction MESSAGE FROM THE COMMISSIONER On behalf of the dedicated IRS staff, I am pleased to present the IRS Agency Financial Report for FY 2023. This report provides an assessment of the IRS’s financial status and demonstrates how the IRS used entrusted resources in support of its mission to provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. Guided by the IRS’s core values of Honesty and Integrity, Respect, Continuous Improvement, Inclusion, Openness and Collaboration and Personal Accountability, the IRS workforce works diligently to serve the people of the U.S. The IRS collects significant funding for the nation’s operations and most critical programs, including national defense, infrastructure and health. Currently, nearly all of the funding that keeps the federal government running comes through the IRS. Through the hard work of our committed employees, the IRS collected about $4.7 trillion in gross revenues. After enactment of the Inflation Reduction Act of 2022 (IRA), the IRS developed a detailed Strategic Operating Plan for FY 2023-2031 (SOP) (www.irs.gov/about-irs/irs-inflation-reduction-act-strategicoperating-plan) that consists of 5 transformational objectives and 42 initiatives the IRS will be working on through FY 2031 when the funding expires. One early success story, that was only possible with the additional funding from the IRA, was the IRS’s ability to hire an additional 5,000 Customer Service Representatives to answer taxpayer calls. This allowed the IRS to achieve a filing season (January 23 through April 21) Level of Service of 87%, compared to 15% in the prior year. I am incredibly proud of what the IRS was able to achieve in FY 2023, and I know that with the additional funding provided to the IRS through the IRA, the IRS will be able to achieve even more for taxpayers and tax administration in FY 2024. Key Areas of Focus: Implementing the IRS Vision: In FY 2023, the IRS made incredible progress on many areas highlighted in the SOP, and many more are in progress as the IRS works to modernize the way it serves taxpayers through improved technology, better service and fairer enforcement. Substantial work was done to advance the objectives and the performance goals of the plan. The Paperless Process Initiative is a clear example of how, with the right funding and priorities, the IRS can quickly move operations to meet the taxpayer’s needs. By the 2025 filing season, the IRS has an ambitious goal to digitize all paper-filed returns as soon as they are received. In addition, the IRS will add more non-tax forms in digital, mobile-friendly formats that will make it easier for taxpayers to complete and submit electronically. iv IRS FY 2023 | AGENCY FINANCIAL REPORT Introduction Transforming the IRS also means continuing to improve service on the phones and in person. In FY 2023, the IRS announced the expansion of the customer callback option (having the option to get a call back instead of waiting on hold) to cover 95% of all taxpayers seeking live assistance. The IRS answered more calls from taxpayers seeking help than last year and significantly reduced phone wait times by hiring additional Customer Service Representatives. The IRS also provided more in-person assistance with 363 Taxpayer Assistance Centers open for business. 2023 Filing Season: During the 2023 filing season, the IRS received more than 137 million individual federal tax returns and issued nearly 86 million refunds totaling more than $236 billion. The infusion of IRA funding enabled the IRS to provide taxpayers with a substantially better experience in the 2023 filing season than in previous years. Reducing the Paper Return Inventory: Addressing a key Coronavirus Disease 2019 (COVID-19) pandemic challenge, the IRS continued to reduce the backlog of paper tax returns and correspondence. I am pleased to report that thanks to the tireless perseverance of IRS employees, the IRS processed all paper and electronic original returns received in 2022 that had no errors and didn’t require further review. As a result, individual returns are no longer backlogged and processing this filing season is at normal levels. Safeguarding Taxpayer Data: The COVID-19 pandemic and resulting legislation increased identity theft and other scams. The IRS continued to make advances in this area, protecting taxpayers and the tax system. In fact, the Treasury Inspector General for Tax Administration (TIGTA) noted the progress the IRS is making. In a report released on May 10, 2023, it stated the IRS “continues to increase the number of fraudulent tax returns detected and stopped from entering the tax processing system,” which prevents the issuance of fraudulent refunds associated with those returns. Contributing to this progress has been an increase in the number of filters the IRS uses to identify potential identity theft tax returns – 236 this filing season, compared to 168 filters during the 2022 filing season – according to TIGTA. Tax Scams and Fraud: Improving public warnings about scams that threaten taxpayers remains a priority for the IRS. The IRS is on the side of taxpayers and is working to protect hard-working people from scammers or fraudsters who try to use the tax system for their schemes. Whether it is promising people inflated amounts of Earned Income Tax Credit, a credit designed to help workers with modest incomes, or tricking people into tax-related identity theft, protecting taxpayers is a critical component to ensuring the success of the nation's tax system. The IRS will continue its aggressive work into the 2024 filing season, building off of efforts like the Dirty Dozen (www.irs.gov/newsroom/dirty-dozen) to warn taxpayers about quickly emerging scams and schemes. IRS FY 2023 | AGENCY FINANCIAL REPORT v Introduction This fiscal year, the IRS saw a significant increase in tax scams and marketing related to the Employee Retention Credit, a credit designed to support eligible businesses affected by the COVID-19 pandemic. Promoters have been aggressively marketing this program to businesses that may not be eligible to claim these credits, putting them at financial risk and requiring the IRS to devote extra staff to process the large influx of new Employee Retention Credit claims. To address potential fraud, the IRS increased audits by specially trained auditors and criminal investigative activities against both the promoters as well as the businesses filing these dubious claims and implemented a moratorium on processing new claims beginning September 14, 2023, to run through at least December 31, 2023. Compliance Efforts: Anchored by a deep respect for taxpayer rights, the IRS is deploying new resources toward cutting-edge technology to improve visibility on where the wealthy shield their income and to focus staff attention on the areas of greatest abuse. The IRS will increase compliance efforts on those posing the greatest risk to the nation's tax system, whether it's the wealthy looking to dodge paying the correct amount or promoters aggressively peddling abusive schemes. These steps are critical for the future of the nation's tax system. In its High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with total positive income above $1 million and more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category who collectively owe hundreds of millions of dollars in taxes. Investing in the IRS Workforce: The IRS’s greatest asset is its workforce, and the IRS is working to raise its workforce numbers up from 1970s-era levels to better serve taxpayers and the nation. In addition to providing work-life balance programs, tuition reimbursement, student loan reimbursement and childcare subsidies to retain current employees, the IRS is looking to recruit new employees to meet current and future challenges. In addition to new hires for in-person and telephone support, IRA resources have enabled the IRS to increase staffing in other service-related areas, including Submission Processing and Information Technology. In FY 2024, we will begin to heavily recruit Revenue Agents, who will be responsible for auditing the most complex tax returns of high wealth/high income individuals, partnerships and corporations. Exhibiting Financial Stewardship: I am pleased to report that the IRS maintained an unmodified (clean) financial statement audit opinion for the 24th consecutive year. Based upon the results of internal control evaluations, I can provide reasonable assurance that the performance and financial information in this report is complete and accurate. The IRS continues to strengthen management controls and make progress toward remediating the significant deficiencies in internal control over financial reporting to meet all U.S. financial systems compliance and conformance objectives as outlined in the Management’s Discussion and Analysis – Analysis of Systems, Controls and Legal Compliance. vi IRS FY 2023 | AGENCY FINANCIAL REPORT Introduction The bottom line is the IRS, after the funding provided by IRA, is in a very different place. But the reality is that the IRS has much, much more work ahead to build on these improvements. I am confident that even more can be accomplished across the IRS. This is good news for employees, good news for taxpayers and a step forward for the nation. So, in conclusion of the fiscal year and completion of the first year of implementing the SOP, I am confident the IRS will continue to improve the taxpayer experience and increase the efficiency and effectiveness of its operations with continued discretionary budget support and continued funding. I am proud to lead this work in collaboration with my colleagues, valued partners in the tax community and national, state and local partners to provide an effective and efficient tax system that is fair and equitable for all. Sincerely, Daniel I. Werfel Commissioner of Internal Revenue November 3, 2023 IRS FY 2023 | AGENCY FINANCIAL REPORT vii This page intentionally left blank MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis ABOUT THE IRS The IRS is a bureau of the Treasury. The IRS carries out the responsibilities of the Secretary of the Treasury under Internal Revenue Code Section 7801. The Secretary has full authority to administer and enforce the Internal Revenue Code and has the power to create an agency to enforce these laws. Internal Revenue Code Section 7803 provides for the appointment of a Commissioner of Internal Revenue to administer and supervise the execution and application of the Internal Revenue Code. The IRS is one of the world’s largest tax administrators. In FY 2023, the IRS collected about $4.7 trillion in taxes, which represents nearly all of the revenue that supports the federal government’s operations. Some key tax statistics in FY 2023 include: 275M $ 4.7T $3,101 $86.1B Federal Tax Returns and Forms Processed Collected in Gross Taxes Average Individual Refund Enforcement Revenue Collected Note: These statistics are from October 1, 2022, through September 30, 2023. The Average Individual Refund amount includes refunds issued in FY 2023 for all tax years. History The IRS is one of the oldest bureaus in the U.S. Government. Article 1, Section 8 of the Constitution gave the federal government the "Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…” In 1862, President Lincoln and the Congress established the Bureau of Internal Revenue and the nation’s first income tax. In 1953, the Bureau of Internal Revenue’s name changed to the Internal Revenue Service. Visit the IRS History Timeline at www.irs.gov/irs-history-timeline. Internal Revenue Service Building, 1111 Constitution Ave. N.W., Washington D. C. 2 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Mission and Organization The IRS's mission is to provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities while enforcing the law with integrity and fairness to all. This mission statement describes the IRS’s role − and the public's expectation about − how the IRS should perform that role. • In the U.S., the Congress passes tax laws and requires taxpayers to comply. • The taxpayer’s role is to understand and meet their tax obligations. • The IRS’s role is to help willing taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share. The IRS’s core operations include collecting taxes, processing tax returns, assisting taxpayers, enforcing tax laws and investigating tax crimes. The extensive IRS portfolio also includes tax-exempt organizations, tax-exempt bonds, multiple refundable tax credits and other specialized programs. The IRS's organizational structure closely resembles the private sector model of organizing around customers with similar needs. Four business units focus on unique groups of taxpayers: Wage and Investment, Small Business/Self-Employed, Large Business and International and Tax Exempt and Government Entities. Additionally, the IRS has other functional organizations that have direct interaction with taxpayers and tax preparers, as well as an operations support structure that supplies direction and guidance to the IRS’s administrative functions. Commissioner Werfel stopped for a group photo with Rhode Island Taxpayer Advocate Service employees. IRS FY 2023 | AGENCY FINANCIAL REPORT An important part of Commissioner Werfel's visits was to hear directly from employees about their ideas and concerns. 