[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
IRS BUDGET FOR FISCAL YEAR 1998 AND THE 1997 TAX RETURN FILING SEASON
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
MARCH 18, 1997
__________
Serial 105-36
__________
Printed for the use of the Committee on Ways and Means
----------
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1998
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
NANCY L. JOHNSON, Connecticut, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
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C O N T E N T S
__________
Page
Advisory of March 10, 1997, announcing the hearing............... 2
WITNESSES
Internal Revenue Service, Hon. Michael P. Dolan, Deputy
Commissioner; accompanied by Tony Musick, Chief Financial
Officer; Dave Mader, Chief, Management and Administration;
Arthur Gross, Associate Commissioner and Chief Information
Officer; and Jim Donelson, Chief, Taxpayer Service, and Acting
Chief, Compliance.............................................. 15
U.S. General Accounting Office, Lynda D. Willis, Director, Tax
Policy and Administration Issues, General Government Division;
accompanied by Rona Stillman, Ph.D., Chief Scientist,
Accounting and Information Management Division................. 77
______
American Institute of Certified Public Accountants, Michael E.
Mares.......................................................... 102
Archer, Hon. Bill, a Representative in Congress from the State of
Texas, and Chairman, Committee on Ways and Means............... 5
National Association of Enrolled Agents, Beanna J. Whitlock...... 94
IRS BUDGET FOR FISCAL YEAR 1998 AND THE 1997 TAX RETURN FILING SEASON
----------
TUESDAY, MARCH, 18, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
room B-318, Rayburn House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
March 10, 1997
No. OV-3
Johnson Announces Hearing on
IRS Budget for Fiscal Year 1998 and the
1997 Tax Return Filing Season
Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the Administration's budget request
for the Internal Revenue Service (IRS) for fiscal year (FY) 1998, and
the 1997 tax return filing season. The hearing will take place on
Tuesday, March 18, 1997, in room B-318 Rayburn House Office Building,
beginning at 11:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will come from invited witnesses only.
Witnesses will include officials from the IRS, the U.S. General
Accounting Office, and representatives from several professional tax
practitioner groups. Any individual or organization not scheduled for
an oral appearance may submit a written statement for consideration by
the Committee and for inclusion in the printed record of the hearing.
BACKGROUND
The Administration's budget requests $7.37 billion to fund the IRS
for FY 1998, plus an additional $500 million to establish a new account
to fund future computer modernization. This level of funding will
support about 102,000 employees who will collect an estimated $1.7
trillion in taxes, according to Administration estimates.
The 1997 tax return filing season refers to that period of time
between January 1st and April 15th when Americans will file 200 million
individual and business tax returns. During this period, the IRS is
expected to issue over 85 million tax refunds and answer 111 million
telephone calls from taxpayers asking for assistance. Beyond the
traditional activities of the filing season, the FY 1998 budget will
also fund, among other things: IRS examination activities, criminal tax
law investigations, efforts to collect delinquent taxes, employee
salaries, and maintenance of the operational status of the IRS's aging
computer systems.
In announcing the hearing, Chairman Johnson stated: ``Although the
IRS has made progress in recent years to streamline its organizational
structure and improve its financial accountability, clearly more
remains to be accomplished in terms of downsizing, redirecting
resources to front-line operations, eliminating unnecessary layers of
management, reducing waste, and correcting deficiencies in its
multibillion dollar Tax Systems Modernization program. The Subcommittee
will examine the IRS's progress in these areas. At the same time, we
must also make sure that the IRS is carrying out its responsibilities
in a fair and courteous manner. American taxpayers must sacrifice a
great deal to support the cost of operating the Federal Government.
They deserve to receive quality service and fair treatment by the
IRS.''
FOCUS OF THE HEARING
The Subcommittee will explore how the IRS intends to allocate its
FY 1998 budget resources, and what effect its funding level will have
on the IRS's ability to fulfill its mission ``to collect the proper
amount of tax revenue at the least cost, and serve the public by
continually improving the quality of its products and services . . .
.'' In particular, the Subcommittee will examine: what effect will the
budget request have on the quality of IRS taxpayer services, the level
of effort in the examination program, the level of effort in collecting
delinquent taxes, and what the implications are of the FY 1998 budget
request for the remaining five years of the budgeting window.
With respect to the current filing season, the Subcommittee will
explore how effectively the IRS is responding to taxpayers requests for
assistance, how efficiently it is processing taxpayers' refunds, and
the effectiveness of IRS's actions to deter refund fraud.
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noted above.
Chairman Johnson. I'd like to call the hearing to order,
and welcome the Chairman. I'm going to keep my opening comment
very brief, Mr. Chairman, in recognition of your schedule.
But this is an important hearing to hear the
administration's proposal for the budgets of not only next
year, but the 4 or 5 years following, and we hope they will
give us greater insight during this hearing as to how they
expect the IRS to become, as Deputy Secretary Summers said, a
different IRS in the future under both their budget scenario
and under their plans.
So it's a pleasure to welcome you, Chairman Archer, to this
Subcommittee hearing. I appreciate your willingness to testify
on the important matter of the structure of the IRS, and the
problems that we face at this time. And without further ado,
unless my Ranking Member has comments----
Mr. Coyne. Well, thank you, Madam Chair, and I welcome the
Chairman here to testify today. Today's hearing will focus on
two of the most important issues currently facing the Internal
Revenue Service: The 1998 tax return filing season, and the
proposed fiscal year 1998 budget for the IRS.
The Oversight Subcommittee holds a hearing each year in the
early spring to evaluate the IRS' efforts to assist taxpayers
in filing their tax returns, and to review the administration's
proposal for funding the various functions of the IRS.
It is important that the Congress have a full understanding
of where the IRS stands in administering our voluntary tax
system, assisting taxpayers in their filing of tax returns, and
planning for the coming year.
Fortunately, the IRS will report to us that the agency has
made great strides in improving taxpayers' ability to reach the
IRS by telephone.
Also the GAO will report that by and large the 1997 filing
season is going very well. We all should thank IRS employees
nationwide for their hard work and a job well done.
Of concern to all of us, of course, continues to be the
impact the IRS' downsizing and reorganization will have on our
constituents, particularly their ability to comply with the tax
laws and to obtain assistance from the IRS.
Clearly, the Congress must continue to evaluate the effect
IRS restructuring efforts will have on taxpayers and
particularly on IRS customer service offices and problem
resolution cases.
The fiscal year 1997 appropriations bill requires the IRS
to report to the Congress on these matters after March 1, 1997,
before proceeding with its planned field reorganization.
I would hope that the Oversight Subcommittee would review
the IRS' report upon its release, and allow us to provide
comment before reductions in force are implemented.
Finally I want to welcome GAO and the panel of tax
professionals for providing their insights into the operations
of the IRS, and thank you, Madam Chair.
[The opening statement of Mr. Ramstad follows:]
Statement of Hon. Jim Ramstad, a Representative in Congress from the
State of Minnesota
Madame Chairman, thank you for holding this important
hearing on the IRS budget for FY 1998 and the 1997 tax return
filing season.
Just as we have asked every area of government to do more
with less and eliminate waste, the IRS must continue to
streamline its operations and improve its financial
accountability. At the same time, this agency has a long way to
go in delivering fair and courteous service to American
taxpayers, who foot the bill for our government.
I look forward to exploring IRS customer service and
management issues in the context of our hearing today,
especially in light of yesterday's statements by Deputy
Treasury Secretary Larry Summers that the Treasury Department
plans to increase its role and overhaul the IRS to focus on
management.
Again, Madame Chairman, thank you for your leadership in
convening this hearing.
Chairman Johnson. Mr. Chairman.
STATEMENT OF HON. BILL ARCHER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TEXAS; AND CHAIRMAN, WAYS AND MEANS COMMITTEE
Chairman Archer. Thank you, Madam Chair. I agree with you
that this hearing is exceedingly important. The IRS has such an
impact on each of our lives, often only psychologically, but at
other times in an administrative way that encumbers us to a
degree beyond what many of us would like to be encumbered.
And I join you this morning to say a few words about the
tax system and the Internal Revenue Service and the role that
it plays in the lives of American citizens. I'm sure that most
would agree with me that our Nation's Federal income tax laws
have grown extraordinarily complex in recent decades.
In some ways this is a natural outgrowth of the increasing
complexity of the American economy. The financial affairs of
American families are far more complicated today than in
previous generations.
Ownership of both financial and nonfinancial assets is more
widespread and varied. Families have a greater variety of
income sources. Business transactions are more complicated.
In response, Congress has continually tried to refine the
tax laws to match the rapid changes in our economy. The Tax
Reform Act of 1986 added tremendous complexity to the Tax Code,
while flying under the banner of simplicity, fairness and
growth.
The Internal Revenue Service is the agency tasked by
Congress with the responsibility of enforcing the tax laws and
collecting the taxes that are legally owed. And that is an
important responsibility to our society, because the very
functioning of the Federal Government depends on the American
people's willingness to voluntarily pay the taxes that they
owe.
Now, that voluntary nature, of course, is enforced by some
very tough rigid and potentially harsh sanctions.
However, it is very difficult for the IRS to discharge its
responsibility, because the complicated structure of our
current income tax system necessarily interjects the IRS into
our private lives. There is no question that the IRS has grown
too powerful and too intrusive in recent years.
However, this has come in direct response to the complexity
of our current income tax system, and the pressure that
Congress annually places on the IRS to collect taxes. And we
should never forget that.
The individual elements of the administration's five-point
plan to restructure the IRS announced yesterday by Deputy
Treasury Secretary Lawrence Summers are all sensible: Better
customer service, less paperwork, greater oversight. Who could
be against that?
We heard that in 1986. We hear it over and over again all
the time. But it really is a figleaf on the problem. Yet a
figleaf is better than no clothes at all, and we should
consider it in that way.
But the plan's main shortcoming is it doesn't go far
enough. Increased oversight by the Treasury Department of the
IRS is only a part of the problem. The crux of the problem is
the tax system itself. The IRS management failures which
prompted the administration's five-point plan have to be viewed
in the context of a Tax Code which has grown so horribly
complex that a majority of Americans today must utilize the
services of paid tax preparers to complete their tax returns.
Madam Chair, I am happy to tell you that I continue to do
my own personal income tax, and it is because of that that my
awareness of the complexity of this Code has been heightened. I
have always been of the view that if all of the Members of
Congress had to do their own tax returns, we'd have a very
different Tax Code.
The Internal Revenue Code and regulations now come in at 1
million words, and 9,000 pages. On average, the Code is
``reformed'' once every 1.3 years. Just since the Tax Reform
Act of 1986, several thousand sections have been added.
According to 1995 IRS estimates, businesses will spend
about 3.4 billion hours, and individuals will spend about 1.7
billion hours embroiled in tax-related paperwork. That means
nearly 3 million people--more than all those serving in the
U.S. Armed Forces, work full time all year just to comply with
the tax laws at a cost of some $200 billion a year. And I
frankly believe that $200 billion is a conservative estimate.
This translates into a tremendous productivity loss for our
Nation. I talked to the chief executive officer of one of our
major corporations 2 weeks ago, and he said in their most
recent audit that the paperwork stacked 200 feet high. For 1
year's audit, for one corporation.
The answer isn't just another IRS oversight organization.
What we need is a tax system that is fundamentally fairer than
the current income tax, that contains no loopholes or special
treatment for favored interests, a tax system that is vastly
simpler, a tax system that is capable of enforcement in a far
less intrusive manner, both in terms of reducing the burdens
placed on the American citizens to comply with the system, and
eliminating the need for an intrusive agency to administer it.
A tax system that enhances, rather than impedes, savings
and investment, economic growth, and advances U.S. living
standards. A tax system which can respond more flexibly to
rapid changes in information technology. And a tax system that
gets at the underground economy.
I'm convinced that there is no single, more important
action that President Clinton can take in his second term to
build a strong bridge into the 21st century than to join me in
seeking a new tax system that is fairer, simpler, less
intrusive and more conducive to economic growth.
I am committed to working with the administration on a
bipartisan basis to achieve this goal.
Let me make one last point, and this is very important: As
long as we have an income tax, we must have an IRS that has the
resources and the tools to perform the mission that it has been
given by the Congress. That means that the IRS must receive
adequate funding.
I am glad that the administration has stepped up to the
plate and indicated its commitment to bring discipline and
accountability to the IRS and its Tax Systems Modernization
effort.
As we all know, recently the IRS admitted that it had spent
over $4 billion on a computer system that doesn't work.
In the short run, there is no more important action we can
take in terms of improving the quality of the IRS' services to
the Nation's taxpayers than a successful completion of the
computer modernization system.
And I say successful, and it is going to be a daunting task
to try to deal with administering this exceedingly arcane Tax
Code.
I also agree in concept with the information technology
investment account proposed in the IRS' fiscal year 1998
request to fund future computer projects.
