Chris Hess of the Internal Revenue Service (IRS) based in Washington, DC provided an overview of the IRS’s approach to the implementation of enterprise risk management at the April 27, 2007 ERM Roundtable. ERM leadership at the IRS is directed by its Office of Program Evaluation and Risk Analysis (OPERA). OPERA provides risk management leadership for this federal agency which consists of 80,000 full-time employees, 10,000 seasonal and part-time employees, and an annual budget of $11 billion.
ERM Leadership at IRS: Top-Down Approach
Organizationally, OPERA is a part of the Research Analysis and Statistics function which directly reports to the IRS Commissioner. Thus, OPERA is positioned at the enterprise level with a top-down view of the organization as part of the Commissioner’s staff. OPERA was created by the IRS Commissioner in 1998 as part of the restructuring of the IRS mandated by Congress. OPERA was created to strengthen data analysis in key decision-making at the agency level.
ERM and Strategy: A Core Connection
ERM at the IRS is directly centered around the IRS’s core mission: “To provide quality service to taxpayers while applying the tax law with integrity and fairness.” The IRS recognizes that its ability to accomplish its mission is directly dependent on voluntary tax filing compliance by taxpayers, both individual and corporate. ERM’s core mission is to preserve and enhance efforts that ensure voluntary compliance with the U.S. tax code continues effectively.
To support its core strategy, the IRS has identified three key strategic objectives necessary for voluntary compliance to continue as a successful approach to federal funding through tax revenues. OPERA has centered its ERM leadership efforts around the identification, assessment, and management of key risks that directly threaten these three strategic goals for 2005-2009:
- Improve taxpayer service
- Enhance enforcement of the tax law
- Modernize the IRS through its people, processes, and technology
OPERA works to help IRS management identify enterprise risks, through the IRS’s strategic planning and budgeting processes, which might affect these core strategic goals. The goal of ERM is to facilitate risk-based decision-making around key organizational issues and to support executive decision-making by collaborating with business units, research counterparts, and corporate planning to identify and analyze enterprise risks to inform strategic decisions being made to accomplish the IRS overall mission.
Leveraging of Existing Processes
ERM at the IRS is designed to work within existing business units and functional areas. Key IRS functional units that deal with taxpayers directly include the following:
- Wage and Investment Division which focuses on individual taxpayer compliance
- Small Business/Self-Employed Division which focuses on small business tax compliance
- Large and Mid-Size Business Division which focuses on mid-size to large corporate tax compliance
- TE/GE Division which focuses on tax-exempt and government enterprise tax compliance
- Criminal Investigation Division which focuses on investigations of non-compliance
OPERA has leveraged existing risk management processes within each of these key operational units within the IRS and seeks to increase the consistency of risk management practices across the agency by helping each of these key business functions maintain an enterprise-wide perspective of risks at the agency level. OPERA also works with other key functional areas of the IRS, such as the chief information officer, chief financial officer, chief of agency-wide shared services, chief human capital officer, and chief of mission assurance. As it works with existing business functions, OPERA helps provide analytical support by doing program evaluations to identify enterprise-wide risks through strategic planning and budgeting processes. OPERA also collaborates with business units to help train them to identify, analyze, and manage risks through strategic decision-making.
IRS Risk Culture and Approach
The IRS’s appetite for risks is limited. The agency is conservative and risk adverse as an organization. Throughout its history, the IRS has sought to minimize risks threatening the agency’s mission. Prior to the creation of the OPERA division, the IRS’s approach to risk management was decentralized, with many of those activities not explicitly referred to or understood as “risk management.” Throughout time, the IRS has established mechanisms to respond to and manage risks (e.g., executive steering committees and business continuity plans, etc.). While these risk management activities have been in place on a decentralized level, IRS management realized that these efforts were not leading to an enterprise perspective on risks and that many of the risk management efforts were not being done in an integrated fashion.
The creation of OPERA was in response to an effort to integrate risk management practices across the agency. The ultimate goal of OPERA’s implementation of ERM within the IRS is to break down barriers of managing risks across a complex organization with well-established business functions.
Identification of Risk Drivers
When OPERA first launched ERM at the IRS, it began the task of identifying drivers of risks threatening the agency by focusing on external and internal drivers of risk. Several external drivers for ERM were identified, such as advancing technologies and web-services, emerging legislation and Congressional inquiries, oversight agency expectations (such as the GAO and OMB), and potential external threats to core operations, such as terrorism and natural disasters. In addition to considering external factors, the IRS looked internally to identify ERM drivers from within, including a need to understand strategic and operational risks, improving coordination and decision-making around risks, increasing the ability to quantify, measure, and monitor cross-cutting risks, addressing operational risks (e.g., resource limitations, aging workforce, technology demands), and ensuring that existing structures.
Building Risk Awareness
OPERA’s approach to ERM started with a goal of raising awareness of ERM through workshops, briefings, and internal and external information sharing. OPERA used the strategic planning process within the IRS to introduce ERM disciplines and practices. As part of the IRS’s corporate strategic analyses, OPERA began to identify risks that cut across business functional silos within the IRS.
As a next step, OPERA then conducted case studies of risk analyses to identify areas within the IRS where ERM disciplines are practiced. OPERA selected existing programs within the IRS that they believed would have cross-cutting issues affecting the enterprise as a whole. For example, OPERA focused on Filing Season Readiness as one of its first case studies. For the IRS to be prepared and ready for an upcoming tax filing season, an extensive network of business processes within the IRS must work together in a coordinated fashion to ensure tax payer services function at the desired level. In addition, the Filing Season Readiness program relies on cross-unit coordination, must have an external and internal focus to deal with processing and compliance risks, and it has an oversight component within and external to the IRS.
OPERA worked with within this program to analyze risks that might arise across the inter-connected functional units and helped the agency’s core leadership team develop an enterprise-wide view of risks that might directly impact the agency’s readiness for tax filing season. Through these series of case studies, OPERA began to help management develop an enterprise perspective of risks that could arise across a complex enterprise, such as the IRS.
Benefits of ERM
While ERM practices at the IRS continue to evolve, several benefits of ERM have been realized. IRS leadership has found that ERM helps provide a better understanding of potential barriers that could impact program and strategic objectives that leads to more informed decision-makers. ERM has also provided a more rational basis for risk-based decision-making, and it has strengthened the IRS’s ability to proactively address risk and opportunities. Also, this proactive (versus reactive) identification of risks has provided its leadership with a fuller range of mitigation options that could be considered.
OPERA will continue to explore best practices and lessons learned through benchmarking and information sharing. It will also continue to develop an ERM business case to enhance existing risk management and decision-making processes.
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