3 Management's Discussion and Analysis IRS Organizational Structure Taxpayer Experience Office IRS Independent Office of Appeals 4 National Taxpayer Advocate Commissioner Office of the Chief Counsel Chief of Staff Communications and Liaison Equity, Diversity & Inclusion Operations Support Services and Enforcement Enterprise Digitalization and Case Management Research, Applied Analytics and Statistics Criminal Investigation Wage and Investment Division Information Technology Human Capital Office Return Preparer Office Large Business and International Division Facilities Management and Security Services Office of the Chief Financial Officer Office of Professional Responsibility Small Business SelfEmployed Division Office of the Chief Procurement Officer Privacy, Governmental Liaison and Disclosure Office of Online Services Tax Exempt and Government Entities Division Lifting Communities Up Office of the Chief Risk Officer Enterprise Digitalization and Case Management Whistleblower Office IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis PERFORMANCE OVERVIEW IRS Strategic Framework The IRA was signed into law on August 16, 2022, giving the IRS a historic opportunity to transform tax administration and services provided to taxpayers and tax professionals. The long-term funding provided by the IRA will allow the IRS to improve services to the public; enable needed technology modernization; provide employees with new tools, skills and capabilities; and effectively enforce the tax laws. Shortly after enactment, Treasury and the IRS developed an IRS IRA Strategic Operating Plan FY 2023-2031 (www.irs.gov/about-irs/ irs-inflation-reduction-act-strategic-operatingplan). The SOP envisions a modernized IRS that is focused on the customer experience, prefers digital to manual processes and prioritizes compliance efforts that focus on complex tax issues and high-income individuals, complex partnerships and large corporations. It outlines how the IRS will deliver transformational change for taxpayers. Each IRS organization aligns its programs and performance within this framework, and this SOP will serve as a guide for decision-making by IRS leadership and project managers. It also supports key government-wide strategic priorities from the President’s Management Agenda including strengthening the federal workforce, delivering an excellent customer experience, enhancing clean energy efforts, increasing equity and supporting underserved communities. Internal Revenue Service Inflation Reduction Act Strategic Operating Plan FY2023 – 2031 While the SOP supersedes the IRS Strategic Plan FY 2022–2026, it is based in part on insights from that strategic plan and other planning efforts. The IRA gives the IRS the resources to turn those plans to improve the way it serves taxpayers into reality. IRS FY 2023 | AGENCY FINANCIAL REPORT 5 Management's Discussion and Analysis The SOP is structured to achieve five objectives which will be accomplished through a series of initiatives and projects aligned as such: Strategic Objective 1 Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible. Strategic Objective 2 Quickly resolve taxpayer issues when they arise. Strategic Objective 3 Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap. Strategic Objective 4 Deliver cutting-edge technology, data and analytics to operate more effectively. Strategic Objective 5 Attract, retain and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers. The IRS Transformation and Strategy Office Advisory Committee was established in January 2023 as the decision-making body for IRS transformation. A Chief Transformation and Strategy Officer joined the IRS in July 2023 to provide leadership for this effort. Change management practices are built into all initiatives and project plans incorporate measures of success, as appropriate. Champions are appointed to lead ongoing projects throughout the IRS to achieve, communicate and monitor the IRS’s cultural goals. The Transformation and Strategy Office monitors risks for all SOP objectives. Many of these risks are shared across the 5 objectives and 42 initiatives and are monitored from an enterprise level. This includes the risk of insufficient management and functional support, such as hiring and procurement capacity. There are functional risks associated with the interdependencies of initiatives, where delays in one initiative could impact the ability of another initiative to commence work. Additionally, there is a funding risk, as Congress considers cutting IRA funding or reducing annual appropriations due to the IRA funding. If the IRS does not receive funding needed to maintain base operations, transformation will be in jeopardy. Without adequate discretionary base funding, IRA funding will be needed to support normal operations, or the IRS will not be able to deliver all improved services nor transform its information technology as outlined in the SOP. The Transformation and Strategy Office will continue to track and monitor all risks, and take corrective action where needed to ensure organization-wide success. As Treasury’s largest bureau, the IRS plays a critical role in advancing the Treasury Strategic Plan 2022–2026 (home.treasury.gov/about/budget-financial-reporting-planning-and-performance/agencyfinancial-report) by co-leading the “Tax Policy and Administration” strategic objective and supporting nine other objectives across all five Treasury goals. 6 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Major Programs The IRS demonstrates responsible stewardship over taxpayer dollars by aligning major programs and performance measures with budgetary resources as appropriated by Congress. The SOP consists of five objectives. Objectives 1 through 4 align to the major programs in the IRS Statement of Net Cost and the IRS distributes the costs associated with Objective 5 across the major programs. Funding for major programs includes annual appropriations and IRA. SOP Objectives and Initiatives Strategic Objective 1: Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible. 1.1 Improve the availability and accessibility of customer service. 1.2 Expand digital services and digitalization. 1.3 Ensure employees have the right tools. 1.4 Improve self-service options. 1.5 Explore direct file. 1.6 Enable taxpayers to access their data. 1.7 Provide earlier legal certainty. 1.8 Deliver proactive alerts. 1.9 Help taxpayers understand and claim appropriate credits and deductions. 1.10 Make payments easy. 1.11 Build status-tracking tools for taxpayers. 1.12 Streamline multichannel customer assistance. Major Program: Service to the Taxpayer IRS FY 2023 | AGENCY FINANCIAL REPORT Total Program Cost: $5,949 million 7 Management's Discussion and Analysis Strategic Objective 2: Quickly resolve taxpayer issues when they arise.* 2.1 Identify issues during filing. 2.2 Deliver early and appropriate treatments for issues. 2.3 Develop taxpayer-centric notices. 2.4 Expand tax certainty and issue resolution programs. 2.5 Offer proactive debt resolution. 2.6 Expand engagement with non-filers. 2.7 Use improved data and analytics to tailor timely collections contacts. Major Program: Enforcement of Tax Legislation Total Program Cost: Objective 2 is combined with Objective 3 Strategic Objective 3: Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.* 3.1 Employ centralized, analytics-driven, risk-based methods to aid in the selection of compliance cases. 3.2 Expand enforcement for large corporations. 3.3 Expand enforcement for large partnerships. 3.4 Expand enforcement for high-income and high-wealth individuals. 3.5 Expand enforcement in areas where audit coverage has declined to levels that erode voluntary compliance. 3.6 Pursue appropriate enforcement for complex, high-risk and emerging issues. 3.7 Promote fairness in enforcement activities. Major Program: Enforcement of Tax Legislation * Total Program Cost: $10,916 million The total costs of Objectives 2 and 3 align to Major Program, Enforcement of Tax Legislation. 8 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Strategic Objective 4: Deliver cutting-edge technology, data and analytics to operate more effectively. 4.1 Transform core account data and processing. 4.2 Accelerate technology delivery. 4.3 Improve technology operations. 4.4 Continue to ensure data security. 4.5 Maximize data utility. 4.6 Apply enhanced analytics capabilities to improve tax administration. 4.7 Strategically use data to improve tax administration. 4.8 Partner to expand insights. Major Program: Transformation of Business Systems Total Program Cost: $943 million Strategic Objective 5: Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.** 5.1 Redesign hiring and onboarding. 5.2 Attract a talented and diverse workforce. 5.3 Improve the employee experience. 5.4 Help employees grow and develop. 5.5 Develop a data-savvy workforce. 5.6 Elevate workforce planning strategy. 5.7 Improve organizational structures and governance. 5.8 Build a culture of service and continuous improvement. ** The IRS distributes costs associated with Objective 5 initiatives among Objectives 1, 2, 3 and 4. IRS FY 2023 | AGENCY FINANCIAL REPORT 9 Management's Discussion and Analysis IRS Performance Measurement Reporting Process The IRS Congressional Budget Justification & Annual Performance Report and Plan (www.irs.gov/ about-irs/budget-documents), approved by the IRS Commissioner and Deputy Commissioners, includes key performance measures, with annual and outyear targets and key performance indicators, which are tracked without targets when initially created, in the absence of historical data, and when there’s a lessened degree of control over the measurable value. Targets are not required for indicators. The IRS uses these key metrics to assess progress in achieving the success in Fiscal Year major program areas and reports its performance data in the IRS Congressional Budget Justification & Annual Performance Report and Congressional Plan. All performance ratings in the FY 2023 Budget Justification Agency Financial Report are considered & preliminary. The IRS will publish its final ratings Annual Performance in the FY 2025 IRS Congressional Budget Justification & Annual Performance Report and Report and Plan Plan, which is generally published after the State of the Union Address. 2024 Summary of FY 2023 Results: The IRS has a total of 28 key performance measures and key performance indicators that support IRS major program areas, of which 19 are key performance measures with targets and 9 are key performance indicators. The IRS exceeded the FY 2023 target for 14 out of 19 key perforIRS-i mance measures and 3 out of 6 key performance indicators are trending in the desired direction compared to the prior year result. Results were not available for 3 key performance indicators; those results will appear in the FY 2025 IRS Congressional Budget Justification & Annual Performance Report and Plan. Publication 4450 (Rev. 2-2023) Catalog Number 39720Z Department of the Treasury Internal Revenue Service www.irs.gov Refer to the Verification and Validation of Performance Data information at the end of this performance overview section for details on the IRS’s approach to verification and validation of performance data and performance measurement reporting. 10 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Strategic Objective 1: Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible. Major Program | Service to the Taxpayer Filing taxes can be time-consuming and difficult; however, the IRS strives to meet demands for taxpayer services. Taxpayers want a more seamless filing process, similar to the services available in other sectors. The IRS is committed to significantly improving services by providing taxpayers, including individuals, businesses and tax professionals, with tools, information and assistance to make it easier for them to comply. In FY 2023, the IRS continued efforts to improve the availability and accessibility of customer service by holding Taxpayer Experience Days (opening Taxpayer Assistance Centers on select Saturdays) during the filing season and in May for walk-in services. The IRS conducted outreach events in underserved and rural communities to provide direct assistance to taxpayers who do not have convenient access to a live assistor. The IRS continued to expand digital services and digitalization during FY 2023 using the new Digital Enablement Platform and launching a pilot for enhanced scanning of key tax forms. The IRS completed both a full implementation plan for Online Account enhancements developed for individual, business and tax professional online accounts and worked to expand taxpayers’ ability to schedule payments, cancel scheduled payments and save bank information. IRS FY 2023 | AGENCY FINANCIAL REPORT The IRS streamlined several customer assistance options by building and implementing new options that allow taxpayers to communicate with the IRS across different channels, including enhanced options to submit documents online. The IRS began developing authentication requirements for online-to-phone cross-channel capability as well as developing authorization and data policy for business entities to support Business Account access capability for Business Online Account access and activity. The IRS has undertaken efforts to expand identity-proofing, make more services available to authenticated taxpayers and expand access for certain types of taxpayers, such as Individual Tax Identification Number holders and international taxpayers. This includes expanding 24/7 customer support in more than 240 languages for the video chat verification option. While the IRS continues to make changes to improve the availability and accessibility of customer service, taxpayers saw immediate improvements during the 2023 tax season. The level of service for the filing season was 87%, including an average taxpayer telephone wait time of approximately three minutes. This was a big improvement compared to 28 minutes in tax season 2022. 