However, I agree with my colleague, Jim Kolbe, the Chairman
of the Appropriations Subcommittee, Treasury, Postal Service,
and General Government, that Congress should not commit to
spend any more funds on computer modernization until a plan for
completing this effort has been approved and specific and
viable projects have been identified.
Once those pieces are in place, capital budgeting for the
IRS' long-term investments is a concept we should adopt. Again,
however, the answer in the long run is not just better IRS
oversight; we must fundamentally reform our tax laws to
eliminate the incredible complexity which necessarily injects
the IRS into each of our individual lives.
And I thank you for listening.
[The prepared statement follows:]
Statement of Hon. Bill Archer, a Representative in Congress from the
State of Texas; and Chairman, Ways and Means Committee
I wanted to join you this morning to say a few words about
our tax system and the Internal Revenue Service and the role it
plays in the lives of American citizens. I'm sure all of you
agree with me that our nation's federal income tax laws have
grown extraordinarily complex in recent decades. In some ways,
this is a natural outgrowth of the increasing complexity of the
American economy.
The financial affairs of American families are far more
complicated today than in previous generations. Ownership of
both financial and nonfinancial assets is more widespread and
varied. Families have a greater variety of income sources.
Business transactions are much more complicated. In response,
Congress has continually tried to refine the tax laws to match
the rapid changes in our economy. The Tax Reform Act of 1986,
in particular, added tremendous complexity to the tax code.
The Internal Revenue Service is the agency tasked by
Congress with the responsibility of enforcing the tax laws and
collecting the taxes that are legally owed. This is an
important responsibility, because the very functioning of the
federal government depends on the American people's willingness
to voluntarily pay the taxes they owe. However, it is also a
very difficult responsibility, because the complicated
structure of our current income tax system necessarily
interjects the IRS into our private lives.
There's no question that the IRS has grown too powerful and
too intrusive in recent years. However, this has come in direct
response to the complexity of our current income tax system and
the pressure that Congress annually places on the IRS to
collect revenues.
The ultimate answer to this problem is not increased
oversight by the Treasury Department over the IRS. The
individual elements of the Administration's five-point plan to
restructure the IRS announced yesterday by Deputy Treasury
Secretary Lawrence Summers are all sensible--better customer
service, less paperwork, greater oversight--who could be
against that? The plan's main shortcoming is that it does not
go far enough.
The problem is the tax system itself. The IRS' management
failures which prompted the Administration's five-point plan
have to be viewed in the context of a tax code which has grown
so horribly complex that a majority of Americans today must
utilize the services of a paid tax preparer to complete their
tax returns.
The Internal Revenue Code and regulations now come in at
one million words and 9000 pages. On average, the code is
``reformed'' once every 1.3 years. Just since the Tax Reform
Act of 1986, several thousand sections have been added.
According to 1995 IRS estimates, businesses will spend about
3.4 billion hours and individuals will spend about 1.7 billion
hours embroiled in tax-related paperwork. That means nearly
three million people more than all those serving in the U.S.
armed forces work full time all year just to comply with the
tax laws, at a cost of some $200 billion a year. This
translates into a tremendous productivity loss for our nation.
The answer isn't another IRS oversight organization. What
we need is:
a tax system that is fundamentally fairer than the
current income tax, that contains no loopholes or special
treatment for favored interests;
a tax system that is vastly simpler;
a tax system that is capable of enforcement in a
far less intrusive manner, both in terms of the reducing the
burdens placed on American citizens to comply with the system,
and eliminating the need for an intrusive agency to administer
it;
a tax system that enhances, rather than impedes,
savings and investment, economic growth and advances U.S.
living standards;
a tax system which can respond more flexibly to
rapid changes in information technology.
I am convinced that there is no single more important
action that President Clinton can take in his second term to
build a strong bridge into the 21st Century that to join with
me in seeking a new tax system that is fairer, simpler, less
instrusive and more conducive to economic growth. I am
committed to working with the Administration on a bipartisan
basis to achieve this vital goal.
Let me make one last point and this is very important as
long as we have an income tax, we must have an IRS that has the
resources and the tools to perform the mission it has been
given by Congress. That means that the IRS must receive
adequate funding.
I'm glad that the Administration has stepped up to the
plate and indicated its commitment to bring discipline and
accountability to the IRS and its Tax Systems Modernization
effort. In the short run, there's no more important action we
can take in terms of improving the quality of the IRS's
services to the nation's taxpayers than a successful completion
of computer modernization.
I also agree in concept with the Information Technology
Investment Account proposed in the IRS's FY 1998 to fund future
computer projects. However, I agree with my colleague, Jim
Kolbe, the chairman of the Treasury, Postal Appropriations
Subcommittee, that Congress should not commit to spend any more
funds on computer modernization until the plan for completing
this effort has been approved and specific and viable projects
have been identified. Once those pieces are in place, capital
budgeting for IRS's long-term investments is a concept we
should adopt.
Again, however, the answer in the long run is not better
IRS oversight. We must fundamentally reform our tax laws to
eliminate the incredible complexity which necessarily injects
the IRS into our private lives.
Chairman Johnson. Mr. Chairman, I thank you for your
testimony. I agree with it wholeheartedly. As you are aware, we
have been holding hearings to follow up on the provisions of
the Taxpayer Bill of Rights 2. And one of those provisions was
to have the taxpayer advocates bring to this Subcommittee the
problems they see on the frontline there with the ordinary
person with an ordinary problem trying to get timely and
accurate assistance from the IRS.
And while generically the hearing was a failure, because
the leadership provided a list that we have seen since 1993,
functionally it was a success, because for the first time we
had advocates from around the country sitting at this table.
And one of the things in spontaneous conversation that was
brought up was the impossibility of implementing some of the
complex proposals that we have passed here in the Congress
recently, and changed repeatedly, like the EITC.
And to hear a taxpayer advocate sit there and say, Look,
just take the money, and put it out through a program that's
used to dealing with means testing, but don't try to ask us to
implement this tax law that we can't do without a high level of
fraud.
It was very revealing, and it puts face and voice behind
what you're saying. And I hope that the Treasury will be far
more forthcoming, and I appreciate your offer to work with
them. But I hope they will be far more forthcoming with us and
with the public in terms of their vision.
Because Deputy Secretary Summers did note in recent
testimony before the Treasury, Postal Service, and General
Government, Appropriations Subcommittee that it should be clear
that a smaller IRS will not be able to do the work that needs
to be done unless it is also a different IRS, and it could only
be a different IRS if it is also a different Code.
And while I appreciate Secretary Summers' comments
yesterday on reorganization, I'd have to say Where's the beef?
I was truly disappointed that at this juncture, when we have a
Restructuring Commission, when through the Taxpayer Bill of
Rights we have asked for a lot of information that will help us
really deal with restructuring issues, and when the
administration did acknowledge the complete collapse and
failure of the modernization systems, the Tax Systems
Modernization Project, that they didn't come forward with a
plan that had, frankly, more to it.
What they did do was to acknowledge the many changes that
the current Commissioner, Commissioner Richardson, has put in
place as a response to her very deep concern with the ability
of the IRS to serve the people and to carry out its function.
And she has done some very good things, and they are all
important, and they are all steps, and they need to be
recognized.
But they don't constitute a vision of a slimmer, trimmer,
more efficient, more effective, more responsible to the
ordinary person taxpayer IRS. And that's really where we are
and where we have to start moving aggressively and
deliberately.
And I thank you for your testimony because without that
kind of insight we cannot do the job the Congress is called
upon to do with the IRS and preserve not only our voluntary
system of revenue collection that funds our great and free
society, but to do it in a way that is increasingly fairer and
simpler and more intelligible so that all of us on the Ways and
Means Committee can do our own taxes, never mind the ordinary
American citizen out there.
I thank you for your comments.
Chairman Archer. It's a pleasure to be with you. Let me
just cite one very, very small part of the Tax Code as
evidence, anecdotally, of the tremendous complexities. Whether
or not you are the head of a household is a pretty basic thing
to many, many people in this country, because if you're the
head of a household then you get a different tax treatment.
To determine whether you are the head of a household, an
IRS agent must ask you 42 questions and get the answers to 42
questions before that agent can definitively tell you that you
are the head of a household.
That's just one minor part of the Code to evidence the
complexities. And so we're going to run aground if simply all
we try to do is get a more efficient IRS until we get rid of
this Tax Code.
And, of course, as you know, I want to abolish the income
tax completely and totally, not simply try to make it better,
because I think inherently income taxes are flawed.
Everybody's got a different definition of income. You talk
from one economist to another and they don't agree on what
income is. And you are forever trying to define income, and as
you try to define it you inevitably get to the complexities
that we have in the current Code today.
Chairman Johnson. Well, Mr. Chairman, it's a privilege for
this Subcommittee to have you testify before us. We are the
Oversight Subcommittee. I don't know how far we have to go back
in history to find another Chairman of the Ways and Means
Committee who does his own taxes. And your knowledge of the
Code at this particular juncture in history is going to be of
enormous importance, not only to the Ways and Means Committee,
but to the American people. And I thank you for being with us
here today.
Chairman Archer. Thank you, Madam Chair.
Chairman Johnson. Mr. Coyne.
Mr. Coyne. Thank you, Madam Chair. I, too, want to welcome
the Chairman here today and welcome your spirit of
bipartisanship in saying that you're committed to working with
the administration on a bipartisan basis to achieve a fairer,
simpler and less intrusive Tax Code, and also that you
recognize the necessity to have a fully funded or an adequately
funded IRS to do the job that needs to be done with the present
Code as we know it.
And, of course, we all have concerns about the
modernization problem. And I know that you're willing to work
to achieve computer modernization and to get it done in the
right way. Thank you.
Chairman Archer. Thank you, Mr. Coyne.
Chairman Johnson. Mr. Portman.
Mr. Portman. Thank you, Madam Chair. And, Mr. Chairman,
thank you for being here and for all you are doing to promote
simplification and new thinking in our tax system. You've been
a tireless advocate for it, and I want to personally thank you
for the support you've given this Commission to Restructure the
IRS.
I know it's not advocating the kind of consumption tax that
you think is so necessary to pull the IRS out by its roots and
truly transform our system into the next century. But
nonetheless, you've been supportive of the effort and
understand that short of fundamental tax reform that you
advocate, and that I happen to support as well, we do need to
make changes in the IRS.
And I want to thank you again for this morning extending
your hand to work with us to come up with changes that really
make sense, even in this imperfect world, to make the IRS work
better.
I agree with many of your statements with regard to
Treasury's proposal yesterday. Among other things, it was said
in the proposal that fundamental tax reform would not
necessarily simplify the Code, and would not necessarily make
the IRS' job easier. I think that is difficult to defend.
I think it is absolutely true that we need fundamental tax
reform in order to move the system in a more aggressive way to
make it easier on the taxpayer.
But short of that, I do think there are things we can do,
and really look forward to working with you on that. You and I
have discussed several times the issue of simplification, even
within our existing Code.
No one knows the Tax Code better than you in Congress in my
view. I wonder if you would have any thoughts on whether short
of, again, structural tax reform this year we might be able to
move something forward to simplify our tax system.
Because, as you say, we are not going to be able to make
the kind of progress we would all like to see at the Internal
Revenue Service, I think, until we give the people lined up
behind you better tools.
Do you have any thoughts on that?
Chairman Archer. Well, I think we should pursue trying to
simplify the Code that we currently have, as we await that
halcyon day of structural tax reform where we can throw out the
income tax completely.
We have that responsibility to try to improve it,
constructively. And with the work that you've been doing, and
the analysis that you and others have been doing, our
Subcommittee should consider that. We have the question of
revenue loss, of course, and what becomes very, very difficult
is that when you begin to simplify, generally you are looking
at revenue losses.
But to the degree that we don't have any significant
revenue loss, I would hope that we could pursue some type of
effective simplification this year.
Mr. Portman. We'd love to work with you on that through the
Commission, through the Full Committee and this Subcommittee.
Let me just make one final comment, and that is that after the
last 9 months of analyzing the various challenges the IRS faces
and problems at the IRS, I think it is fair to say that all 17
Commissioners, many of whom came at it, frankly, from a
different perspective, now believe that if we do not address
simplification, we will not have done our job.
Certainly there are other problems at the IRS that need
addressing, some of which were discussed yesterday by the
Deputy Secretary of the Treasury. We believe that some of those
solutions make sense. Some of them don't go far enough.
But I think it's fair to say that all 17 members, and this
includes a former Commissioner, as you know, a representative
of taxpayer advocate groups, the head of the union for the
Treasury Department, and a lot of experts from around the
country, now truly are committed to the notion of
simplification--really following along the lines of what you've
been talking about for years.
And again, short of major structural tax reform, I would
hope that we could move in that direction. Thank you, Mr.
Chairman.
Chairman Archer. Thank you, Mr. Portman. Thank you for the
good work that you've been doing in trying to lead us down the
path toward a simpler income tax.
Chairman Johnson. Mr. Ramstad.
Mr. Ramstad. Thank you, Madam Chair. Mr. Chairman, I, too,
want to applaud your strong, outspoken and effective leadership
in this area. It's accurate to say that no one in this Congress
or this town has done more to highlight the need for major tax
reform than you, and we all appreciate that.
And I also appreciate the comments of Mr. Coyne. We do need
to work together in a bipartisan, pragmatic way to get this
done. I saw this headline this morning, after running my 3
miles, and it set me back.
This is not about heading off the GOP. The headline reads,
Clinton IRS Plan Seeks to Head Off GOP. This is not about
politics as usual. It's not about us trying to preempt them or
trying to outdo them politically. This is something that there
is strong unanimity, certainly, among the American people that
we do need major, structural tax reform, that the present
system is neither simple nor fair--two requisite elements, as
we all know, for any legitimate tax system.
So I truly hope that those at the other end of Pennsylvania
Avenue understand, as well as those on this Subcommittee and in
this Congress, that we do truly need to work together, because
that's what the American people want, and that's what they
deserve.
And I was encouraged. My question was the same as Mr.
Portman's. I think most recognize that we probably will fall
short of major structural reform this year--of a complete,
sweeping, comprehensive overhaul of the system--but that we
should enact simplification.
I was very encouraged by your response, as well as your
testimony. So thank you, again, Mr. Chairman. Madam Chair, this
is an important area. I don't think anything is more important
to the American taxpayers than what we're talking about today.
Thank you.
Chairman Johnson. Thank you very much, Mr. Ramstad, and I
agree with you absolutely. It's not about one party beating
another. It's about service to the American people, and whether
or not a great and free Nation like America can keep in place a
voluntary tax system. And we are really there now. We have to
deal with this, and your comments are right on, as is the
Chairman's testimony.
Mr. Watkins.
Mr. Watkins. Madam Chair, with all respect, I just walked
in. May I yield to my colleague from Missouri, and then I'll
take the last shot?
Chairman Johnson. All right. I'll recognize Mr. Hulshof.
Mr. Hulshof. Thank you, Madam Chair. Mr. Chairman, it's
good to be here. I just learned that you and I have something
else in common. I, too, do my own taxes. I took every tax law
course that the University of Mississippi had to offer.
I noticed that during your testimony that some of the
representatives from the IRS that are here in the room began to
shake their heads in disagreement with some of the things you
had to say. And my only comment would be when I'm chewing my
pencil trying to muddle through the tax forms as I do my taxes,
I'm very violently shaking my head in disagreement, and
certainly applaud all your efforts, as we move toward a simpler
tax system.
I also applaud, Madam Chair, that this is a dialog that I
think the people of this country need to participate in. Any
time we have some major reforms--and I look at certain reforms
that have been attempted in the past, regarding health care,
Medicare, when we don't bring in the American people it's
difficult to make our case.
So I certainly appreciate, Mr. Chairman, your testimony as
we begin to bring the American people into this dialog as to
what sort of tax system they would prefer. And again, I
appreciate your testimony here today.
Chairman Johnson. Thank you. Mr. Watkins.
Mr. Watkins. Thank you, Madam Chair. Mr. Chairman, I think
like all Americans I would like to have more simple tax--I
don't do mine. I have to get a CPA to do it.
But my concern is something I think we share, and that's
whatever changes we make, we try to make this an economic
growth package, a package with changing tax structure that
would allow us to see more economic growth.
And I keep pushing this, and I wanted to just make a little
more record on it again, that it seems like the administration
has settled for a low economic growth policy. And I think it
shouldn't be dismissed by the Congress or the American people
that with this type of policy, it's not meeting our present-day
needs, and puts tremendous burden on trying to find the revenue
to try to carry out the functions of government today.
But also it's selling the future of our children and our
grandchildren down the drain here in America. I think we have
got to try to change the tax structure that will enhance our
economic growth in the United States. Because we're in a
global, competitive world. We're not going to go back to an
isolated country and we're going to lose our leadership in the
economic world in the next decade or so if we don't make some
changes today or in the days and months ahead.
So with whatever structure changes we make, if it's tax
simplification, if it's a flat tax, a modified consumption tax,
whatever, I think we've got to--I keep emphasizing, every group
that comes into my office, I talk about it, every group back
home I talk about it, that if we continue to settle for a low
economic growth policy, we are selling the future down the
drain for our children and our grandchildren.
And I think it behooves, and I want to be there trying to
do everything I can during my tenure here in Congress to try to
change our tax structure to the extent that will allow us and
enhance that opportunity.
And so as we go about trying to simplify, I hope we will
always continue to try to put the economic growth out front,
because we're going to need it. So I thank you.
Chairman Archer. Mr. Watkins, thank you for your comments,
and although the focus, I know, of this hearing is primarily
simplification and perhaps fairness, the gentleman from
Oklahoma is absolutely correct.
We need a Tax Code that will give us an advantage,
competitively, in the world marketplace, not a disadvantage.
And the current Income Tax Code disadvantages us in our
ability to compete with our foreign competitors, and as a
result of that, impact negatively on our ability to grow and
create jobs for export, which are the best kind of jobs.
And the gentleman is absolutely correct. That should be a
major factor in our consideration, when we do start talking
about restructuring our entire tax system.
Chairman Johnson. Mr. Chairman, we thank you for your
testimony and we look forward as a Subcommittee to working with
the Full Committee on these issues. We are, as you know,
represented on the Restructuring Commission, the Commission
that will propose how we restructure the IRS to better
accomplish its goals, by both Mr. Coyne and Mr. Portman.
And we will be coming to you with proposals. We will be
holding hearings on those. But it is appropriate that at this
budget hearing we find ourselves talking about restructuring as
well as Tax Code reform.
In the current budget, the administration proposes putting
more money into telephones and telephone access for customers.
Well, that's, of course, important. It's one of the big
problems that they have.
But they take the money from document matching and
examination activities, which is the way we collect money that
isn't voluntarily paid. And they anticipate that because of
this diversion of resources we will collect $35 billion instead
of $38 billion next year. So we're going to lose $3 billion in
revenue because of the place from which we're going to take
resources to be more responsive to the ordinary citizen who has
an ordinary problem with the IRS.
Surely we can do better than robbing Peter to pay Paul.
Surely it is time now to look at the budget, look at the Code,
look at the agency structure and act. And I think your comments
today have given us a very clear indication of what the
principles are that ought to underlie our Tax Code and
therefore direct our action, both as we look at Tax Code
reform, and as we look at the agency structure that we need to
have in place to implement that Tax Code.
So I thank you for your testimony here today. This is a
moment in history of great importance.
Chairman Archer. Well, I welcome, and I will look forward
to the recommendations of your Oversight Subcommittee, and
again I applaud all of you in a bipartisan basis for what
you're doing. Thank you.
Chairman Johnson. Thank you, Mr. Chairman.
I would like to call Mr. Dolan, the Deputy Commissioner of
the IRS.
Mike, I'd like you to introduce everybody before you begin,
and I hope in your testimony you will address the very
significant challenge of the current budget, which is over the
next 5 years to carry out the mission of the IRS with what will
be effectively $1 billion less in resources by the year 2002,
and with 541 fewer employees than in 1997.
We face an enormous challenge, and I hope your testimony on
your budget will be not only about numbers but about structure
and reform. Because if we don't talk about these things now, I
think we set both the IRS and our form of government up for
troubled waters and possible failure in the decade ahead.
I would like you to introduce your people, and I welcome
your testimony.
STATEMENT OF HON. MICHAEL P. DOLAN, DEPUTY COMMISSIONER,
INTERNAL REVENUE SERVICE; ACCOMPANIED BY TONY MUSICK, CHIEF
FINANCIAL OFFICER; DAVE MADER, CHIEF, MANAGEMENT AND
ADMINISTRATION; ARTHUR GROSS, ASSOCIATE COMMISSIONER AND CHIEF
INFORMATION OFFICER; AND JIM DONELSON, CHIEF, TAXPAYER SERVICE,
AND ACTING CHIEF, COMPLIANCE
Mr. Dolan. Thank you, Madam Chair. It's a pleasure to be
here with my colleagues today, and I'll start from my left.
Tony Musick is our Chief Financial Officer. To my immediate
left, Dave Mader, is our Chief of Management and
Administration. To my immediate right is Art Gross, our
Associate Commissioner and CIO. And to his right is Jim
Donelson, who is the Chief of Taxpayer Service, and Acting
Chief of Compliance.
And we very much appreciate the opportunity to accept your
invitation and to focus chiefly on the budget and on the filing
season. We've got, Madam Chair, a longer statement that
hopefully goes into a little more detail on some of the
subjects that you asked about.
Chairman Johnson. Certainly. That will be included in the
record, Mr. Dolan.
Mr. Dolan. I'd like to do an opening statement, and to the
extent I don't meet your standard of what you'd like me to
comment on, I'm certainly prepared to answer any questions.
I was going to start off by saying that it might be an
understatement on my part to say that these are challenging
days to be in tax administration. But I think that between
Chairman Archer and the balance of the panel you sort of made
that case.
I think that you, Madam Chair, and Chairman Archer pointed
out some things that we confront every day, and not only with
respect to the complexity of the Code. First, there is an
expectation among our customers that they are entitled to and
do receive first-class treatment.
Second, we are part of a mosaic that finds a total
shrinking budget available to do what are ``discretionary''
things within the current budget structure. And finally, you,
Madam Chair, talked about the structure.
We are in the midst of taking an organizational structure
born when geographical segmentation and functional segmentation
made more sense than it does today: When the underlying
taxpayer population is more mobile; when what is going on in
the economy has evolved much, as Chairman Archer said, from the
days of sort of stand-alone financial life and big corporations
to today where financial life is a lot different.
It's a lot more dynamic. It is a lot more interdependent,
and it is not subject to neat little functional or geographical
boxes. And that underlies some of the changes that we have set
out to make in the last couple of years.
And last, one of the realities with which we operate today
is that our technology infrastructure strains under the
business problems that we try to solve day in and day out.
Some of those business problems are a function of the Tax
Code. Some are a function of the size of our customer base.
Some are a function of the expectations of our customers.
Some of them are functions of laws that require us--in the
CFO Act or other places--to make our systems comply with
standards that are enacted after the systems were in place.
So without question our technology systems today are
strained, not only under the business problems they solve, but
also under the century date problem, such that like any other
major enterprise in America, we have a major, major challenge
in making our systems compliant with the century date problem.
Significant work lies ahead of us on all those subjects,
and I think the seriousness of that couldn't be any more amply
documented than the work that the Restructuring Commission has
done, or the work represented in yesterday's announcement by
Deputy Secretary Summers. Both of those I think adequately and
vigorously put a spotlight on the work that remains.
One of the things I'd like to not have lost in that
process, though, is the fact that a fair amount of progress has
been made, and I respect, Madam Chair, the comments you made at
the outset about the Commissioner's devotion of her energies;
it's not all about future victories.
A lot of points have been put on the board in recent years
that don't represent the whole solution, but represent the kind
of progress that I think all of us are committed to to make the
system work as effectively as possible.
Some of those really back up against a basic vision that
we've had for some time, and the vision has two or three pieces
to it that aren't rocket science. The first piece of the vision
is that we think it's now fundamentally easier for people to
receive information from us, to file, to make payments to us,
and to get payments back from us.
I mean, those are the kinds of key front-end transactions
that the vast majority of Americans have with us, and
thankfully they don't need to have another transaction after
that. But that whole process of focusing on how you make that
easier in large part means how you can support it with more
electronic commerce.
But that whole function of the interface with the customer
is a key part of our vision. The next one would be our customer
service capacity. We have got to have a capacity to perform the
way people have come to understand and expect from the best of
the retail industry.
And to do that means a couple of things. One thing it means
is that we have to allow folks broad access to us, so that if
they have a question, or they're trying to meet an obligation,
they have an opportunity to get to us.
The other thing that we have to do, and I think we have
made some progress in doing it, is when somebody has a problem,
we've got to be able to resolve it--resolve it quickly and
resolve it finally.
Another part of our vision anticipates change in the
compliance arena. And you quite accurately refer to one aspect
of our compliance program that will look different in 1998 than
it has in the past. Overall, Madam Chair, we've got a vision of
compliance that says yes, many of the tried and true elements
of audits and accounts receivable have got to be a component of
any compliance strategy.
But there's no way that you solve this compliance issue, or
resolve this compliance gap, in only retail, after-the-fact
transactions. We've got to find more and more effective up
front ways of segmenting noncompliance, and dealing with the
segments as more preventative as opposed to strictly the after-
the-fact, retail kinds of things.
And I think we've done a number of things that have started
us on that path.
And last, the key piece of the vision that we seek to
deliver to the American public does indeed require us to
modernize and modernize effectively our information technology.