11 Management's Discussion and Analysis Objective 1 Performance Results The IRS met or exceeded 5 out of 6 of its Objective 1 key performance measures and 1 out of 3 of the key performance indicators are trending in the desired direction compared to the prior year result. TABLE 1: Summary of key performance results for Fiscal Years 2019–2023 Key Performance Measures 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual Customer Service Representative Level of Service1 65.4% 53.1% 18.5% 17.4% 60.0% 51.8% Customer Accuracy – Tax Law (Phones)2 91.6% 91.0% 92.8% 92.0% 87.0% 91.4% Customer Accuracy – Accounts (Phones)3 94.3% 93.5% 93.0% 91.8% 87.0% 89.2% Timeliness of Critical Individual Filing Season Tax Products to the Public4 92.6% 78.4% 92.0% 96.4% 83.0% 96.4% Timeliness of Critical TE/GE & Business Tax Products to the Public5 96.1% 96.0% 92.9% 96.0% 85.0% 86.5% Enterprise Self-Assistance Participation Rate6 85.4% 90.6% 92.3% 93.9% 94.0% 94.2% Target met, or indicator trending in the desired direction compared to the prior year result. Target not met, or indicator not trending in the desired direction compared to the prior year result. ** Historical data provided for comparative purpose. ** Results not available and are not included in the total Key Performance Indicators count above. Results will appear in the IRS FY 2025 Congressional Budget Justification & Annual Performance Report and Plan. The number of toll-free callers that either speak to a Customer Service Representative or receive informational messages divided by the total number of attempted calls. From October 1, 2022, through September 30, 2023, Customer Service Representative Level of Service was 51.8%, which was 13.6% below the target of 60%, and an increase of 197.8% over the prior year actual level of service of 17.4%. The level of service for the filing season (from January 23 through April 21) was 87%. The IRS allocated employees in October through December, from accounts management that answer phone calls, to assist in processing correspon­dence. This resulted in delivering a lower level of service. Customer service representatives answered around 17.9 million calls in FY 2023 while accounts management demand fell 52.3% to 38.8 million, from 81.3 million in FY 2022. Average wait time was 10.1 minutes, which was less than half the average from the prior fiscal year of 26.0 minutes. In FY 2023, around 8.5 million taxpayers were offered a callback and 64% accepted. This resulted in around 2.4 million hours saved for the taxpayer, providing a better experience. To meet service goals, the IRS will continue to monitor demand in real time and the resources allocated down to the half hour enabling us to regularly shift people between telephones and paper. 2 The percentage of correct answers given by a live assistor on toll-free tax law inquiries. 3 The percentage of correct answers given by a live assistor on toll-free account inquiries. 4 The percentage of critical individual filing season tax products available to the public seven calendar days before the official IRS start of the individual filing season. 5 The percentage of critical Tax Exempt and Government Entities and business tax products available to the public seven calendar days before the official IRS start of the individual filing season. 6 The percentage of taxpayer assistance requests resolved using self-assisted automated services. 1 12 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Key Performance Measures 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual Key Performance Indicators 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual Taxpayers Satisfied with the IRS7 73 74 70 69 Indicator N/A** Total Ending Inventory (Thousands)*,8 1,100 1,100 4,100 2,156 Indicator 2,923 Percent of Closures to Receipts* 92.7% 99.6% 71.9% 116.4% Indicator 93.8% Level of Service(A)* 79.2% 71.6% 38.2% 39.3% Indicator 66.4% ,9 ,10 Target met, or indicator trending in the desired direction compared to the prior year result. Target not met, or indicator not trending in the desired direction compared to the prior year result. ** Historical data provided for comparative purpose. ** Results not available and are not included in the total Key Performance Indicators count above. Results will appear in the IRS FY 2025 Congressional Budget Justification & Annual Performance Report and Plan. The score of taxpayers satisfied with the IRS according to the American Customer Satisfaction Index survey. The All-Individual Tax Filer score is calculated from separate American Customer Satisfaction Index Individual Paper Filer and Electronic Filer Customer Satisfaction Index Scores. Based on a 100-point scale. 8 The total number of accounts management and correspondence work to be processed in inventory. Ending correspondence inventory was higher in FY 2023 mainly due to an increase in amended business returns received. This indicator was added to performance reporting in FY 2022. 9 The number of adjustment cases closed compared to the number received. This indicator was added to performance reporting in FY 2022. 10 The relative success rate of taxpayers that call seeking assistance and receive a response to their inquiry by an assistor or through automated responses divided by the total number of attempted calls. This indicator was added to performance reporting in FY 2023. 7 During a Community Assistance Visit event, a cross-functional group of employees in Hastings, Nebraska helped taxpayers with their concerns. IRS FY 2023 | AGENCY FINANCIAL REPORT 13 Customer callback option now available for up to 95% of callers seeking live assistance In July, the IRS expanded the availability of its customer callback option to cover up to 95% of callers seeking live assistance. Expanding customer callback is one of several improvements to taxpayer service outlined in the IRS’s SOP. The main goal of the customer callback feature is to enhance the taxpayer’s experience with the IRS by giving them more options when call volumes are high. The long road to expanding customer callback Customer callback was first offered by the IRS in January 2019. At that time, it was available on one toll-free application. In the subsequent years, the option was expanded incrementally. By January 2023, the customer callback option had been expanded to cover 43 toll-free applications which represented 75% of the live assistance volume. The agency also had an enterprise solution in place to replace the pilot program. “This was a huge effort that required tremendous collaboration and coordination across the IRS. The team’s efforts resulted in the delivery of the customer callback feature a year ahead of schedule,” shares Wage and Investment Commissioner Ken Corbin. Stock Imagery, Luis Alvarez, gettyimages The expansion included adding the customer callback option to an additional 73 toll-free applications, bringing the total number of applications with an option for customer callback to 116. Applications are used to route taxpayers to destinations for service on specific topics. “From a technical perspective, we’ve turned a corner on what we can do to improve the experience of calling the IRS,” said Vaishali Narkhede, the acting executive lead for the live assistance program in Information Technology. “I’m incredibly proud of the team and hopeful that the expansion substantially reduces the need for repeat calls to the IRS.” Since January 2019 through the end of July 2023, taxpayers have saved more than 8.6 million hours by not being on hold. The customer satisfaction survey results state that more than 85% of the taxpayer’s surveyed said they were satisfied with their callback experience. On the horizon: more technology improvements to enhance customer service Based on data and trends in customer preferences,1 the IRS continues to invest in technology improvements that will enhance customer service. This includes technology investments that make it easier to pay your taxes over the phone, investments in digital options for communicating back-and-forth with the IRS across different channels, as well as investments to enhance the tools people use to track the status of their refund and/or amended return. 1 Looking ahead, the IRS plans to add and enhance the conversational voicebots available on toll-free lines, as well as adding chatbots that make it easier for people to get the information they need without needing to wait on the availability of customer service representatives. This was a huge effort that required tremendous collaboration and coordination across the IRS. The team’s efforts resulted in the delivery of the customer callback feature a year ahead of schedule. –Ken Corbin Wage and Investment Commissioner Most people say they initiate contact with the IRS through the agency’s website and toll-free numbers, according to results from the 2021 Comprehensive Taxpayer Attitude Survey. In addition, most taxpayers believe the IRS should focus its efforts on improving in-person and phone call assistance to taxpayers. Management's Discussion and Analysis Strategic Objective 2: Quickly resolve taxpayer issues when they arise. Major Program | Enforcement of Tax Legislation Millions of taxpayers make simple mistakes when completing their returns, and millions fail to properly claim tax incentives for which they are eligible. Resolving these and other simple mistakes can be a prolonged process. Through investments in data management and taxpayer communications tools, the IRS will work to resolve these issues faster and prevent their recurrence. The initiatives that support this objective will leverage a multichannel outreach approach. In FY 2023, Online Account for individuals provided 19 specific notices that taxpayers are able to view, print or download. It also allows some taxpayers to respond to certain notices online and quickly resolve issues using a secure two-way communication channel. These taxpayers can chat with IRS employees, view and send messages and receive and upload applicable documents via their online account. Also, Duplicate Dependent notices are sent to taxpayers when a dependent on their tax return was also claimed on another return. The notice provides them with information on accurately claiming dependents and immediate actions to take if a dependent was claimed in error. In addition, the IRS continued its efforts to increase awareness of tax certainty programs and their benefits to taxpayers with complex issues. The IRS published an Interim Guidance Memorandum setting forth guidance for considering Advance Pricing Agreement submissions from taxpayers. As part of its initiative to offer proactive debt resolution, the IRS updated the self-service payment plan functionality in Online Account for individual taxpayers. The IRS worked to expand engagement with non-filers by developing notices for IRS core tax processing systems for the Case Creation Non-Filer Identification Process and to launch a pilot program to address new non-filers. Using IRS Online Account on IRS.gov allows you to easily do several things with your taxpayer account. Find out more by visiting: www.irs.gov/account. View this and other helpful videos on IRS's Youtube Channel, IRSVideos. 16 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Objective 2 Performance Results The IRS met the target of its Objective 2 key performance measure and 2 out of 2 of the key performance indicators are trending in the desired direction compared to the prior year result. TABLE 2: Summary of key performance results for Fiscal Years 2019–2023 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual 41.3% 34.9% 41.2% 38.3% 33.4% 34.9% 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual 60.9% 66.3% 66.0% 68.0% Indicator 72.0% Time to Resolve Compliance Issue After Filing* 469 491 484 404 Indicator 372 Repeat Noncompliance Rate*,4 31.4% 35.6% 30.7% 28.1% Indicator N/A** Cost to Collect $1005 $0.33 $0.35 $0.33 $0.29 Indicator N/A** Key Performance Measures Collection Coverage1 Key Performance Indicators Time to Start Compliance Resolution*,2 ,3 Target met, or indicator trending in the desired direction compared to the prior year result. Target not met, or indicator not trending in the desired direction compared to the prior year result. ** Historical data provided for comparative purpose. ** Results not available and are not included in the total Key Performance Indicators count above. Results will appear in the IRS FY 2025 Congressional Budget Justification & Annual Performance Report and Plan. The volume of collection work disposed compared to the volume of collection work available. The percentage of all individual income tax enforcement cases started within six months of the return posting date. This indicator was added to performance reporting in FY 2020. 3 The median time it takes to close all individual income tax enforcement cases in days (excluding disaster, bankruptcy and Tax Equity and Fiscal Responsibility Act cases for exam and collection cases that are not closed as full paid) starting from filing date. This indicator was added to performance reporting in FY 2020. 4 The percentage of individual taxpayers in a fiscal year with noncompliance two years after the initial tax year that contains a filing, payment or reporting compliance issue, compared to total taxpayers. This indicator was added to performance reporting in FY 2020. 5 The cost of collecting $100 is computed as total operating costs divided by gross collection multiplied by 100. 