I think it is clear that we have to have a new corporate data
capacity. We don't have to have one that's mandated and
splintered and changed at the margin. But we have to have a
capacity to collect what is probably the most important asset
the current tax system has--which is the data that underlies
our individual compliance patterns and our individual
compliance needs.
And we've then got to have a way--within that corporate
structure--to manage that data much more dynamically and
robustly than we do today. And last, the data has to find its
way easily into the hands of the customer service person, or
the compliance person who is trying to do their job.
Those are the components, the vision. I think if we can
create that kind of a technology infrastructure, it will,
indeed, allow us to leverage the first three or four pieces of
that system.
I think the filing season this year is evidence that some
of this is already taking hold, as you pointed out in your
opening remarks. And I think the GAO will come in behind us and
say that by most conventional standards, this filing season is
going well.
One thing that helps us, and always helps us, is if there
is no major tax law change. And none of us counted what went on
in the last Congress as major tax law change, although I know
you know, Madam Chair, that there were still several hundred
changes that we ended up trying to embrace this year, either as
a part of the immediate filing season, or the ones to follow.
But it helps us to be able to enter the filing season
without a major set of tax changes.
In the notion of trying to improve that access, that front-
end access, one thing that we're very proud of this year is
that we have made some strides in the telephone access. We've
made some tradeoffs, and I'd like to come back to maybe respond
to both questions and more directly to your concern about
whether they are the right tradeoffs, and whether they are
robbing Peter to pay Paul.
But we've made some choices that basically said to us,
based on our experience over the last 2 or 3 years, when we
were answering the questions--and answering them well--about
half of our customers were unable to get to us.
None of us are satisfied with operating in that
environment. You can answer every question right, but if half
of your customers can't get to you, it's a loser. And so that's
a large part of what we have tried to do. We tried to gut our
way through this year by taking that level of access to a point
that we still haven't achieved, but we're answering in excess
of 70 percent of the people who are trying to get to us now.
Our notion also is that we're going to learn some things
this year. Some part of the volume that's been out there in the
past years is going to be moderated if we can indeed answer
people when they want to get to us in the first instance, and
that doesn't create a repeat customer call.
The other thing we have done fairly effectively this year
is to do more than just throw resources at telephone calls. Not
for a moment have we wanted to play a pat hand or just meet the
demand that's out there. We know we've got to try to affect the
demand.
And one of the things that we've been very successful at
this year has been going through our whole notice family and
looking at our notices. Last year we sent about 100 million
notices out. Many of those notices prompt people to ask us,
``What is it you're really trying to say to me? What should I
do as a result of this transaction?''
Some of the notices are written in governmentese rather
than in English. So, we have been about a very deliberate
process that at this point in time has let us take out of the
system 12 notices and something in the neighborhood of 18
million actual mailouts to customers.
We've got a second wave that we talk about in more detail
in my statement that will eliminate the next series of notices
and maybe another 3 million issuances.
In addition to making a variety of access points available
to taxpayers, we've done some significant work, as you know,
Madam Chair, in terms of creating the flexibility for people to
come in and talk to a live assister or to use a voice response
unit, or to use our TeleTax system, which covers 148 questions.
And last year our telephone traffic was evenly split with
45 million calls to the nondirectly assisted system, and about
45 million to the directly assisted system. This year we hope
to answer another 15 million of the directly assisted and to
get another 2 to 3 million calls into the automated systems.
Additionally, this year, we've segmented out two other
kinds of calls. We've segmented out the person who comes to us
with a notice. Somebody who has a notice from us is trying to
pay, trying to figure out what they have to do to satisfy their
obligation. We've created an access point for that person that
hopefully guarantees a much higher probability that that person
is able to get through.
And the second type of call segmented was selected to take
what is a pretty significant inventory of people who only want
to know about their refund and segment those calls so that we
aren't consuming the energy of an IRS employee who might be
able to answer a more complex call with the kind of question
that could be more easily and more quickly answered on just the
status of a refund.
We've done something else that signals where we are trying
to go. In the old days if you wanted a tax return, whether you
wanted to file your tax return or you asked your accountant to
do it, you typically either got the package from us in the
mail, or you went to the bank, the post office, or the library.
Increasingly we've tried to create other ways for people to
do that. Now, we give the practitioners--and we make widely
available--a CD-ROM capability so that they don't have to have
a storeroom full of forms, but can take the CD-ROM and have
available to them the forms and schedules that they can print
as needed.
We've had a very good experience in the fax forms arena. A
taxpayer who has access to a fax and finds himself on April 14,
or Sunday on the kitchen table, can dial through, 24 hours a
day, identify from a menu the form or the schedule they need,
and have us fax it to them.
And then last, I know we've bragged a lot about our Web
site. And that has been a terrific success by most standards,
private or public. Last year at this point we had 29 million
hits. This year, so far, there are 82.9 million hits, and we
know some of the hits are people downloading forms and
publications. Over 1 million have been people who have got
their forms or publications that way. A bunch of the rest of it
is coming into our 148 most asked questions, and, again,
hopefully bringing the demand down for the telephones.
As for easier filing methods, one of the things that we
have said is we'd like to have electronic commerce or an
electronic filing strategy that takes everybody's returns in
electronically. We'd love to have that.
We know in some part the way to get there has to do with
the way we effectively design and market electronic filing. And
in part it has to do with what taxpayers or customers really
want to do with their tax returns or their data.
But one of the things we've tried to do each year is make
incremental progress with electronic filing. And the product
that we first introduced nationwide last year, the TeleFile
product, once again looks like it's going to meet with even
better success.
At this point this year we've got 3.6 million TeleFile
returns as contrasted with only 2.3 million last year, which is
a 54-percent increase at this point in the year. We expect that
product again to find its way into the marketplace of 26
million people who are eligible for it.
Regular electronic filing is also up by 18 percent this
year. Fed/State, which allows a person to have one transaction
and to feed both the Federal and the State interest, is up by
34 percent this year.
And we're about to do something new, which I think is kind
of a neat way to take the TeleFile product, which has worked
well in the individual market, to the business market. With the
quarter that will end in March, we will invite nearly 1 million
taxpayers in the 14 Southeastern States to do their 941, their
quarterly tax deposit, with a touch tone telephone, and make
that transaction a TeleFile type transaction.
So, again, we are not where we would love to be overall in
the final state, but these are steps toward the final vision
that says it's got to be made easier for people to get in touch
with us and to have a transaction with us.
We are due to go back to the management, the Treasury
Modernization Board in May to talk about how to take the
electronic tax administration strategy to the next level. We
think that answer can only involve a very healthy partnership
with the private sector.
We clearly know that there are issues in the commercial
sector--whether it's the tax preparation, the financial
services, the banks--the entire suite of folks involved in that
sector are going to propose answers as to how they can assist
the development of an electronic tax administration strategy.
We very much look forward to that.
I am going to very quickly talk about the budget. I know
you have--perhaps--some of your most significant questions
there, and so I will try to anticipate a couple, but then be
ready for others.
Last year, as I think you know, Madam Chair, we went
through a pretty difficult transition from fiscal year 1995 to
1996. We found ourselves with the tick of the fiscal year clock
having about 6,200 more people on the payroll than we had money
to pay.
So we essentially spent all of 1996 wrestling with that
problem. And it wasn't as if we had unlimited options, because
there were some givens. You've got to run a filing season.
You've got to anticipate the telephone demand. You've got to
get refunds out on time.
So when you take those givens, that there are 6,300 people
more or less that you can't pay for, but you know you've got
some givens that must be paid for, we did about the only thing
that was available to us: We took the dollars that weren't
associated with permanent salaries, the dollars that are in our
seasonal and WAE's and tried to line them up first to ensure
that the returns got processed timely, then that the refunds
were made timely, and then that we were able to answer as many
calls as we possibly could.
That was not a pretty process. That was a process that had
us taking staff years based more on the nature of the staff
year, the fact that it was a temporary dollar that didn't have
a body onboard, and using the available resource to plug what
we thought were the most critical parts of our mission
delivery.
Beyond that, we did some other things that didn't make a
lot of sense. We cut training to an alltime low. We cut travel
in a way that was not optimum. We made some choices about
enforcement expenses: When we would file liens and when we'd
bring expert witnesses in on some transactions, as a result,
not necessarily of any grand, strategic plan, but as a result
of trying to use 1996 to transition from an environment that we
thought was going to be a 5-year revenue initiative to one that
turned out to be only a 1-year revenue initiative.
We hired, ramped up and were prepared for 5 years, and had
to end after the first year.
The present year, 1997, will have us doing more of that
transition. But we were able in 1996 to do a fair amount of
transitioning, such that the 1997 problem isn't of the same
dimension. The year 1997, as you well know, was a step down
still further from 1996, so in absolute terms, we have fewer
dollars in 1997 than in 1996.
But what I think you will want to talk about, perhaps,
Madam Chair, is some of the choices we have made in 1997, and
envision in 1998. In our 1998 budget, the administration has
proposed essentially to fund us at the current level. And what
that will allow us to do is take the human assets and
compliance and customer service and essentially roll them over
into the next year.
Our challenge is obviously to leverage them more highly so
that the rollover doesn't get us only what last year's numbers
do, but gets us a different, a more impactful involvement in
both compliance and customer service.
I look forward to maybe going into more detail on that. I
know I've gone through this reasonably quickly. But we have
made a series of choices that we feel we can stand behind, and
we would clearly like the input and the influence of this
Subcommittee on whether or not those are choices that you think
meet the expectations the Subcommittee has.
The other thing that I would comment on before asking Art
to spend 1 minute on what he envisions for our 1998 information
technology is the couple of things in compliance we really hope
will continue to bear fruit.
You know, I think, that this year we have been able to
install in nine districts, as of the end of February, a system
called the Integrated Collection System. That system makes our
revenue officers on average at least 30 percent more effective,
because of the kind of information it puts in their hands and
the ability to manage their inventories. They are not
paperbound, deskbound, or officebound any more.
That's a system that will be a key information rollout for
us in 1998. We are very much interested in having that get as
wide a penetration as possible. That allows us to compensate
for what has been the erosion in the actual revenue officer
base.
In the revenue agent or examination side, we continue to
look at strategies like our market segment strategy, where we
hope through the publication of some 31 audit guides, and
market guides, that we can shape an industrywide reaction to
something and depend less on an audit-by-audit transaction.
We're going to continue our tip agreements, which, again,
allow us to take a whole segment of taxpayers rather than spend
time auditing onesies and twosies. Instead, we move an entire
set of entities into a compliance mode.
You, I know, Madam Chair, were very involved last year in
our classification settlement program, where we took the
nettlesome issue of the employee/independent contractor status
that has been sort of a bugaboo for all of us for a long time.
We took and put that concept into what maybe is not the perfect
solution, but it's a solution that allows people to come in and
get themselves set up prospectively. And it takes us out of the
onesies and twosies audit process.
So that has helped as has the reliance on a concept that we
have built in each of our district offices. We now have a
district office research capacity, which we never had in the
past. It was always a capacity that was funded centrally and
managed centrally.
Now each of our 33 districts have the capacity to know more
about the unique features of their taxpayer base. The southern
California taxpayer is not like the Connecticut taxpayer. The
Illinois taxpayer is not like the Mississippi taxpayer, and it
doesn't make sense for us to devote resources or employ
strategies as if all taxpayers are the same.
And that's another of the aspects that we hope will help us
get more leverage out of that compliance resource.
Maybe what I ought to do is, since I've probably used
enough of your time, let me ask Arthur to spend, with your
indulgence, just a couple of minutes highlighting the things
that we think will be key aspects on the technology side of our
1998 budget.
Chairman Johnson. We'd be happy to hear from Mr. Gross.
We're pleased to have him at the table.
Mr. Gross. Thank you, Madam Chair, and distinguished
Members.
My tenure began on April 15, 1996. And in the 11 months
since that time in which I inherited an organization that had
lost 20 percent of its staffing over the previous 3 years, had
a quality assurance function that had sunk to 30 percent of the
minimum national standards for those kinds of functions, had a
year 2000 project office that had three staff members and a $20
million total project budget, a demoralized work force, but
nevertheless delivered a filing season this year.
From that base, over the last 11 months, we have focused on
the following priorities, on a previous and go forward basis.
Year 2000 is our single greatest priority. We have established
a massive project office. We pulled together the best and the
brightest of IRS to manage the program. We've partnered with
contractors.
We've acquired resources from Congress in both 1997, and,
plan to in 1998. I would say that we have command and control,
reasonable command and control, over the core business systems
with respect to century date conversion.
And what I mean by that is the systems that year in and
year out process more than 200 million tax returns, issue more
than 80 million refunds, process more than $1.4 trillion in tax
payments; I would say we have reasonable command and control
over that aspect of the century date conversion problem.
Nevertheless there are still many problems with the balance
of our infrastructure. We have perhaps as many as 3,000
applications in the field for which we have not even identified
a complete inventory. And I would say that our single greatest
priority on a go forward basis in 1998 must be the century date
conversion.
Along with that we are rebuilding our quality assurance
function. And with respect to modernization, we are completing
preparedness, and preparedness is some ways off.
Our commitment in the future is that we will not begin
modernization until we are ready, and that readiness involves
three critical elements: We need a significant partnership, and
a unique partnership, a strategic partnership with the private
sector; we need a disciplined set of processes and practices
which we do not yet have in place; most importantly, we need a
practical, disciplined and focused plan. And that plan would be
built around creating corporate data bases, storing corporate
data, and accessing corporate data efficiently for customer
service and compliance.
Mr. Dolan. Madam Chair, we'd be happy to take your
questions. I guess as we do that, I would also like to make the
observation that we very much appreciate the quality of the
interaction that we have with the Subcommittee staff.
We frequently are working with tough issues, but we almost
always find an ear and a receptivity that I think makes our
mutual interests and our joint jobs more constructive. And we
appreciate that.
[The prepared statement and attachment follow:]
Statement of Hon. Michael P. Dolan, Deputy Commissioner, Internal
Revenue Service
Madame Chairman and Distinguished Members of the
Subcommittee:
With me this morning are Arthur Gross, Associate
Commissioner and Chief Information Officer; Jim Donelson, Chief
Taxpayer Service and Acting Chief Compliance Officer; Tony
Musick, Chief Financial Officer; and Dave Mader, Chief
Management and Administration. We are pleased to be here this
morning to discuss the IRS' 1997 filing season as well as the
Service's FY 1998 budget request and its effect on taxpayer
services, the Internal Revenue Service (IRS) compliance
efforts, the IRS reorganization, and our continuing efforts to
modernize.
I. Introduction
In today's testimony, I would like to highlight what the
IRS has accomplished over the past several years with its
appropriations and what we expect to accomplish with our FY
1998 appropriation. Many of the programs that IRS has initiated
or improved take time before their results are fully reflected
in performance indicators. However, the evidence is already
clear that the IRS has made progress in making it easier for
taxpayers to get information about their tax obligations, pay
their taxes, file their returns, and obtain their refunds where
appropriate.
An important responsibility for the IRS is to manage a
successful filing season. We collect more than one trillion
dollars annually (see Chart 1), process more than 200 million
returns and 85 million refunds, and assist millions of
taxpayers to comply with their obligations. Over the past few
years, we have been trying to shift taxpayers, and the IRS,
from some paper transactions. We have made more and more
information available via the telephone, computer, fax
services, and CD-ROM. We have published telephone numbers which
are dedicated to refund information and we have established
what amounts to an IRS answering machine so that taxpayers can
call in and leave a brief description of their issue. We also
have encouraged taxpayers to use alternatives to filing by
paper.
The Service recognizes that it must continue to improve
services, reduce costs, and provide an effective balance
between assisting taxpayers, processing returns, issuing
refunds and ensuring that all segments of the taxpaying
public--wage earners, self-employed, and businesses--pay their
proper amount of tax, at the least cost to the government and
to them. Balancing these seemingly competing interests so that
the IRS can continue to be the world leader in tax
administration is not a simple task.
The FY 1998 budget is about making informed choices based
upon the best information available to strike a balance and
recognizing when those choices are made what the consequences
are to customer service, taxpayer burden, fairness and
efficiency. The IRS and the Congress both share a common
interest: to provide this country with a fair and effective tax
administration system.
II. Operations
Background. The IRS, like many large businesses, has many
functions--all dedicated to accomplishing its mission. The
Service collects money, processes data, maintains customer
accounts, and responds to taxpayers' questions. Customers
expect the Service to do this accurately and efficiently while
maintaining a high level of integrity and safeguarding their
privacy.
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The Service is in the midst of a major transition that
began several years ago and that will continue for many more
years. As I discuss current operations and the FY 1998 budget
request, I would like to focus on what the Service is doing to
make it easier for taxpayers and how the IRS is doing its job
more efficiently and effectively.
Serving Taxpayers Better
Making It Easier For Taxpayers. We understand that
taxpayers get frustrated when they call the IRS and repeatedly
get a busy signal. In the past four years, the IRS has answered
more calls than ever before, but there are still taxpayers
whose calls are not answered. There are also a growing number
of taxpayers who visit or write. In 1993, the IRS heard from
taxpayers by phone, visit, or letter 73 million times; last
year, that number had increased to nearly 106 million taxpayers
(see Chart 2). Access to the TeleTax recorded information line,
which offers taped information on 148 topics all day, every
day, and refund information 16 hours a day, Monday through
Friday, has been expanded. Last year over 45 million TeleTax
calls were answered and assistors answered another 45 million
toll-free calls. The overall level of taxpayer access to
telephone assistance increased from 39 percent to 46 percent.
Our FY 1998 target for taxpayer level of access is
approximately 60 percent. More taxpayers were served by
increasing productivity, expanding hours of service, and
installing call routing equipment that allows the ever growing
telephone workload to be better managed. This technology allows
the Service, among other things, to route calls to available
assistors, who may be in the next county, next state, or across
the country. As a result, account issues could be resolved with
a single call over 80 percent of the time.
In FY 1997, assistors expect to answer 60 million toll-free
calls. This represents an increase of 15 million over the 45
million answered last year. In addition, the TeleTax system
should provide service to over 47 million taxpayers. During the
1997 filing season, the Service is using its resources
differently to ensure more taxpayers are served. So that
assistors can answer more tax law and account questions, the
IRS added a new, toll-free number that will enable taxpayers to
quickly determine the status of their refunds without having to
speak to an assistor. Taxpayers who wish to call after hours or
who do not want to be put on hold may leave their questions on
recorded messages, and they will be contacted within two
business days with an answer. In an effort to improve telephone
service this year, the IRS is temporarily using some of its
examination personnel to answer the telephones. In other words,
compliance personnel are being used to perform traditional
taxpayer service functions. Because of these efforts, we have
significantly improved our toll-free telephone system,
answering over 70 percent of callers. This is a 20 percentage
point increase over last year.
Despite these improvements, not every taxpayer call is
being answered and not all taxpayers who want to be served are
being served. Resource constraints ultimately limit the number
of calls that can be answered so the Service is looking for
other ways to meet taxpayers' information needs. At the outset,
that means making the information provided clear enough that
taxpayers will not need to contact the Service.
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The notice reengineering efforts eliminated 12 different
notices in FY 1996; this resulted in 18 million fewer notices
being issued and mailed to taxpayers--potentially avoiding 18
million telephone calls or letters from taxpayers. We plan to
eliminate another 20 notices and letters for FY 1997. This is
good for taxpayers, who not only are relieved of the stress
when an official looking letter from the IRS arrives in the
mail, but who may not need to follow up with the Service. It
also is good for the IRS; money is saved on printing and
postage and subsequent questions are eliminated. The notices
that will continue are being rewritten in clearer language so
that fewer recipients will need to have any additional
explanation.
The IRS also is conducting a test during this filing season
to determine the optimal level of access, how the level of
access affects repeat callers and the number of taxpayers who
walk into IRS offices, and how it impacts the amount of
correspondence received. With this information, the Service can
better tailor its communications with taxpayers and make better
decisions about the application of resources (the use of
current technology) and the need for additional systemic
support.
Technology has enabled entirely new ways for taxpayers to
get forms and information from the Service while reducing IRS'
postage and printing costs. Three years ago, taxpayers
requesting a publication or form either had to call to have the
material mailed or they had to drop by an IRS office, their
local post office, or library. Not today--at least for many
taxpayers. Tax forms and publications now are available on CD-
ROM, and, last year, the IRS instituted an innovative FAX-Forms
service that processed over 79,000 requests for tax forms and
instructions by fax during the filing season; so far this
filing season, over 240,000 requests have been processed. This
service has been expanded this year by doubling the number of
forms and instructions available and advertising the FAX phone
number in all 1040 series tax packages.
For the 1996 filing season, the Service also developed a
world-class Web site that provides access to over 700 current
and prior year tax forms and instructions, tax publications,
regulations with plain English summaries, frequently asked
questions, disaster relief assistance, newsletters, press
releases, information on 148 tax topics, interactive
applications that answer tax questions, and other information.
This service is available world-wide, 24 hours a day, to anyone
with access to a personal computer and the Internet. During
1996, over 100 million ``hits'' were logged and over three
million files were downloaded. This year, the site is already
averaging over one million ``hits'' a day and over 2.4 million
files have been downloaded. This Web Site has received
outstanding customer, media, and industry feedback and has been
honored with over 40 awards for its design and ease of use from
such sources as Netscape, PBS, Wired magazine, USA Today, Tax
World, Money magazine, Microsoft, Harcourt Brace, PC Computing
Magazine, and Government Executive magazine.
As a way of expanding the help available to taxpayers, the
IRS also sponsors VITA, the Volunteer Income Tax Assistance
program, and TCE, Tax Counseling for the Elderly. With these
two programs, the IRS increased taxpayer assistance by giving
taxpayers the opportunity to have direct contact at almost
20,000 sites with volunteers trained by IRS personnel. Last
year, over 80,000 volunteers served almost 3.5 million
taxpayers through both of these programs.
Easier Filing Methods. One of the Service's goals has been
to make it easier for taxpayers to file their tax returns.
Current data suggests progress is being made on this front.
Almost 50 percent of individual filers now use the easiest tax
forms and almost 75 percent take the standard deduction.
What could be easier than filing by telephone? This filing
season, almost 26 million taxpayers are eligible to file their
tax returns with a phone call that takes less than ten minutes.
By making TeleFile available to married taxpayers and taxpayers
wanting direct deposit of their refunds, three million more
taxpayers can use TeleFile this year. Last year, the Service
received 2.8 million TeleFile returns; as of March 14, 1997,
over 3.6 million have been received for this year. Starting in
FY 1994, taxpayers could file from their home computer through
a third-party transmitter. In 1996, the IRS received over
158,000 returns that way, and as of March 14, 1997, 233,000
returns have been received. Also, last year, the IRS forwarded
to 31 states 3.2 million returns filed through its joint Fed/
State electronic filing program; this year the District of
Columbia has been added. This represents a significant savings
to taxpayers and to the states in this program.
Electronic filing is not just limited to individuals. It is
also available to businesses. Employers nationwide can now file
their ``Employer's Quarterly Tax Return'' (Form 941)
electronically. Almost 363,000 of these returns were filed in
this manner for 1996. A TeleFile option for the simpler Form
941 returns will be tested later this spring with nearly one
million businesses in 14 states.
Electronic filing offers advantages for taxpayers and for
the IRS. One advantage is that taxpayer refunds are received
sooner--an average of 21 days as opposed to 40 days for paper
returns. The advantage for the IRS is the receipt of more
accurate information more quickly.
Electronic tax administration means more than just
receiving returns electronically; it includes electronic
payments as well. Most of the over 88 million taxpayers who
will be entitled to refunds this year can have them directly
deposited into their bank accounts. Taxpayers enjoy the safety
and ease of direct deposit and the government saves the expense
of printing and mailing checks. A change to the Form 1040 has
made it even easier for taxpayers to request direct deposit
this year. Last year, if a taxpayer wanted a refund deposited
directly into a bank account, he or she had to submit a
separate schedule. This year, a few extra lines on the Form
1040 will do it. As of March 14 in this filing season, we have
had an increase of approximately 42 percent in the number of
filers requesting direct deposit of their refunds.
The TaxLink/Electronic Funds Transfer Payment System
(EFTPS), used by employers to pay employment and other
depository taxes electronically, is faster, easier, and more
accurate for tax collectors and taxpayers alike. In FY 1996,
more than $380 billion were deposited electronically, an
increase over the $232 billion deposited in FY 1995. As of
March 15, 1997, over 928,000 enrollment forms had been received
and approximately $42.6 billion had been collected through the
new EFTPS. The IRS has communicated extensively with banks,
payroll companies, and practitioner groups--as well as with the
taxpayers themselves--to enable a smooth July 1 implementation.
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The IRS currently is working on ways to further expand
electronic tax administration. The Service will soon present
additional ideas for expanding electronic tax administration to
the Treasury Modernization Management Board. At a minimum, it
will include the following:
full exploration of ways to make electronic filing
more attractive to taxpayers;
leveraging existing private and public sector
infrastructure; and
aggressively partnering with the private sector.
Despite new electronic options, the number of paper tax
returns remains large: the IRS processes over 190 million paper
returns and documents each year. To address the continuing
volume of paper returns, the IRS is pursuing the potential for
outsourcing the processing of paper returns as was outlined in
our January report. Based upon this input, and assuming that
there is commercial interest, a Request for Proposal would be
issued to obtain contractor bids. Risks are inherent in turning
such a critical system over to an outside processor. Thus, the
IRS has already begun the ongoing process of identifying
specific risks and potential mitigation strategies as well as
identifying ``inherently governmental'' functions in that
process. Based upon the experience of other agencies in large
scale outsourcing initiatives, the IRS estimates that it could
be as many as four years before it could be ready for a pilot
project on outsourcing paper returns processing.