1 2 IRS FY 2023 | AGENCY FINANCIAL REPORT 17 The IRS continues reopening Taxpayer Assistance Centers; 47 reopened following IRA funding As part of an expanding effort to improve service, the IRS continued reopening Taxpayer Assistance Centers across the country while also starting a special series of events, such as Community Assistance Visits, to help taxpayers located in areas not close to the IRS's in-person offices. In these new Community Assistance Visits, the IRS sets up a temporary Taxpayer Assistance Center to give taxpayers from underserved areas an opportunity to meet face-to-face with IRS assistors. This is part of a larger effort underway to transform the IRS and improve service to taxpayers as part of the new SOP with funding made available through the IRA. The IRS conducted events in Michigan, Nebraska, Idaho, Alaska, Hawaii, Oregon and Puerto Rico. “A key part of the IRS transformation effort is to get taxpayers the help they need,” said IRS Commissioner Danny Werfel. “While an important part of this involves providing improved online tools and services, in-person assistance is a vital piece that the IRS cannot overlook. We continue to add staff and reopen previously closed offices. But to help people farther away, these special community visits are designed to get into places where IRS offices are a long distance away or are not convenient for some taxpayers. We want to do more to help taxpayers, and the IRS is putting our additional funding to work through important projects like this.” The IRA provided the IRS with long-term funding for the agency to transform its operations and improve taxpayer service, enforcement and technology. Projects like the Community Assistance Visits represent part of the SOP, the blueprint for the agency’s transformation work. For years, observers have noted that IRS Taxpayer Assistance Centers are limited in number or far away from many people who need in-person help or who don't have access to online tools. To address this, the IRS reopened 47 Taxpayer Assistance Centers in FY 2023; a list is provided. In addition, the IRS has hired more than 745 personnel to provide in-person assistance at Taxpayer Assistance Centers. This represents a 31% net increase in staffing compared to FY 2022, and IRS continues to hire to replace departing staff. Taxpayer Assistance Centers have served about 235,000 more taxpayers in FY 2023 than FY 2022, an 18% increase. IRS Taxpayer Assistance Centers Number of Taxpayer Assistance Centers 1–5 6–10 11–20 21–30 The IRS reopened 47 Taxpayer Assistance Centers in FY 2023. • Monroe, LA • Parkersburg, WV • Overland Park, KS • York, PA • Bend, OR • West Nyack, NY • Topeka, KS • Greenville, MS • Binghamton, NY • Utica, NY • Trenton, NJ • Casper, WY • Fayetteville, AR • Bellingham, WA • Fort Myers, FL • Hickory, NC • Augusta, ME • Grand Junction, CO • Rome, GA • Jackson, TN • Rockford, IL • Plantation, FL • Joplin, MO • Hagerstown, MD • Panama City, FL • Colorado Springs, CO • DASE (Guaynabo), PR • Cranberry Township, PA • Glendale, AZ • Johnson City, TN • Peoria, IL • Cranberry Township, PA • Prestonsburg, KY • Huntington, WV • La Crosse, WI • Vienna, VA • Lincoln, NE • Charlottesville, VA • Greensboro, NC • La Vale, MD • Queensbury, NY • Bloomington, IL • Altoona, PA • Santa Fe, NM • Ponce, PR • Fredericksburg, VA • Longview, TX Management's Discussion and Analysis Strategic Objective 3: Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap. Major Program | Enforcement of Tax Legislation Even with improved taxpayer service, some taxpayers will not comply. The rising breadth and complexity of tax administration, coupled with the sophisticated ways that some taxpayers attempt to evade tax, have outpaced the IRS’s resources and ability to monitor compliance and close the gap between taxes owed and collected. The IRS will improve efforts to help ensure that the proper amount of tax is paid and to promote future compliance. Pursuant to Treasury’s directive, small businesses and households earning $400,000 or less will not see audit rates increase relative to historical levels. The IRS will increase its focus on segments 20 of taxpayers with complex issues and complex returns where audit rates are minimal today, such as those related to large partnerships, large corporations and high-income and high-wealth individuals. Modern data analysis tools can greatly streamline these efforts, and the technology investments from Objective 4 will enable this work. Barriers in the hiring process have led to delays in the hiring and onboarding of this first wave of specialists. The IRS is monitoring delays in this area and leveraging areas where the process can be expedited when and where possible. IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Objective 3 Performance Results The IRS met or exceeded 4 out of 6 of its Objective 3 key performance measures. TABLE 3: Summary of key performance results for Fiscal Years 2019–2023 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual Examination Efficiency – Individual1 109 76 108 101 92 103 Exam Starts – High Income Individuals*,2 2,108 2,693 2,227 3,625 3,817 4,326 Exam Starts – Partnerships*,3 5,823 4,106 4,327 3,155 8,852 6,709 Exam Starts – Large Corporations (Assets >= $250M)*,4 2,009 1,700 1,490 1,365 1,121 1,400 Criminal Investigations Completed5 2,797 2,624 2,766 2,552 2,500 2,584 Conviction Rate6 91.2% 90.4% 89.4% 90.6% 92.0% 88.4% Key Performance Measures Target met, or indicator trending in the desired direction compared to the prior year result. Target not met, or indicator not trending in the desired direction compared to the prior year result. ** Historical data provided for comparative purpose. The sum of all individual 1040 returns closed by Small Business/Self-Employed, Wage and Investment, and Large Business and International (Field Exam and Correspondence Exam programs) divided by the total full-time equivalent expended in relation to those individual returns. 2 The number of examinations of individual returns started during the fiscal year with a total positive income of $10 million and above. This indicator was added to performance reporting in FY 2021. 3 The number of examinations of partnership returns started during the fiscal year. FY 2023 performance was 6,709, which was a 112% increase from FY 2022. Exam Starts – Partnerships finished below the target of 8,852 due to lower than expected training starts. Reduced training starts are the result of delayed phases of training and additional time given to trainees to start partnership returns. This indicator was added to performance reporting in FY 2021. 4 The number of examinations of large corporate returns started during the fiscal year reporting assets of $250 million and above. This indicator was added to performance reporting in FY 2021. 5 The total number of subject criminal investigations completed during the fiscal year, including those that resulted in prosecution recommendations to the Department of Justice as well as those discontinued due to a lack of prosecution potential. 6 The percent of adjudicated criminal cases that result in convictions. 1 IRS FY 2023 | AGENCY FINANCIAL REPORT 21 Nearly 12,000 tax pros attend 2023 IRS Nationwide Tax Forums The 2023 IRS Nationwide Tax Forums kicked off on July 10, in-person for the first time since 2019, drawing nearly 12,000 paid attendees. The forums – in New Orleans, Atlanta, Washington, D.C., San Diego and Orlando – featured continuing education seminars, focus groups, an exhibition hall, a case resolution room and multiple special events. Each forum offered 42 live presentations over three days – including four seminars presented in both English and Spanish and a keynote address by senior IRS leaders including Commissioner Danny Werfel. Attendees could earn up to 18 continuing education credits per city. The continuing education agenda included hot topics in tax administration: • IRS transformation • 1099-K reporting changes • Collection notices • Cybersecurity • Digital assets • Ethics for tax pros New additions to this year’s program included four special events. More than 3,000 attendees participated in these interactive sessions: • Tax Pro & Entrepreneur: Unleashing Your Potential in the Tax Industry • The Written Information Security Plan • Townhall with the National Taxpayer Advocate • The Taxpayer Experience: Where It Stands Today and Where It’s Headed Meanwhile, the Exhibition Hall featured more than 90 different tax software, financial and business service providers. The Exhibition Hall also included the IRS Zone, with subject matter experts from the Taxpayer Experience Office, Online Services, Small Business/Self-Employed, Wage & Investment, Tax Exempt & Government Entities and Large Business & International. IRS hiring was a new feature at this year’s forums with Human Capital Office recruitment staff providing information on and interviewing attendees for positions across the IRS. Also in 2023, the forums launched a pilot outreach program for college-level accounting students, hosting 49 students and 10 faculty for a one-day “tax adventure” at 4 of the 5 forums in 2023. Students and faculty met with IRS executives, revenue agents and Human Capital Office hiring staff, attended seminars and visited the exhibition hall. Commissioner Werfel delivers the keynote address to a crowd gathered for the 2023 IRS Nationwide Tax Forum in Atlanta, GA. Management's Discussion and Analysis Strategic Objective 4: Deliver cutting-edge technology, data and analytics to operate more effectively. Major Program | Transformation of Business Systems Technology improvements at the IRS must always be driven by what will improve customer service and enforcement, and in a way that secures taxpayer information. The key dependency for many SOP initiatives is the modernization of the IRS’s core information technology infrastructure, which includes some of the oldest information systems in the federal government. Currently, the IRS cannot get the full value of its data because it does not standardize or store it in a single environment. Until the passage of the IRA, the IRS lacked the resources to bring its technology infrastructure into the current era, and the inability to plan for stable funding led to a start-and-stop approach that did not allow for sustained progress. IRA funding will enable the IRS to make dramatic improvements to its information technology infrastructure. The multi-year nature of the funding will allow the service to successfully plan and deliver. The IRS will design and deliver modern technology platforms that center around data and applications, with integrated protective and detective security controls. The IRS expanded the use of voicebot for taxpayers calling via authenticated Collection Services phone lines, making it easier for people to fulfill their tax obligations by phone and expanded service options for taxpayers through chat services. The IRS expanded secure messaging to Collection employees that allows taxpayers and their approved agents (powers of attorney) to communicate online with assigned revenue officers. The IRS also expanded digital services and digitalization when it delivered the 24 Information Returns Intake System, a free, modernized online portal, for businesses to electronically file Form 1099 series information returns, demonstrating the IRS’s commitment to finding useful and innovative ways of reducing paperwork for the business community and others. Moreover, taxpayers can now receive and respond to more notices online with the expanded use of the Document Upload Tool. Taxpayers or their tax professionals can use the Document Upload Tool to electronically upload documents rather than mailing them, helping reduce time and effort resolving tax issues. In addition, the IRS is working to ensure employees have the right tools. The IRS continued implementing a single desktop tool for IRS customer service agents to manage calls and chats as part of the “Agent Desktop Modernization” effort and deployed Enterprise Case Management Release 5 providing additional system functionality for various IRS organizations, enabling employees to work and resolve taxpayer issues more efficiently. The IRS launched another new public-facing program that allows taxpayers to report tax law violations by individuals or businesses through an online portal on IRS.gov. The IRS continued to enhance online self-service options for taxpayers by offering new expanded online account capabilities, such as enabling taxpayers to use their Online Account to create a long-term payment plan and to electronically file Form 1040-X, Amended U.S. Individual Income Tax Return. For the first time, taxpayers will have the ability to use direct deposit for all refunds. IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis In FY 2023, the IRS enhanced Vulnerability and Threat Management capabilities by delivering analytics tools that leverage machine learning to proactively identify and respond to emerging insider threats and fraudulent behavior. The IRS designed and implemented a new artificial intelligence capability that actively learns how to recognize fraud user behavior. Objective 4 Performance Results The IRS met or exceeded 3 out of 4 of its Objective 4 key performance measures. TABLE 4: Summary of key performance results for Fiscal Years 2019 – 2023 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual Rentable Square Feet per Person1 298 278 278 264 261 248 Percent of Aged Hardware2 31.0% 16.0% 9.3% 7.1% 20.0% 19.9% Percent of Major Information Technology Investments Within +/- 10% Cost Variance at the Investment Level3 88.9% 84.2% 94.1% 81.3% 90.0% 85.7% Percent of Major Information Technology Investments Within +/- 10% Schedule Variance at the Investment Level4 88.9% 94.7% 100.0% 87.5% 90.0% 92.8% Key Performance Measures Target met, or indicator trending in the desired direction compared to the prior year result. Target not met, or indicator not trending in the desired direction compared to the prior year result. ** Historical data provided for comparative purpose. The amount of rentable square feet the IRS maintains per person requiring space. This measure shows the percentage of all information technology hardware in operation that is past its useful life. 3 The number of major information technology investments within +/-10% variance between planned total cost and projected/actual cost within a fiscal year divided by the total number of major information technology investments in the fiscal year. Twelve of 14 major investments were within the cost variance threshold at the close of the 4th quarter. Authentication, Authorization and Access underspent due to applications that will be migrated after filing season 2024 instead of FY 2023. Integrated Data Retrieval System underspent due to a mid-year 2023 project that contributed to a very small variance. Underspent funds will be requested in FY 2024 to complete planned activities. IRS will continue to closely monitor cost reporting for investments in FY 2024 to improve current performance levels for this measure. 