Fairness: Ensuring All Taxpayers Pay the Proper Amount
Along with responsibility for serving taxpayers and
providing easier filing methods, the IRS is charged with
enforcing the tax laws--both civil and criminal. In furtherance
of its responsibility to enhance compliance, the Service has
continued to improve its compliance operations.
The FY 1998 budget requests approximately the same number
of employees in compliance as in the FY 1997 budget. Even so,
the Service is committed to continuing to help taxpayers file
and pay timely. For the past four years, the IRS has improved
the compliance program through earlier identification of
noncompliance patterns, innovative uses of compliance tools,
and improved procedures--such as the Market Segment
Specialization Program, offers in compromise, and installment
agreements.
Collection. For the past three years, the collection yield
has steadily increased. In FY 1994, collection yield increased
three percent; in FY 1995, it increased more than seven
percent; and in FY 1996, it increased 19 percent. The 1995 and
1996 increases reflect in part the additional collection
personnel hired as part of the 1995 Compliance Initiative.
Beyond that the results reflect the continued emphasis on early
involvement with delinquent taxpayers. As a result of
improvements in the Compliance Program and the Compliance
Initiative, the revenue collected from compliance increased
from $31.4 billion in 1995 to $38 billion in 1996 (see Chart
4). We have consciously prioritized ``front'' collection
operations--notice and telephone calls--to deal more quickly
with the tax debt. We also have made significant improvements
in the rate at which examination personnel secure collection of
agreed tax assessments. In 1996, 70 percent of agreed tax
assessments were collected at the earliest possible time--the
close of the examination.
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The Service has also expanded the use of an important
tool--the installment agreement--to keep taxpayers in the
system who cannot immediately pay all they owe. By increasing
installment agreement authority, installment collections have
increased from $2.28 billion in FY 1992 to $6 billion in FY
1996.
The improvements made in the collection process, which I
described earlier, not only helped increase the collection
yield over the last several years, but they are also helping
the IRS manage the accounts receivable inventory. The IRS plans
to continue increasing the collection yield through the use of
technology in field collection operations. In FY 1995, the
Integrated Collection System (ICS), which provides on-line
access to current account information to revenue officers, was
used in two districts. In these two districts, productivity
increased more than 30 percent, translating directly to
additional tax collections ``in the bank.'' By February 18,
1997, ICS was operational in nine districts.
Examination. In 1996, the Service closed over 2.1 million
examinations and audit coverage was 1.63 percent--maintaining
the accomplishments achieved in FY 1995. Over 184,000
determination letters were issued for exempt organizations and
employee plans.
The compliance program, however, is more than just
delinquent accounts and traditional audits. The Service has
continued to develop new compliance approaches. Through
programs like Accelerated Issue Resolution and Advance Pricing
Agreements, the IRS is stressing early resolution of issues--a
practice that can save all of the parties time and money. With
Accelerated Issue Resolution, the IRS can accelerate the
collection of the largest corporate assessments by resolving
recurring issues and simply carrying the resolution forward to
future years. Reducing the number of issues under examination
can save costs both for taxpayers and the Service. Under this
procedure, taxpayers have agreed to pay about $1.1 billion
between FY 1993 and FY 1996.
The Advance Pricing Agreement program was developed as a
new way to resolve intercompany pricing issues. As a
cooperative process, both taxpayers and the government derive
significant benefits. Taxpayers welcome certainty in a complex
area and avoid a lengthy debate with the IRS. By the end of FY
1996, the Service had entered into 79 Advance Pricing
Agreements. Currently, 146 Advance Pricing Agreements are in
process.
To address the noncompliance with underreporting of tip
income, the IRS, working with industry representatives,
developed the Tip Rate Determination Agreement (TRDA) and the
Tip Reporting Alternative Commitment (TRAC). These two
initiatives benefit both employers and employees. Employers
benefit from not having significant unplanned tax liabilities
assessed against them. Employees benefit from increased social
security benefits, unemployment benefits, retirement plan
contributions, and worker's compensation benefits. As of
December 31, 1996, the IRS had received over 3,100 TRAC
agreements representing more than 21,000 establishments and
more than 800 TRDA agreements with nearly 1,200 establishments.
From tax year 1994 to 1995, tips reported have increased over
$2 billion.
Working with private industry, the Service is responding to
the increased sophistication of transactions in the financial
world and specialization in the business community. The IRS has
cooperatively developed Market Segment Specialization Program
guidelines, focusing on the practical problems of examining a
market segment and identifying particular issues of interest to
the IRS. In turn, taxpayers are better informed about the
noncompliance in that market and about the IRS' position.
Through January 1997, the Service issued 31 Market Segment
guidelines. These guides are available to the public through
the Government Printing Office and also on the IRS Home Page on
the Internet.
Last year, the IRS continued its efforts to address the
problem of erroneous refund claims, one element of the filing
fraud issue identified by GAO as an area of high risk for the
IRS. The Service has contracted with the Los Alamos Labs for an
anomaly detection program to help spot erroneous refund claims.
The IRS also has continued and increased verifications,
including increased checks of social security numbers. On the
Electronic Return Filing System, there was a 25 percent
reduction from FY 1995 to FY 1996 in the number of returns
rejected because of missing, invalid, or duplicate uses of
social security numbers. Similar validations were conducted on
paper returns. In FY 1996, these efforts prevented over $900
million in erroneous or fraudulent refunds from being issued.
This filing season, the IRS has continued to refine the
efforts to address refund fraud based on what was done last
year. The Service is continuing to look carefully for
suspicious returns and, under legislation enacted last year, a
quicker, more efficient method to verify social security
numbers can be used as returns are processed.
In addition to compliance activities in examination and
collection, the IRS' Criminal Investigation (CI) Division
investigates complex financial transactions of taxpayers,
looking for criminal tax violations and money laundering. CI is
also actively identifying and investigating new and emerging
areas of tax fraud that affect the economy and prey on honest
citizens. These areas include bankruptcy, health care,
insurance, motor fuels excise taxes, non-traditional organized
crime, and telemarketing. Last year, CI increased the number of
investigations started in traditional criminal tax violations
by 14 percent; money laundering investigations increased by
eight percent; and bankruptcy investigations increased 58
percent.
The 1995 Compliance Initiative. In FY 1995, the Service
received the first year of funding for a five-year plan to
improve compliance with the dollars raised going directly to
deficit reduction. The compliance accomplishments attributable
to that initiative were impressive. An additional 676,000
examinations were closed and audit coverage increased from 1.08
percent to 1.63 percent in FY 1995. Furthermore, an additional
$803 million directly attributed to the first year of the
Compliance Initiative was collected, far exceeding the $331
million projected. Overall, with a five-year investment of $2
billion, the IRS had conservatively committed to raise $9.2
billion in additional revenue. As the Subcommittee is aware,
the initiative was not funded beyond the first year.
Although the loss of the Compliance Initiative impacts
federal revenues, an important point that may be overlooked is
the corresponding loss in state revenues, because adjustments
made during federal compliance efforts are used by the states
to make corresponding adjustments without the need for a state
audit.
III. Using the FY 1998 Budget to Achieve IRS' Strategic Goals
FY 1998 Increases. The FY 1998 IRS budget totals $7.369
billion and 102,385 FTE. It includes gross increases of $308
million and 195 FTE, amounts which are reduced by $143 million
and 736 FTE. This produces a net increase of $165 million and a
net reduction of 541 FTE from the FY 1997 operating level (See
Charts 5 and 6). Also, an Information Technology Investment
Account has been proposed to respond to the requirements of the
Federal Acquisition Streamlining Act of 1994 and the
Information Technology Management Reform Act of 1996.
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The $308 million increase has been requested to permit the
Service to do the following: (1) maintain current service
levels; (2) fund critical operational information systems
needs; and (3) fund a very modest increase for Criminal
Investigation to detect overseas money laundering. The $143
million in program reductions includes $113 million from
Information Systems and $30 million from rent.
Maintaining Current Service Levels. The Service
needs a $214 million increase to fund mandatory pay increases
and to maintain FY 1997 program levels in FY 1998. Without this
increase, the Service would have to reduce programs and
shortchange funds for essential training, travel, and
enforcement expenses.
Funding Critical Operational Information Systems
Needs. The Service is requesting a $93 million increase for
Information Systems investments to finance immediate
improvements in taxpayer services. Much of this increase will
be used for Year 2000 Conversion efforts. However, a portion
will be used to test programming changes for major information
systems; to replace vital Service Center computers used to
process remittances and input data from tax returns; and to
replace some of the laptop computers used to examine individual
and business returns.
Deterring Money Laundering. The Service is
requesting a $1 million increase to combat overseas money
laundering. Many governments are considering, or have adopted,
laws to criminalize money laundering and other financial
crimes. The globalization of financial markets and the U.S.
economy, and criminal organizations' increased sophistication
at concealing illicit gains, have created an environment that
requires the expertise of IRS special agents.
IV. Information Systems
Over the past several years, this Subcommittee, as well as
other Congressional committees, have focused on IRS' efforts to
develop, implement, and manage its technology modernization
projects--collectively referred to as Tax Systems
Modernization.
Because technology modernization is so important to the
business of tax administration now and in the future, the
Service has been working closely with Congress for the past
year on this issue. The IRS has made progress in addressing the
concerns and criticisms of the technology modernization
efforts. However, the Service recognizes that there is more
work to be done to meet the challenges of updating technology
to better serve the American taxpayers.
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Efforts to improve the management of IRS' technology
investments have benefitted from this oversight, and Tax
Systems Modernization remains a high priority for the IRS. The
Service has made progress in the past year within Information
Systems on modernization efforts in developing an architecture
for modernization and in establishing a process for making
intelligent investment choices. The FY 1998 budget proposal is
designed to let the IRS continue these efforts.
Maintaining the Legacy Systems. One accomplishment that
often goes unheralded is the IRS' successful delivery of a tax
filing season each year. A key factor in delivering a
successful filing season is the group of conscientious
employees in the Information Systems organization who continue
to update the legacy systems, develop new computer programs to
comply with legislative mandates, and manage a complex array of
technologies. Early indicators are that the 1997 filing season
will again be successful.
Year 2000 Conversion. The most immediate challenge is the
massive century date conversion project--the Year 2000
conversion. This challenge is not unique to IRS and much has
been recently reported in various media about the magnitude of
this problem. Most legacy systems are programmed to display
``00'' in the year fields so that beginning on January 1, 2000,
date-based calculations will be based unintentionally on an
interpretation of the year field as 1900. Failure to identify,
recode, and retest each of these date-based fields could result
in the generation of erroneous tax notices, refunds, bills,
interest calculations, taxpayer account adjustments, accounting
transactions, and financial reporting errors. Put another way--
such a failure could significantly burden the over 200 million
taxpayers and IRS resources and jeopardize IRS' ability to
carry out its mission. This conversion not only is vital to IRS
but also to other organizations with which the IRS shares data,
such as the Social Security Administration, Federal Reserve
Banks, and most of the states.
To date, the Service has identified 62 million lines of
computer code in the corporate systems which must be analyzed.
The effort to make needed changes may exceed 2000 work years of
effort on the part of both the IRS and its contractors to
ensure these critical systems are century date compliant by
January 1, 1999. The IRS also is aggressively completing the
inventory of field based applications, which may require the
review of an additional 40 million lines of computer code. In
addition, the IRS is actively reviewing all commercial off-the-
shelf software and hardware to either replace or upgrade to
ensure compliance.
With the support of Congress through a $45 million FY 1997
appropriation, the IRS has mounted a massive effort to ensure
its systems become century date compliant. Given the broad
scope of the Year 2000 Conversion, the Service also is
diverting significant existing information systems resources to
the project, deferring all but critical and legislatively
mandated legacy systems changes during FY 1997.
In Fiscal Year 1998, the IRS is planning a further
expansion of the project and, therefore, has requested a total
of $84 million. The IRS' Chief Information Officer is currently
leading an extensive effort to identify and cost the corrective
actions that will need to be taken. If the resource
requirements change upon completion of the field-based
applications inventory, updated information will promptly be
provided to the Subcommittee.
Management Processes and Practices. The Service has made
significant progress towards improving the management processes
and best practices that are requisite to managing the size and
scope of IRS' modernization efforts. Specifically, the Service
has focused FY 1997 resources on the development of the program
infrastructure--systems architecture and systems life cycle--
needed to undertake major modernization efforts. The IRS
adopted a Systems Life Cycle that provides the policies and
processes needed to manage systems development efforts. The
Systems Life Cycle is consistent with industry practice,
thereby underscoring the commitment to shift significant
aspects of the technology modernization efforts to contractors.
The Service is developing a modernization blueprint, including
the architecture, which identifies critical business
requirements and provides for a sequenced rollout of
modernization projects based on prioritized business needs.