4 The number of major information technology investments within +/-10% variance between planned days and projected/actual days within a fiscal year divided by the total number of major information technology investments in the fiscal year. 1 2 IRS FY 2023 | AGENCY FINANCIAL REPORT 25 Secretary Yellen and Commissioner Werfel visit digital-intake scanning facility in Virginia Treasury Secretary Janet Yellen and Commissioner Danny Werfel visited a digitalintake scanning facility in McLean, VA to see technology improvements in action and announce an ambitious plan to dramatically reduce paper inside the IRS starting next year and into 2025. Yellen and Werfel highlighted developments on IRS progress toward the digitalization of paper tax returns and other documents. They noted that initiatives like this digital-intake effort serve as concrete examples of IRS accomplishing goals set forth in the SOP and funded by IRA. Yellen and Werfel toured and received a demonstration at the high-speed digital-intake site where cutting-edge technology is being used to scan paper documents as part of ongoing transformation efforts. In the first quarter of 2023, IRS scanned 80 times more paper returns than in all of 2022 and taxpayers were able to respond online to the 10 most common tax notices, Yellen noted. “We’ve made it easier and quicker for Americans to interact with the agency,” Yellen said. Yellen showcased another specific goal for IRS that will be achieved through IRA funding and expansion of customer service initiatives. “Today, we’re announcing that – by the next filing season – taxpayers will be able to digitally submit all correspondence, non-tax forms, and notice responses to the IRS,” said Yellen, who went on to note that taxpayers could still respond with paper correspondence at their own preference, and they, too, would benefit from this and other digitalization efforts. “For those taxpayers, by filing season 2025, the IRS is committing to digitally process 100% of tax and information returns that are submitted by paper – as well as half of all paper correspondence, non-tax forms, and notice responses. It will also digitalize historical documents that are currently in storage at the IRS.” We’ve made it easier and quicker for Americans to interact with the agency. –Janet Yellen Treasury Secretary Commissioner Werfel echoed Secretary Yellen’s comments regarding IRS achievements and future IRA-enabled commitments. “We’ve seen some major accomplishments, and many more are in progress as we work to modernize the way we serve taxpayers through improved technology, better service and fairer enforcement,” said Werfel. “But the Paperless Process Initiative we’re launching today stands out as a special one out of all these projects. It’s a very clear example of how with the right funding and the right priorities, we can relatively quickly move the IRS operations decades forward.” The Commissioner also took time to acknowledge the internal effort that make these achievements possible. “This has been a team effort,” he said. “I want to recognize the IRS’s Office of Enterprise Digitalization – who we fondly refer to inside the IRS as ‘Team Digi’ – as well as the various IRS operating divisions participating in the scanning initiative that has been a long time in the making,” Werfel said, highlighting contributions from Wage and Investment, Information Technology, Privacy, Governmental Liaison and Disclosure and Procurement. Werfel added, “There are many other parts of the IRS involved in this effort, including the Taxpayer Advocate Service. And a central part of this effort will be our new Transformation and Strategy Office, which is helping put in place scanning as part of the new SOP. I deeply appreciate all their hard work to get us where we are today and to keep us moving forward in this vital area.” The Digital Intake Center in McLean, VA employs cutting edge technology to quickly and accurately scan paper documents as part of IRS’s ongoing modernization efforts Others leading the charge to modernize the IRS through digital intake were themselves well aware of the impact of this demonstration and the importance of this ongoing effort. “It was an honor to represent #teamdigi and our many stakeholders in demonstrating one of several cutting-edge optical recognition advancements the IRS is harnessing to serve taxpayers better for Secretary Yellen,” said Harrison Smith, Project Director, Enterprise Digitalization Management. “I am very proud to be part of the team as we move forward with truly evolutionary step and am excited to see how things will continue to improve under the leadership of the Digitalization Initiative.” Management's Discussion and Analysis Strategic Objective 5: Attract, retain and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers. To offer taxpayers world-class service, the IRS will invest in attracting, developing and retaining exceptional talent. People are the heart of the IRS and its most valued asset. Despite momentous challenges including funding, technology and staffing constraints, IRS employees remain resilient and are vital to implementing the strategies and pursuing the priorities to meet all SOP objectives. The IRS will invest in and focus on people, equipping and empowering them with the technology, equipment, training and tools they need to be successful. The IRS will assess and reshape its workforce to meet future requirements, foster a positive employee experience and create a workplace that reflects the diversity of the taxpayers it serves and the unique talents of each person. IRS employees will have the modern tools and upgraded facilities they need to perform their best, collaborate effectively and build meaningful connections within and across teams. During FY 2023, the IRS developed an enterprisewide recruiting strategy for Revenue Agents and will expand the strategy to other priority positions as it works toward a unified, enterprise-wide recruiting strategy. Work is currently underway to improve the employee experience across the IRS, such as performing external scans on best practices of other federal agencies and options for supplementing existing awards programs. The IRS also performed work in areas targeted toward helping employees cultivate and grow, as well as developing a data-savvy workforce. This includes soliciting sprint teams to focus on curriculum development including simulation labs, leadership coaching, mentoring and avatars. Additionally, the IRS completed several facility inspections to create a safer working environment and began addressing major deficiencies in key working locations. Fiscal Year 2023, the STARS* Recruitment Team Stats 52,008 job seekers engaged 21 48 13,526 in-person events supported in tentative job offers sent different cities 61 virtual events held 20 events emphasized the Agency’s commitment to hiring Veterans, Individuals with Disabilities (Schedule A) and cultivating a diverse workforce *Strategic Talent Analytics & Recruitment Solutions office 28 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Objective 5 Performance Results The IRS met or exceeded 1 out of 2 of its Objective 5 key performance measures and the key performance indicator is not trending in the desired direction compared to the prior year result. TABLE 5: Summary of key performance results for Fiscal Years 2019 – 2023 Key Performance Measures Attrition Rate1 Hiring Cycle Time* ,2 Key Performance Indicators Employee Engagement Index3 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual 7.31% 6.15% 7.52% 9.72% 7.97% 8.43% 117.6 119.5 98.6 80.63 80 77.14 2019 Actual 2020 Actual 2021 Actual 2022 Actual 2023 Target 2023 Actual 68.6% 74.2% 73.5% 73.1% Indicator 72.9% Target met, or indicator trending in the desired direction compared to the prior year result. Target not met, or indicator not trending in the desired direction compared to the prior year result. ** Historical data provided for comparative purpose. Attrition Rate is the total number of full-time permanent employees that left the IRS during the fiscal year divided by the number of full-time permanent employees on board at the beginning of the fiscal year plus the number of full-time permanent new hires. The attrition rate was higher than projected as a result of resignations, mostly customer service representatives during and after initial technical training. 2 Hiring Cycle Time is the number of days between the date a hiring request is approved (or a certificate is issued) to the enter on duty date. This measure was added to performance reporting in FY 2019. 3 The Office of Personnel Management Employee Engagement Index is a measure of the conditions conducive to engagement. The index consists of 15 items grouped into three subindices: Leaders Lead, Supervisors, and Intrinsic Work Experience. The Office of Personnel Management measures this government-wide. The change in the IRS Employee Engagement Index from the prior year is not statistically significant and remained above the government-wide average of 71.7%. 1 IRS FY 2023 | AGENCY FINANCIAL REPORT 29 Management's Discussion and Analysis Verification and Validation of Performance Data The IRS requires complete, accurate and reliable performance data to assess progress toward its strategic objectives and program outcomes to make good management decisions. The IRS's approach to verification and validation of performance data to improve accuracy and reliability is based upon the following: 1. The IRS reviews performance measures through its annual performance assessment process with Treasury. This assessment includes reviewing the extent to which currently reported performance measures support the strategic plan and priorities and identifying or developing new performance measures to fill any gaps. 2. IRS business units use a standard template to document detailed information for each performance measure. The IRS includes these measure templates in its comprehensive data dictionary, which it maintains corporately and updates annually. For each measure, the data dictionary includes information including, but not limited to: • Definition • Source of the data • Business unit • Data limitations • Responsible Official • Management controls • Formula/methodology for computation 3. The Responsible Official for the measure is responsible for assessing the completeness, consistency, timeliness and quality of the data, following the documented procedures for gathering the data and ensuring management controls are in place. The Heads of Office are accountable for their performance results. These positions vary by business unit. 4. The CFO's Strategic Planning office reviews quarterly and year-end performance measure results before sharing the results with the Senior Executive Team and/or publishing them in Treasury and IRS documents. The Strategic Planning office also independently reviews the performance measure targets and accompanying documentation to ensure the targets reasonably reflect allocated funding. If anomalies occur, the Strategic Planning office informs the business unit, which makes any necessary adjustments. Leadership reviews all target adjustments as part of the budget development and review process. 5. As part of managing the portfolio of enterprise performance measures, the Strategic Planning office conducts ad-hoc meetings with business units to discuss topics such as: oversight, responsibilities of ownership, guidance on measurement and reporting and organizational change. 