Advancing Modernization. The IRS has also put in place an
investment review discipline to assess and prioritize
information systems investments, monitor progress of spending
against plans, and evaluate the results of those investments.
The IRS Investment Review Board (IRB), chaired by the Deputy
Commissioner, has reviewed all ongoing technology development
projects. Projects that failed to demonstrate significant
business value or comply with best practices for disciplined
systems development have been suspended. To date, the IRB has
suspended the Document Processing System, Corporate Accounts
Processing System, Workload Management System, and Integrated
Case Processing System, resulting in significant future cost
avoidance. The IRB also is overseeing the reallocation of
resources from these projects to higher priority investments,
in accordance with the principles of the Information Technology
Management Reform Act.
Last year, Art Gross was selected as the IRS Chief
Information Officer. Art has significant technical management
expertise and an excellent grasp of the tax ``business.'' This
year, the Service has continued to strengthen its information
technology management capabilities with the appointment of the
new Director of the Government Program Management Office
(GPMO), who is an experienced systems development program
management executive from the New York State Department of
Taxation and Finance, and a new Director of the Systems
Standards and Evaluation Office (SSE), who was formerly with
the GAO and has extensive experience in the development of
systems life cycle standards, policies and procedures, and
information technology program evaluation and oversight.
The IRS recently initiated an aggressive, nationwide
recruitment program for well-qualified individuals to fill
approximately fifteen executive and senior management positions
to enable the IRS to strengthen and improve its overall
management of modernization efforts, including management of
contractors.
One measure of the effectiveness of an information
technology organization is the comprehensiveness of its product
assurance program. Between 1992 and 1996, IRS' Information
Systems organization downsized by over 2,000 positions, with a
disproportionate reduction in the product assurance program. In
the product assurance program, resource levels sank to less
than 30 percent of the industry standard. Accordingly, in 1997,
the IRS is undertaking a major rebuilding of this program to
mitigate systems acceptance testing deficiencies that have
prevented the thorough testing and certifying of principal IRS
operating systems.
At the same time, the IRS continues to transfer significant
aspects of the technology modernization program to the private
sector. The December 1, 1996, report to Congress documents the
modernization program resource allocation; 64 percent of it is
provided by the private sector. The largest and most important
initiative for FY 1997 was the contract recently awarded to
develop, pilot, and implement the submissions processing manual
data entry systems replacement. The IRS also is in the process
of competitively acquiring a Systems Engineering and Technical
Assistance (SETA) contractor to provide technical, program, and
project management guidance to the modernization effort.
Pursuant to the FY 1997 Treasury appropriation, the Treasury
Modernization Management Board is conducting the preparation of
a Request for Proposal for a prime contractor to manage,
integrate, test and implement the program.
The IRS is completing its strategic modernization plan,
which integrates implementation schedules and establishes
completion dates for each of the major components of the plan.
The major components are (1) a Modernization Blueprint, which
focuses on rebuilding the corporate data bases to enable
customer service taxpayer account resolution and improved
compliance; (2) a procurement strategy to shift primary
responsibility for systems development and integration to the
private sector; and (3) linkages among the short-term legacy
and operational systems enhancements, the Year 2000 project,
and the longer-term modernization sequencing plan. The
modernization plan will be submitted to Congress in May 1997.
Downsizing. Significant progress is being made toward the
Year 2000 Conversion and implementing the program
infrastructure needed to undertake major modernization efforts.
However, the IRS also needs to manage a nearly 10 percent
downsizing of the Information Systems program staffing levels
during FY 1997. The FY 1998 budget provides for a further
downsizing of 736 FTEs. While this downsizing plan reflects the
intention to shift additional elements of modernization to the
private sector, this additional staff reduction must be
carefully managed, given the number and the critical nature of
initiatives that are underway in addition to modernization.
V. Implementing the Government Performance and Results Act (GPRA)
The IRS is one of the leaders among federal agencies that
use an integrated Strategic Management Process, one in which
planning, budgeting, investment, performance measurement, and
program evaluation processes are interdependent. The IRS
consulted with other public and private sector organizations
and executives to develop its integrated Strategic Management
Process.
The IRS and Treasury eagerly implemented the requirements
of the Government Performance and Results Act of 1993 (GPRA).
The long-term use of strategic management and participation as
a GPRA pilot agency have enabled the IRS to implement many of
GPRA's requirements ahead of schedule.
First, the IRS developed an integrated strategic plan and
budget in the Spring of 1996, although GPRA does not require
one until the Fall of 1997. This plan uses the IRS Mission and
three Strategic Objectives to set priorities and program
targets for business operations, set funding levels, and
establish performance measures. The Service uses performance
indicators to monitor progress during the year, to make mid-
course adjustments to optimize performance, and to evaluate
performance at the end of the year.
Second, in the FY 1997 budget request, the Service included
outcome-oriented performance indicators rather than the
traditional workload output measures. For FY 1998, the Service
refined these performance measures and used them to evaluate
its program choices. This allowed the Service to prioritize its
program requirements and use that prioritization to drive its
budget decisions. The Appendix to my testimony includes the
overall performance indicators for FY 1998.
Third, the FY 1998 budget request includes a progress
report on each program goal the Service proposed for FY 1996.
If the performance goal was exceeded, that is noted, and if
not, the report explains why not and what will be done about
it.
Setting long-term goals and annual targets, managing
activities to achieve those goals and targets, measuring
performance annually, and holding people accountable will help
improve tax administration. It will also help the IRS and
Congress make more informed budget decisions about balancing
resources across these objectives.
VI. GAO High Risk Areas
The General Accounting Office (GAO) issued its latest in a
series of reports on federal programs considered high-risk
``because of vulnerability to waste, fraud, and
mismanagement.'' The latest report discusses four high-risk
areas at the IRS: Tax Systems Modernization (TSM), financial
management, tax accounts receivable, and tax filing fraud.
While the report credits the IRS with making some progress in
all four areas, it outlines significant challenges still ahead.
The key points raised by the GAO and the IRS responses are
summarized below.
TSM. Although the GAO recognizes that the IRS and Treasury
have together taken several steps to implement their
recommendations, much remains to be done. We agree with many of
the concerns expressed by the GAO and have taken and are
continuing to take aggressive actions to address those concerns
as illustrated in our February 27, 1997, report to Congress.
Financial Management. The GAO reported on financial
management weaknesses that diminish the credibility of
information available for assessing the results of IRS'
financial operations and measuring its performance. The GAO did
indicate, however, that the Service had made improvements in
the areas of reporting and accounting, stating that the
improvements in accounting were particularly notable. The
revenue accounting system, which was designed prior to
enactment of the Chief Financial Officers Act, was not designed
to give data on financial position or give detailed
transactions that auditors could go back and sample, as
required by recent changes in the law. We agree with the GAO's
recommendations and are making the short-and long-term changes
needed to bring our systems up to those standards.
Tax Accounts Receivable. According to GAO, weaknesses
hamper the IRS' ability to manage and collect its reported $216
billion inventory of tax debts effectively and efficiently. In
FY 1996, IRS delinquency collections totaled $29.8 billion, the
most ever collected by IRS--a 19 percent increase over FY 1995.
Moreover, we continue to automate many of the processes carried
out by collection field employees, resulting in substantial
productivity improvements. Unlike private business, the IRS
cannot determine credit-worthiness prior to a transaction, and
the law requires that we keep accounts receivable on the books
for 10 years. About 30 percent of the current inventory is
accrued penalties and interest ($65 billion of the current $216
billion inventory); obviously, even if the principal remained
static, the total would grow because of accrued interest and
penalties.
Tax Filing Fraud. According to GAO, weaknesses hamper IRS'
efforts to detect and prevent the filing of fraudulent tax
returns. The IRS has taken several steps to prevent and deter
tax return fraud, including substantial improvement to the
Electronic Fraud Detection System. Criminal investigations and
related prosecutions continue to demonstrate IRS enforcement
presence. Moreover, we continue to develop and test various
systemic and compliance alternatives to identify those that are
most successful.
VII. Security of IRS Information
The IRS has long understood that protecting taxpayer
information is essential to maintaining our country's self-
assessment tax system. We also understand that although new
technologies will help to streamline IRS operations and improve
the delivery of services to taxpayers, these same technologies
will also increase the risks to privacy associated with
automation unless a strong program is in place to adequately
mitigate these risks. Risk mitigation is of greater
significance as IRS' reliance on paper decreases and its
dependence on new technologies increases. In this regard, we
are also aware that our security and privacy programs need to
be strengthened, so that the Service has integrated and
consistent safeguards in place to adequately ensure (1) the
privacy and security of taxpayer account information; (2)
continuity of its operations; and (3) security of the
infrastructure for modernized systems.
In January 1997, IRS announced that centralized
responsibility for security and privacy issues had been
delegated to the Office of Systems Standards and Evaluation
(SSE). Recognizing the critical need to enforce federal law and
regulations on privacy and non-disclosure of confidential tax
information, SSE was created to assume responsibility for
establishing and enforcing standards and policies for all major
security programs including, but not limited to, physical
security, data security, and systems security. In this regard,
SSE provides IRS with a proactive, independent security group
that is directly responsible for the adequacy and consistency
of security over all IRS operations.
One taxpayer security area of particular concern to this
Subcommittee and to us is the unauthorized access to taxpayer
data by IRS employees--or ``browsing.'' The IRS does not
tolerate browsing. We consistently stress both within and
outside the IRS that unauthorized access of taxpayer accounts
by IRS employees will not be tolerated. However, recent court
cases, especially one in the First Circuit Court of Appeals
(United States v. Czubinski, No. 9-1317, 1997 U.S.App. LEXIS
3077 (1st Cir. February 21, 1997), are very troubling to the
IRS and make it more difficult for us to appropriately
discipline employees who violate our policy against
unauthorized access.
In the past several years, the IRS has taken a number of
steps to ensure that unauthorized access of taxpayer
information by IRS employees does not occur. For example, each
time an employee logs onto the taxpayer account data base (the
Integrated Data Retrieval System (IDRS)), a statement warns of
possible prosecution for unauthorized use of the system. All
new users receive training on privacy and security of tax
information before they are entitled to access the IDRS. The
Service has also installed automated detection programs that
monitor employees' actions and accesses to taxpayers' accounts,
identify patterns of use, and alert managers to potential
misuse. Employees are disciplined according to a Guide for
Penalty Determinations that includes dismissal. In the recent
First Circuit opinion, the court noted that ``the IRS rules
plainly stated that employees with passwords and access codes
were not permitted to access files on IDRS outside the course
of their official duties.''
In addition to the internal actions, the IRS has
recommended and supported legislative efforts to amend the
Internal Revenue Code and Title 18 to clarify the criminal
sanctions for unauthorized computer access to taxpayer
information. A recent amendment to 18 U.S.C. 1030(a)(2)(B)
provides criminal misdemeanor penalties for anyone who
intentionally accesses a computer without authorization or who
exceeds authorized access and thereby obtains information,
including tax information, from any department or agency of the
United States. Although the recent amendment to 18 U.S.C. will
hopefully serve as a significant deterrent to unauthorized
computer access of taxpayer information, this statute only
applies to unauthorized access of computer records. It does not
apply to unauthorized access or inspection of paper tax returns
and related tax information. Legislation such as S.670,
introduced in the 104th Congress, would achieve that result. By
clarifying the criminal sanctions for unauthorized access or
inspection of tax information in section 7213 of the Internal
Revenue Code, whether that information is in computer or paper
format, the confidentiality of tax information and related
enforcement mechanisms would be appropriately found in the
Internal Revenue Code.
VIII. Improvements in Financial Management
Despite inclusion in GAO's series of reports on areas at
``high risk because of their vulnerability to waste, fraud,
abuse and management,'' the IRS has significantly improved
financial management over the last four years. Still, there is
more to do. The Service has a detailed action plan, developed
in cooperation with GAO, that addresses corrective actions and
tracks the progress toward correcting deficiencies and
implementing GAO recommendations.
The IRS was one of the pilot agencies under the Chief
Financial Officers Act (CFO Act) of 1990 and, as such, was
required to submit financial statements beginning with Fiscal
Year 1992. Prior to this, the IRS was not required to prepare
audited financial statements or to have financial audits.
However, the fact that audits were not routinely done in the
past does not mean that poor financial management existed. The
IRS, like other agencies, was and is controlled by budgets that
were appropriated by law and incorporated into our
administrative financial system, and obligations and
expenditures were monitored against those appropriations.
Unlike many other agencies, the IRS also collected substantial
amounts; our custodial financial systems were designed to
account for those receipts and to ensure that they were
promptly deposited into the Treasury. These requirements and
controls still exist in addition to the new requirements
introduced as part of the annual audit. Passage of the CFO Act
and the introduction of annual financial statements and audits,
however, added new rules. We are using the financial statement
audit, and the discipline it imposes, as a blueprint for
continued financial management improvements.