30 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis 6. At the end of each fiscal year, the business units who are involved in the collection and reporting of these measures receive a notification from the Strategic Planning office, reminding them of their responsibility for: • Ensuring the quality and accuracy of the performance data, • Reviewing and following Internal Revenue Manual guidelines when proposing new and modifying existing measures and • Ensuring there are sufficient controls in place for proper and accurate reporting of their performance results. These procedures help to provide assurances that the performance data and internal controls reported by the IRS are sufficiently complete, accurate and reliable. Detailed guidance on the appropriate use and application of performance information appears in Internal Revenue Manual 1.5.1: The IRS Balanced Performance Measurement System (www.irs.gov/ irm/part1/irm_01-005-001). IRS FY 2023 | AGENCY FINANCIAL REPORT 31 Management's Discussion and Analysis ENTERPRISE RISK MANAGEMENT In compliance with the Office of Management and Budget Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control, the IRS conducts an annual Enterprise Risk Assessment and develops an Enterprise Risk Profile. The Enterprise Risk Profile articulates the IRS’s top risks to achieving its strategic objectives. The annual Enterprise Risk Assessment process includes internal and external environmental scanning activities and a comprehensive aggregation and analysis of business unit risks. Over the last 12 months, the IRS has seen its risk environment transformed. From the passage of the IRA, to emerging challenges and opportunities implementing SOP initiatives, the only guarantee is that the IRS will continue to face new and evolving risks to its mission. Existing challenges remain as the IRS works toward increasing and training enforcement staff, modernizing information technology, tackling a rapidly evolving fraud risk environment and handling increased insider risk complexities. Risk is about uncertainty, and while significant progress has been made in many areas, including many of the risks below, the IRS’s challenge lies in maintaining that positive trajectory in an uncertain future. The use of emerging technologies will provide opportunities for the IRS to improve and enhance operations, while also posing risks to security posture for fraud, cyber and data. Additionally, the shift from labor shortages to challenges surrounding recruiting and onboarding new personnel, including contractors, as well as providing effective oversight, has shifted the nature of several risks to achieving the IRS's mission. Understanding all of these intersecting risks and opportunities, the top six IRS enterprise risks over the next 12-18 months are: • Data Security: The risk that an inability to protect sensitive data from unauthorized access, disclosure, use, modification, or destruction may result in exposure of taxpayer or other sensitive data, potentially negatively impacting public trust. • Impact and Implementation of Legislation and Other Requirements: The risk that failure to timely and effectively implement an increasing number of complex multi-year legislative and non-statutory requirements, including increased audit activities, may adversely impact the ability to fulfill core responsibilities and commitments to modernize technology, enhance service delivery and more effectively enforce the tax law, ultimately eroding trust and confidence in the IRS. • Information Technology Modernization, Operations, Support and Funding Levels: The risks centered around Information Technology systems maintaining continuity (Operations and Maintenance funding), improving capabilities (Modernization), reducing aged hardware and software and strengthening cybersecurity protections that may expose them to threats and outages reducing efficiency and effectiveness of IRS operations, ultimately limiting the IRS from performing its core mission. 32 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis • Critical Staffing Challenges: The risk that challenges with hiring and backfilling employees, including those with specialized skills and expertise, coupled with increased attrition and challenges to onboard new employees, may result in critical business failures, diminished service to taxpayers, loss of institutional knowledge, dependence on contractors and a lack of resilience to events impacting employees' ability to work. • Adverse Impact of Reduced Enforcement on Compliance: The risk that reduced enforcement activities may adversely impact compliance, erode confidence in the tax administration system and contribute to the tax gap. • Cybersecurity: The risk that the increased complexity and sophistication of cyber threats on computer systems, networks, and digital assets from cyber-attacks including insider threats, social engineering and unauthorized access to sensitive information, results in data loss, refund fraud, identity theft, ransomware, loss of trust or denial of service. IRS FY 2023 | AGENCY FINANCIAL REPORT 33 Management's Discussion and Analysis ANALYSIS OF FINANCIAL STATEMENTS Financial Management Highlights The financial statements are prepared to report the financial position and results of operations, pursuant to the requirements of 31 U.S. Code Section 3515(b). The statements are prepared from records of federal entities in accordance with U.S. generally accepted accounting principles and the formats prescribed by the Office of Management and Budget. Reports used to monitor and control budgetary resources are prepared from the same records. Users of the statements are advised that the statements are for a component of the U.S. government. The IRS is responsible for the administration of tax laws and the custodial collections of taxes for the U.S. government. The financial management activities that support the responsibilities of the IRS are divided into two distinct account categories: administrative and custodial. Administrative accounts are included as appropriations and offsetting collections in the Statements of Budgetary Resources. These resources are also reflected as assets, liabilities, revenues, expenses, and ultimately the net position of the IRS. Custodial accounts include activity in support of tax collections. The IRS collects the majority of receipts for the U.S. government. These receipts are accounted for in designated custodial accounts as presented on the Statements of Custodial Activity. Custodial accounts are also included in Fund Balance with Treasury, Federal Taxes Receivable, Net and Federal Tax Refunds Payable. Financial Statement Overview In FY 2022, the IRS received $79,411 million in supplemental funding through the IRA. This funding is available through the end of FY 2031. IRA obligations incurred total $3,396 million and $106 million in FY 2023 and FY 2022, respectively, with $74,520 million remaining unobligated to carry forward into FY 2024. The Fiscal Responsibility Act of 2023 rescinded $1,389 million of IRA funding. IRA unobligated balances at the end of FY 2023 are broken out as follows: Taxpayer Services – $2,292 million, Enforcement – $43,949 million, Business Systems Modernization – $3,984 million, Operations Support – $23,792 million, Energy Security – $500 million and Direct E-File Taskforce – $3 million. The following financial statement analysis provides an overview of the IRS’s financial position and results of operations with an emphasis on significant variations in financial statement line items. Complete audited financial statements with accompanying notes, including the independent auditor’s report, are presented in the Financial Section of this report. In addition, Note 21. COVID-19 Activity and Note 22. Inflation Reduction Act provide information for budgetary resources, obligations incurred, the remaining available budgetary resources and specific note disclosure data related to IRS supplemental appropriations for FY 2023 and FY 2022. 34 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Financial Statement Analysis Analysis of the Balance Sheets The Balance Sheets display amounts of future economic benefits owned or available for use (assets), amounts owed (liabilities) and the residual amounts (net position) at the end of the fiscal year. The following chart displays changes in Balance Sheet line items as of the fiscal year ended September 30, 2023, compared to September 30, 2022. ($ in Millions) 2023 2022 $ Change %Change ASSETS Federal Taxes Receivable, Net $182,000 $236,000 $(54,000) -22.9% Fund Balance with Treasury 86,347 87,389 (1,042) -1.2% Due from the General Fund of the U.S. Government 6,647 6,947 (300) -4.3% Other 1,798 1,854 (56) -3.0% $276,792 $332,190 $(55,398) -16.7% $185,633 $238,624 $(52,991) -22.2% Federal Tax Refunds Payable 6,648 6,947 (299) -4.3% Other 4,368 2,235 2,133 95.4% Total Assets LIABILITIES Intragovernmental Federal Employee Benefits Payable Total Liabilities 1,009 1,003 6 0.6% $197,658 $248,809 $(51,151) -20.6% $77,569 $82,049 $(4,480) -5.5% NET POSITION Unexpended Appropriations Cumulative Results of Operations Total Net Position 1,565 1,332 233 17.5% $79,134 $83,381 $(4,247) -5.1% Assets of the IRS primarily comprise: Federal Taxes Receivable, Net; Fund Balance with Treasury; Due from the General Fund of the U.S. Government; and Other, which primarily consists of Property and Equipment, Net. The composition of FY 2023 assets is presented as follows: ($ in Millions) IRS FY 2023 | AGENCY FINANCIAL REPORT 35 Management's Discussion and Analysis Asset fluctuations primarily include: decreased Fund Balance with Treasury; decreased Federal Taxes Receivable, Net; and decreased Due from the General Fund of the U.S. Government. Fund Balance with Treasury decreases of $1,042 million are primarily associated with expenses incurred against the supplemental appropriations received from the IRA. Due from the General Fund of the U.S. Government decreased by $300 million as this line item correlates to Federal Tax Refunds Payable. Amounts Due from the General Fund of the U.S. Government represents funds that will be used as resources to disburse federal tax refunds. Federal Taxes Receivable, Net, decreased by $54,000 million in FY 2023 as compared to FY 2022. This decrease is primarily due to payments on the employer portion of Federal Insurance Contributions Act Social Security taxes due to the federal government provided under the Coronavirus Aid, Relief and Economic Security Act. These deferrals are discussed in greater detail in Note 5. Federal Taxes Receivable, Net. Liabilities include Intragovernmental (Due to the General Fund of the U.S. Government and Other Liabilities), Federal Tax Refunds Payable, Federal Employee Benefits Payable and Other as detailed in Note 10. Other Liabilities. The percentage composition of IRS liabilities is depicted in the following chart: ($ in Millions) Liability fluctuations primarily include decreased Due to the General Fund of U.S. Government, decreased Federal Tax Refunds Payable and increased Other Liabilities. Intragovernmental liabilities decreased from the previous fiscal year because of a $54 million decline in the amount for the Due to the General Fund liability, which is representative of funds that will be distributed to the General Fund upon collection. This amount is directly correlated with the amount of Federal Taxes Receivable, Net. 36 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Federal Tax Refunds Payable decreased by $299 million in comparison to FY 2022. Federal tax collections and refunds owed have both decreased by 4% from the prior fiscal year. Net Position consists of Unexpended Appropriations and Cumulative Results of Operations. Funds made available by Congress are recorded in Unexpended Appropriations. Cumulative Results of Operations is the net difference between 1) expenses, losses and transfers out from the inception of an agency or activity, and 2) financing sources such as appropriations and revenues, and gains from the inception of an agency or activity (whether financed from appropriations, transfers in, revenues, reimbursements or any combination of the four) to the reporting date of the financial statements. Net Position decreased by 5% in FY 2023 due to expenditures of the supplemental appropriations received from the IRA. Analysis of the Statements of Net Cost The Statements of Net Cost present the annual cost of operating the IRS’s three major programs: Service to the Taxpayer, Enforcement of Tax Legislation, and Transformation of Business Systems. Net Cost of Operations includes Gross Cost less Earned Revenue from user fees and reimbursable agreements. Net Cost of Operations increased by $1,561 million, or 10% over the prior fiscal year. The Statement of Net Cost reflects a total of $17,228 million for the period ending September 30, 2023, as compared to $15,667 million for the period ending September 30, 2022. Gross Cost increased by $1,607 million due primarily to an increase in expenses incurred against the IRA appropriation for enforcement and business systems modernization. Earned Revenue increased by $46 million due to increases in both user fees and the Private Debt Collection program. IRS FY 2023 | AGENCY FINANCIAL REPORT 37 Management's Discussion and Analysis Net Cost of Operations by major programs are presented in the table below for the periods ending September 30, 2023, and September 30, 2022, respectively. ($ in Millions) Analysis of the Statements of Budgetary Resources IRS operations are financed through appropriations, spending authority from offsetting collections and unobligated balances carried forward. Custodial appropriations for taxpayer refunds and refundable tax credits are not available to the IRS for operational expenditures and are therefore not included in the presentation of the Statements of Budgetary Resources (refer to Note 16. Statement of Budgetary Resources for a reconciliation to the Budget of the U.S. Government). As displayed in the following chart, Total Budgetary Resources decreased by $2,871 million from the previous fiscal year, which is primarily attributable to obligations incurred against IRA funding. The FY 2022 IRA appropriation is responsible for the large variations between the Unobligated Balance from Prior Year Budget Authority and Appropriations lines in the Budgetary Resources section of the report, as well as the Apportioned and Unapportioned lines in the Status of Budgetary Resources section. 38 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis 2023 2022 $ Change %Change $80,934 $2,694 $78,240 2,904.2% Taxpayer Services 2,880 6,038 (3,158) -52.3% Enforcement 3,776 51,032 (47,256) -92.6% Operations Support 4,181 29,631 (25,450) -85.9% Business Systems Modernization 10 5,025 (5,015) -99.8% Other 575 802 (227) -28.3% 11,422 92,528 (81,106) -87.7% 149 154 (5) -3.2% $92,505 $95,376 $(2,871) -3.0% ($ in Millions) BUDGETARY RESOURCES Unobligated Balance from Prior Year Authority Appropriations (Discretionary and Mandatory) Total Appropriations Spending Authority from Offsetting Collections Total Budgetary Resources In FY 2023, the IRS incurred obligations of $16,526 million, which represents an increase of $1,956 million, or 13%, from the previous fiscal year. Higher obligations are due to expenditures from the IRA supplemental appropriation. The following chart displays the FY 2023 obligations incurred by category. Miscellaneous includes travel and transportation, grants, printing, and supplies and materials. ($ in Millions) Major Budget Account Descriptions Taxpayer Services funds the necessary expenses of the IRS to provide taxpayer services, including pre-filing assistance and education, filing and account services, taxpayer advocacy services, low-income taxpayer clinic grants and Community Volunteer Income Tax Assistance Matching Grants for tax return preparation assistance. Enforcement funds the necessary expenses for tax enforcement activities of the IRS to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations and to enforce criminal statutes related to violations of internal revenue laws and other financial crimes. IRS FY 2023 | AGENCY FINANCIAL REPORT 39 Management's Discussion and Analysis Operations Support funds the necessary expenses of the IRS to support taxpayer services and enforcement programs, which includes rent payments, facilities services, printing, postage, physical security, headquarters and other IRS-wide administration activities, research and statistics of income, telecommunications, information technology development, enhancement, operations, maintenance and security. Business Systems Modernization funds the necessary expenses of the IRS's business systems modernization program to include resources for planning and capital asset acquisition of information technology systems. Analysis of the Statements of Custodial Activity The Statements of Custodial Activity present custodial revenues (federal tax collections), refunds of federal taxes and dispositions of custodial revenues for the current and prior fiscal years. Custodial activity is performed on behalf of another entity. The IRS collects federal tax revenues on behalf of the U.S. government. Additional information relative to the fluctuations discussed below is provided in the Other Information section of this report. FY 2023 revenue receipts collected by the IRS totaled about $4.7 trillion, a $207 billion decrease from $4.9 trillion in FY 2022. Federal tax revenues are reported in six major classifications: Individual Income, which includes Federal Insurance Contributions Act and Self-Employment Contributions Act; Corporate Income; Excise; Estate and Gift; Railroad Retirement; and Federal Unemployment. ($ in Billions) 40 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis The Statements of Custodial Activity also present refunds and outlays made by the IRS on behalf of the federal government. Total Refunds of Federal Taxes and Outlays include refunds of tax overpayments, payments for interest and disbursements for refundable tax credits such as the Earned Income Tax Credit and the Additional Child Tax Credit. Total Refunds of Federal Taxes and Outlays totaled $659 billion for the period ending September 30, 2023, as compared to $642 billion for the period ending September 30, 2022, which represents an increase of 3%. Unpaid Assessments Under federal accounting standards, federal taxes receivable are unpaid assessments in which the taxpayer or court has agreed to the amount. Unpaid assessments not agreed to by taxpayers or the courts are categorized as compliance assessments, and assessments that have no future collection potential are categorized as write offs. Compliance assessments and write offs are not included on the Balance Sheets as Federal Taxes Receivable, Net. 2023 2022 Federal Taxes Receivable Compliance (Amounts not agreed to by taxpayer or courts) Write-offs (No future collection potential) $404 94 76 $437 88 77 Total Unpaid Assessments $574 $602 (In Billions) UNPAID ASSESSMENTS The decrease in total unpaid assessments is $28 billion when compared to September 30, 2022. This decrease in total unpaid assessments is primarily due to non-delinquent Social Security Tax deferral scheduled final payments and Internal Revenue Code Section 965(h) payments (refer to the Other Information section of this report for additional information). The total unpaid assessment balance consists of delinquent and non-delinquent balances. These balances are owed by taxpayers who file returns without sufficient payment and/or assessed amounts through the IRS’s enforcement programs (refer to Note 1.E. Federal Taxes Receivable, Net and Note 5. Federal Taxes Receivable, Net for further details). Delinquent balances are past due while non-delinquent balances are Internal Revenue Code 965(h) amounts, for repatriated foreign earnings, due at a future point in time. In FY 2022, non-delinquent balances also included Coronavirus Aid, Relief and Economic Security Act related Social Security Tax Deferral balances. 2023 2022 Nondelinquent 965h Unpaid Assessments Nondelinquent Social Security Tax Deferral Unpaid Assessments Uncollected Branded Prescription Drugs Delinquent Unpaid Assessments Delinquent Restitution Based Unpaid Assessments $123 0 2 276 3 $140 51 0 243 3 Federal Taxes Receivable, Gross $404 $437 (In Billions) FEDERAL TAXES RECEIVABLE, GROSS IRS FY 2023 | AGENCY FINANCIAL REPORT 41 Management's Discussion and Analysis Collectability Modeling and Economic Conditions Delinquent unpaid assessments collectability reflects existing economic conditions of the taxpayers’ ability to pay. Indicators of financial health were manually reviewed for publicly traded businesses with large dollar Internal Revenue Code Section 965(h) amounts due. The analysis determined that large dollar Internal Revenue Code Section 965(h) taxpayers are primarily in a favorable long-term economic position to make their future payments. Under the Coronavirus Aid, Relief, and Economic Security Act, employers can elect to defer payment of the employer’s share of Social Security taxes. The final installment of Social Security Tax Deferrals was due December 31, 2022. Federal Taxes Receivable, Net, excludes the estimated uncollectible amount of $222 billion as of September 30, 2023, and $201 billion as of September 30, 2022. Examples of uncollectible taxes include taxpayers who agree they owe the tax but are unlikely to pay and businesses with extreme financial hardships. In FY 2023, overall collectability combines separate collectability calculations for delinquent taxes receivable, Internal Revenue Code Section 965(h) amounts and restitution-based assessments. Estimated Collectability: Federal Taxes Receivable Gross and Net As of September 30, 2023 ($ in Billions) Collectability Gross Net Nondelinquent 965h Unpaid Assessments 94.3% $125 $118 Delinquent Unpaid Assessments 23.1% 279 64 Federal Taxes Receivable, Gross and Net $404 $182 ($ in Billions) As of September 30, 2022 Nondelinquent 965h Unpaid Assessments Nondelinquent Social Security Tax Deferral Unpaid Assessments Delinquent Unpaid Assessments Federal Taxes Receivable, Gross and Net 42 Collectability Gross Net 96.5% $140 $135 90.7% 51 47 21.9% 246 54 $437 $236 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis ANALYSIS OF SYSTEMS, CONTROLS AND LEGAL COMPLIANCE Federal Managers' Financial Integrity Act Background The Federal Managers' Financial Integrity Act of 1982 requires executive branch agencies to establish and maintain internal control and financial systems to provide reasonable assurance that: • Obligations and costs comply with applicable laws. • Funds, property and other assets are safeguarded against waste, loss, unauthorized use or misappropriation. • Revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts and reliable financial and statistical reports and to maintain accountability over the assets. Office of Management and Budget Circular A-123 provides implementing guidance for the Federal Managers' Financial Integrity Act and defines management’s responsibility for establishing and assessing internal controls. The Circular also requires federal agencies to adhere to the Government Accountability Office’s Standards for Internal Control in the Federal Government, and to evaluate and report on the effectiveness of the organization’s internal controls to achieve: (1) the objectives of effective and efficient operations, (2) reliable reporting for internal and external use and (3) compliance with applicable laws and regulations (Federal Managers' Financial Integrity Act Section 2). Additionally, agencies are required to assess whether financial management systems comply with federal financial management systems requirements (Federal Managers' Financial Integrity Act Section 4). IRS FY 2023 | AGENCY FINANCIAL REPORT The agency’s executive assessment team, Management Controls Executive Steering Committee, brief the Deputy Commissioner of Operations Support and the Deputy Commissioner of Services and Enforcement regarding any significant deficiencies. Executives from different divisions provide quarterly updates on the status of these deficiencies and any current or pending audits regarding these. Analysis of Controls The Commissioner’s Assurance Statement is supported by a comprehensive risk-based internal control evaluation plan that adheres to Treasury guidance. This plan includes a methodology that identifies and documents key controls and provides for the assessment and testing of those controls to provide reasonable assurance that the controls are designed, implemented and operating effectively. As part of the evaluation process, the IRS considered results of this extensive testing and assessment across the IRS. Internal Control over Reporting In accordance with Office of Management and Budget Circular A-123, Appendix A, Management of Reporting and Data Integrity Risk, the IRS also assessed internal controls over financial reporting. The IRS applied Treasury’s Appendix A guide to assess the effectiveness of these internal controls by testing the design, implementation and operating effectiveness of key internal controls for material transactions to support reliable financial reporting. Based on the results of this assessment the IRS can provide reasonable assurance 43 Management's Discussion and Analysis regarding the effectiveness of its internal control over financial reporting as of September 30, 2023. Federal Financial Management Improvement Act of 1996 The Federal Financial Management Improvement Act requires federal agencies to implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards and the U.S. Standard General Ledger at the transaction level. As described in Office of Management and Budget Circular A-123, Appendix D, “a financial management system includes an agency’s overall financial operation, reflecting the people, processes and technology to capture, classify, summarize and report data in a meaningful manner to support business decisions.” The Federal Financial Management Improvement Act Section 803(c)(1) requires an annual determination of substantial compliance with Section 803(a) of the Act based on review of relevant factors. To support this determination, the IRS assesses its financial management systems annually for conformance with the requirements of Office of Management and Budget Circular A-123, Appendix D, Compliance with the Federal Financial Management Improvement Act and other federal financial management system requirements. The IRS's assessment process includes the use of the Federal Financial Management Improvement Act Compliance Determination Framework, in Office of Management and Budget Circular A-123, Appendix D, which is a risk and evidence-based assessment model that leverages existing audits, evaluations and reviews that auditors and agency management already perform. It is an outcomebased approach to assessing Federal Financial 44 Management Improvement Act compliance through a series of financial management goals that are common to all agencies. In applying the framework, the IRS assesses available information from audit reports and other relevant and appropriate sources, such as the Federal Information Security Modernization Act compliance activities, to determine whether its financial management systems comply substantially with Federal Financial Management Improvement Act. The IRS also assesses improvements and ongoing efforts to strengthen financial management systems and the impact of instances of noncompliance on overall financial management system performance. Based on the results of the overall assessment, the IRS concluded that its financial management systems did not comply substantially with federal financial management system requirements as of September 30, 2023, due to significant deficiencies. The IRS has two significant deficiencies in internal control over financial reporting related to its unpaid assessments and information system controls. Specifically, these deficiencies relate to: (1) limitations in the ability of IRS’s financial management systems to classify unpaid assessments and report taxes receivable in accordance with federal accounting standards, and (2) unresolved and new internal control deficiencies related to information system controls. The IRS worked diligently during FY 2023 to continue to enhance its information technology security posture and continues to implement a strategy and assessment process to verify the effectiveness of internal controls for the information systems that affect the financial statements. This assessment supports the IRS’s overall internal control framework and helps mitigate deficiencies in the information technology environment. IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis Financial Management Systems The IRS developed its financial management systems to generate timely and accurate data and comply with applicable laws and regulations, while protecting data and systems through the design, implementation and monitoring of strong internal controls. The IRS objectives are to continuously improve financial management systems by implementing enhancements that expand and streamline financial transaction processing, analysis and reporting, while operating in a robust security environment. The IRS’s financial management systems provide timely, accurate and complete financial information to generate the IRS’s financial statements and provide IRS business units data to execute their missions. IRS's financial management systems comprise of two major components. The Redesigned Revenue Accounting Control System is a custom-built software database used to account for and summarize all IRS revenue tax transactions and activities. The IRS uses the Redesigned Revenue Accounting Control System to record, control, account for, reconcile and balance all revenue accounting activity, including tax payment collections and refunds, receivables, appropriation warrants, refundable tax credits and other transactional revenue activities on behalf of the federal government. The Redesigned Revenue Accounting Control System specifically supports the IRS revenue responsibilities to ensure the accuracy and completeness of tax collections, disbursements and related activities in its financial reports and records. The Integrated Financial System is comprised of three SAP software components: the Enterprise Resource Planning Central Component, Procurement for Public Sector and Business Warehouse. The Integrated Financial System IRS FY 2023 | AGENCY FINANCIAL REPORT interfaces with multiple systems, including, but not limited to, Invoice Processing Platform, ConcurGov, MoveLINQ and National Finance Center systems. The Integrated Financial System provides the IRS with comprehensive automated functionality that supports financial and administrative program management. The software provides automated functionality for significant administrative business processes, including core financials, procurement, intragovernmental transactions, purchase card activities and budget formulation and execution. The Integrated Financial System also provides robust cumulative reporting capabilities by merging data from all sub-systems in Business Warehouse. During FY 2023, IRS implemented several system improvements including: • New database modernizing data analytics for revenue financial data. • Government Invoicing functionalities in the Integrated Financial System. • SAP and Business Warehouse software upgrades. • System-wide legislative, technical and cybersecurity upgrades. The IRS will build upon successes of FY 2023 with the vision that fully articulates the goals and objectives of the SOP. The IRS is committed to developing its employees by providing resources, tools and training that will help meet the needs of today and tomorrow and continuing to build its workforce using data-driven planning to strategically understand future workforce needs. It is important for the IRS to foster continued partnerships and build new ones with those who are essential contributors in improving the taxpayer experience. The IRS will continue to expand its network for better information sharing and improved service delivery. 45 Management's Discussion and Analysis Within the next five years, the IRS plans to continue to enhance financial management systems including: • Implementing the remaining segments of the Government Invoicing functionality. • Expanding data analytics across financial systems. • Building core systemic functionality to support financial accounting program changes related to the IRA and the Creating Helpful Incentives to Produce Semiconductors Act of 2022. • Enhancing the Integrated Financial System functional capability platform with technical upgrades, including migrating to the SAP NS2 Cloud (HANA) in FY 2024, and continuing to plan and implement the multi-year initiative to upgrade the Integrated Financial System functional software to SAP S/4. Other Laws The IRS is required to comply with several legal and regulatory requirements, including the Antideficiency Act. The Management Controls Executive Steering Committee, which includes top IRS administrative and programmatic leadership, provides oversight and governance for the design, implementation and monitoring of controls to comply with these legal and regulatory requirements. The IRS is not aware of any violations of the Antideficiency Act. 46 IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis MANAGEMENT ASSURANCES Commissioner's Statement of Assurance The IRS’s management is responsible for managing risks and maintaining effective internal control and financial management systems to meet the objectives of the Federal Managers’ Financial Integrity Act of 1982. We conducted our assessment of risk and internal controls in accordance with the Office of Management and Budget Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control. Based on our assessment, we can provide reasonable assurance that, in accordance with Section 2 of the Federal Managers’ Financial Integrity Act of 1982, the IRS’s internal control over operations, reporting and compliance with laws and regulations were operating effectively as of September 30, 2023. This includes the effective operation of internal control over financial reporting which was considered as part of our assessment. In addition, we can provide reasonable assurance that, as of September 30, 2023, the IRS was in compliance with the Federal Financial Management Improvement Act of 1996, Section 803(a) federal accounting standards and the U.S. Standard General Ledger at the transaction level. However, we are not in compliance with federal financial management systems requirements because of the two significant deficiencies related to unpaid assessments and information system controls. Therefore, we are in substantial conformance with Section 4 of the Federal Managers’ Financial Integrity Act, with the exception of the federal financial management systems requirement discussed above. As a result of these significant deficiencies, our financial management systems are not in substantial compliance with the Federal Financial Management Improvement Act of 1996 as of September 30, 2023. We continue to make progress in remediating these deficiencies and remain committed to focusing management’s attention and resources on appropriate corrective actions. Overall, we continue our efforts to ensure high standards, minimize internal control weaknesses and meet federal financial management systems requirements. Additional information on the deficiencies can be found in Other Information: Section A: Summary of Financial Statement Audit and Management Assurances, of this report. Daniel I. Werfel Commissioner of Internal Revenue November 3, 2023 IRS FY 2023 | AGENCY FINANCIAL REPORT 47 Management's Discussion and Analysis IRS Management’s Report on Internal Control over Financial Reporting Fiscal Year 2023 November 3, 2023 The IRS’s internal control over financial reporting is a process effected by those charged with governance, management and other personnel. The objectives of this process are to provide reasonable assurance that: (1) transactions are properly recorded, processed and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use or disposition, and (2) transactions are executed in accordance with provisions of applicable laws, including those governing the use of budget authority, regulations, contracts, and grant agreements, noncompliance with which could have a material effect on the financial statements. IRS management is responsible for designing, implementing and maintaining effective internal control over financial reporting relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. IRS management evaluated the effectiveness of the IRS's internal control over financial reporting as of September 30, 2023, based on the criteria established under 31 U.S. Code 3512(c) and (d) (commonly known as the Federal Managers' Financial Integrity Act). Based on that evaluation, we conclude that as of September 30, 2023, the IRS’s internal control over financial reporting was effective. The IRS has two significant deficiencies in its internal control over financial reporting, for unpaid assessments and information system controls, which we are actively addressing. Daniel I. Werfel Commissioner of Internal Revenue 48 Jeffrey J. Tribiano Deputy Commissioner, Operations Support Teresa R. Hunter Chief Financial Officer IRS FY 2023 | AGENCY FINANCIAL REPORT Management's Discussion and Analysis FORWARD-LOOKING INFORMATION The information in this report reflects not only the work the IRS has done to serve taxpayers over the past year but also the challenges the IRS faces and the vision for continuing to improve in the future. The IRS will continue a customer-focused approach that dedicates more resources to helping taxpayers file correctly the first time, while addressing issues in the simplest ways appropriate. Noncompliance will be addressed by using data analytics to expand enforcement in certain segments. The IRS will modernize how it attracts, retains, develops and empowers its employees and become an employer of choice across the government and industry. These changes will enable the IRS to serve all taxpayers more equitably and in ways they want to be served. The IRS is focused on helping taxpayers get it right the first time—claiming the credits and deductions they are eligible for and avoiding back-and-forth with the IRS when errors arise. To help taxpayers get it right, the IRS will continue working toward taxpayers being able to seamlessly interact with the IRS in the ways that work best for them whether it is on the phone, in-person or online. The IRS will expand in-person service and meet taxpayers where they are, particularly those in underserved and rural communities. The IRS will continue to expand Taxpayer Assistance Centers across the country, while also starting a special series of events to help taxpayers living in areas far from the IRS's in-person offices. To make this strategic vision a reality, and to deliver on the commitments in the SOP, the IRS’s Transformation and Strategy Office is responsible for coordinating collaboration across the organization and engaging in disciplined and transparent accountability processes. The Transformation and Strategy Office also supports IRS leadership by providing and maintaining a clear and effective governance and accountability structure; facilitating real-time, transparent enterprise prioritization, performance monitoring and risk management; leading organization-wide capacity building and change management; supporting detailed execution-planning and project management; and enhancing the IRS’s culture and operations. These efforts are led by the Chief Transformation and Strategy Officer and coordinated through an advisory committee to facilitate informed decision-making by the Commissioner on issues related to strategic alignment and problem-solving. To support the agency’s compliance work, the IRS has announced new compliance initiatives as part of a historic effort to restore fairness in tax compliance by shifting more attention on highincome earners, partnerships, large corporations and promoters abusing the nation's tax laws. IRS FY 2023 | AGENCY FINANCIAL REPORT The IRS has identified partnerships with over $10 million in assets having ongoing discrepancies between their prior year-ending and current year beginning balance sheets, which is an indicator of potential noncompliance. The IRS will focus on high-risk large partnerships to quickly address any balance sheet discrepancies. Beginning in early FY 2024, the IRS will send correspondence to an initial set of partnerships and, depending on the responses, the IRS may add these to the audit stream for additional work. 49 Management's Discussion and Analysis The IRS’s Large Partnership Compliance program includes examinations of some of the largest and most complex partnership returns in the filing population. In FY 2024, the IRS will expand its Large Partnership Compliance program to additional large partnerships, applying cuttingedge machine learning technology to identify potential compliance risk in the areas of partnership tax; general income tax and accounting; and international tax in a taxpayer segment that historically has been subject to limited examination coverage. The IRS will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets. The IRS Virtual Currency Compliance Campaign will continue in the months ahead after an initia [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Acfab996f8ebef642. Public record. Not legal advice.