Financial Statement Audit--A Major Challenge. When the GAO
began auditing our financial statements in 1992, we were not
working with systems designed to provide data in accordance
with the CFO Act. Our revenue and administrative accounting
systems were designed with adequate controls but did not
provide the information necessary to report on our financial
position in accordance with Generally Accepted Accounting
Principles. In addition, our size alone has made it difficult
to obtain a clean opinion quickly. As the primary collector of
the nation's revenues, we collect over $1 trillion annually and
GAO has verified that this has been properly deposited in the
Treasury. This is no small accomplishment for an organization
that handles over one billion information documents per year,
processes more than 200 million returns, issues 90 million
refunds, and deals with over 12,000 financial institutions and
12 Federal Reserve Banks in over 600 locations. Any complex
system will produce some errors. The IRS system does, but great
efforts are made to detect errors and promptly correct them.
It is important to keep in mind that the Service has two
separate financial processes to track funds: the administrative
system that handles appropriated funds and the revenue system
that tracks tax collections and is used to report on custodial
statements. To understand GAO's audit findings, it is important
to recognize the distinction between these two systems and what
is being done to improve both systems to comply with the CFO
Act.
Improvements In Administrative Accounting. The IRS is proud
of the improvements it has made in its administrative
accounting system. Six years ago, the Service had eight
separate systems that were not linked to each other. Now the
IRS has a single corporate administrative financial system of
record that it uses to monitor and control the more than $7
billion the IRS receives annually in appropriated funds. This
system, known internally as the Automated Financial System,
provides an integrated, auditable, comprehensive accounting and
budgeting system that fully complies with the Joint Financial
Management Improvement Program core requirements, including the
U.S. Standard General Ledger, and other government-wide
standards that apply to automated financial systems.
Even though IRS purchased an off-the-shelf commercial
package, it was customized to meet the unique agency
requirements, including developing interfaces. For example, the
Service transferred payroll to the Department of Agriculture's
National Finance Center (NFC) and operates an interface from
NFC to provide payroll data to the corporate database. The
Service also has integrated its procurement system and travel
system so data is only entered once and is transmitted
electronically.
Since the first audit in 1992, the Service has made
significant improvements in administrative financial
management, resulting in GAO's FY 1994 and FY 1995 audit
reports focusing on just two remaining administrative
accounting issues: (1) failure to reconcile IRS accounts with
Treasury, and (2) the lack of receipt and acceptance
documentation for some non-payroll payments to other federal
agencies, such as rent payments to GSA and printing payments to
the Government Printing Office (GPO).
Accounting for the Revenue the IRS Collects for the U.S.
Treasury. The challenge with revenue accounting is to develop a
financial management system that will provide the organization
with the capabilities for (1) controlling financial
transactions; (2) collecting and processing transaction-level
data; (3) obtaining detailed information on financial position;
and (4) providing complete financial information necessary to
manage an organization.
While the IRS can, and does, reconcile gross amounts
collected, it has been unable to give GAO auditors the
information that they want to reconcile on a transaction-by-
transaction basis with the Masterfile database. The challenge
has been to augment the revenue accounting information to meet
the requirements of the CFO Act.
For the FY 1995 and FY 1996 audits, in cooperation with the
GAO, the IRS began extensive analysis and documentation of all
revenue transaction flows and source documentation. Detailed
flowcharts were prepared to document revenue flows between the
Revenue Accounting and Control System (RACS) and supporting
feeder systems. Site visits were made with the GAO to all
service centers to validate these flowcharts and further
document detailed transaction flows that were unique to a
service center. Additionally, the IRS now uses its Masterfile
to provide detailed transaction data to support its custodial
financial statements. This data is reconciled to RACs and
Treasury schedules.
Accounts Receivable. Another area that has caused concern
is converting the IRS inventory of tax assessments to an
accounting definition for accounts receivable. When taxpayers
either do not file returns or file inaccurate returns, the IRS
makes assessments based on the tax laws irrespective of
collection potential. Since IRS assessments are unlike typical
accounts receivable, the Service had to determine a way to
derive and report the portion of the Accounts Receivable Dollar
Inventory (ARDI) that meets more of a financial definition for
accounts receivable.
To overcome the limitations associated with ARDI, the GAO
and the IRS agreed on a systemic approach and definition of
financial receivables. This approach relies on coding that is
available in the Masterfile to identify the type of compliance
action taken as of a certain date, and the major reason that
the IRS made the assessment. Using this coding, the Service
then segments the total ARDI into three categories: (1)
financial receivables (amounts reported in the financial
statements), (2) financial write offs, and (3) compliance
assessments, (amounts disclosed as footnotes in the
statements).
Progress in FY 1996 Toward Correcting the Five Major
Findings. GAO listed five financial management problems as the
major contributors to the disclaimer--two related to the
administrative area and three to the revenue area.
1. Amounts reported as appropriations available for
expenditure for operations cannot be reconciled fully with
Treasury's central accounting records. IRS has worked with GAO
to bring this issue to resolution. As of FY 1996, the
reconciliations are current and there is an automated mechanism
in place to ensure that these balances are reconciled monthly.
2. A significant portion of IRS' reported $3 billion in
non-payroll operating expenses cannot be verified. The IRS can
and does have acceptable and auditable records to verify
commercial vendor payments. The $3 billion in non-payroll
operating expenses could not be verified because of the
interagency payments included in GAO's sample. Within this
sample were interagency payments for which they questioned
whether the IRS had support showing receipt and acceptance from
other federal agencies, primarily GPO and the General Services
Administration.
The interagency payment problem deals with a receipt and
acceptance issue related to goods and services received from
other federal agencies paid via the government's Online Payment
and Collection system. Because they identified these
transactions as exceptions, they concluded that their testing
(review of supporting documentation) of the non-payroll
expenditures could not be projected to the universe of $3
billion; therefore, they could not verify the non-payroll
expenditures.
The IRS has been working closely with GAO to define the
problem areas and to propose interim and long-term solutions to
the receipt and acceptance issues.
3. The amounts of total revenue and tax refunds cannot be
verified or reconciled to accounting records maintained for
individual taxpayers. The IRS is now using individual taxpayer
records to prepare financial statements and to ensure that the
auditors can verify and reconcile the total revenue and tax
refunds to the accounting records maintained for individual
taxpayers. This is being done until such time as longer term
systems solutions can be implemented.
4. Amounts reported for various types of taxes collected
(social security, income, and excise tax, for example) cannot
be substantiated. In preparing the FY 1995 and FY 1996
financial statements, the IRS made great progress in developing
methods to substantiate the revenue collected. For Social
Security, the IRS developed an extract that enables it to
report and match assessment and collection information. As
stated earlier, the IRS is also using the Masterfile to provide
all detailed transactions to support income tax collected. In
providing excise tax information, the IRS will continue to
analyze monies assessed and collected to determine if there are
significant differences. Additionally, the IRS is developing
programming that will enable it to have detailed assessment and
collection information as it does with Social Security.
5. The reliability of reported estimates for $113 billion
in accounts receivable and $46 billion for collectible
receivables cannot be determined. During the FY 1995 audit,
initial testing by GAO resulted in its conclusion that the
Service's program that classified receivables as financial
receivables, financial write-offs, and compliance assessments
was flawed. Based on a review of cases this year to determine
the validity of our categorizations, GAO has indicated that the
systemic process is accurately segmenting our portfolio of
receivables. GAO's next step is to review the supporting source
documentation for the selected cases to verify they are
accurate. The Service is in the process of building the ARDI
Expert System, a centralized data base that allows analyses to
be performed on the entire inventory using all of the existing
information.
Status of 59 Recommendations. The GAO has made 59
recommendations through their financial statement audits for
the last four fiscal years. Of the 59 recommendations, the IRS
and GAO agree that the IRS has implemented 17 of them. Of the
remaining 42, the IRS believes it has met the requirements on
an additional 27. The Service is working with GAO to get
agreement before actually closing these items. Of the remaining
15, 11 are scheduled to be completed by the end of the fiscal
year; and four have completion dates beyond FY 1997. The IRS is
committed to working with GAO to resolve these recommendations
and believes that through mutual cooperation and effort this
goal will be achieved.
IX. Reorganization
In 1993, details of a major IRS reorganization were
announced and the Service has worked since then to streamline
operations and reduce costs--a process that continues. This
carefully considered effort, undertaken before IRS
appropriations were reduced, was done in recognition that the
IRS should place the maximum amount of its resources on meeting
customer needs effectively and efficiently.
The National Office has been reduced in size, three
regional offices have been closed and 63 district headquarters
offices consolidated into 33, while 80 administrative support
offices were consolidated into 24 and 70 customer service sites
have been reduced to 30 and ultimately will go to 23. Taxpayer
assistance levels and problem resolution services have been
improved. Consolidating offices and operations reduces or
avoids redundant infrastructure costs, such as space,
telecommunications, toll-free call distribution systems, and
management overhead. In FY 1997, IRS will eliminate a net of
over 1,000 field office support positions plus over 800
positions in the National Office, ensuring that the salary
dollars can be spent instead on front line operations.
For almost three years, the IRS, working with the National
Treasury Employees Union (NTEU), has used a variety of
voluntary workforce transition tools to move employees into the
new, streamlined organizational designs. Beginning in 1996, the
total number of occupied IRS support positions not optimally
located was approximately 3,390--less than five percent of the
total IRS workforce at that time. However, there still are over
1400 employees occupying such positions who have not been
placed in continuing positions despite the voluntary efforts
and outplacement activities of the Service.
The IRS is making every effort to lessen the effects of the
reorganization on employees. Working with the NTEU, the Service
developed a Pre-Reduction in Force (RIF) Activities Agreement
in October 1996. Voluntary activities, such as buyouts, early
outs, paying moving expenses for employees, and a Career
Transition Assistance Plan are all in place as methods to
reduce the numbers that would be subject to a RIF.
As a result of Section 105 of the FY 1997 Treasury
Appropriations Act, the Service has been unable to complete the
final stages of the reorganization. This has caused an
imbalance between workload and people. Upon delivering the
report required by the Appropriations Act, the IRS will move
forward to fill critical vacancies, move its workload, and
finalize this phase of the IRS reorganization.
Buyout Update. Since Congress approved the IRS' voluntary
incentive separation plan in December 1996, the IRS has
implemented it aggressively. As of March 1, 1997, approximately
1300 employees have accepted buyout offers and have left the
IRS employment rolls. Those who left were either in non-
continuing positions or in positions that created a vacancy
that would provide a placement opportunity for someone who
could be subject to a RIF.
The IRS currently is placing employees in continuing
positions and by mid-April should know how extensive a RIF, if
any, would have to be. After that, the Service will move
forward to separate employees when there is an agreement with
NTEU either voluntarily arrived at or imposed by the Federal
Service Impasses Panel. I know there is continuing interest in
this matter by this Subcommittee and the IRS will continue to
keep you informed about how it is proceeding.
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X. Conclusion
My colleagues and I appreciate the opportunity to present
this testimony. The IRS is committed to achieving its mission
in a way that provides the information and assistance required
by our citizens and at the same time reinforce the overall
fairness of the tax system by seeing to it that all of us pay
our correct share of taxes. Under the most stable of
circumstances this is a challenging responsibility. The
testimony has highlighted some of the most important advances
that we have made and also pointed out the many areas which
still require improvement. The Service appreciates the
consistent interest and support of this Subcommittee and its
staff and we look forward to a continuing strong relationship.
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Chairman Johnson. Thank you, Mr. Dolan. I appreciate your
comments about the chief of staff on both sides of this
Subcommittee. We are blessed to have very bright and very
capable women chiefs of staff on this Subcommittee.
I also appreciate your taking the time in your testimony to
go through some of the accomplishments of the IRS in the last 2
years. And I would remind this Subcommittee and also the public
that Commissioner Richardson was very forthright with this
Subcommittee more than 2 years ago about the difficulty that
the Federal Personnel Regulations posed for the agency to reach
the level of expertise that you needed to help with the Tax
Modernization Program.
And, indeed, after a long and very careful search you did
bring Mr. Gross aboard. I think all parties are impressed with
his expertise and abilities, and I think the vision that you
lay out, Mr. Gross, of the kind of partnership that you are
looking for, the kind of plan you think must precede action is
music, at least, to the ears of this Member.
But, Mr. Dolan, while we have had great problems with the
Tax Systems Modernization Program, the agency has not been
idle. And I appreciate your going through the kinds of
improvements that you have made in the last couple of years, in
terms of enabling people to file by telephone, your Web site,
access to forms, and schedules and information.
And I am pleased that this filing season seems to be going
very well. I would also say that in part it is going well
because in the last filing season you did a very good job of
cracking down on some of the sources of, for example, fraud in
the EITC Program, and I think that is paying off.
I think your willingness to sort of engage in the problem
of the independent contractors does make it easier. I don't see
how these kinds of approaches, as important as they are to the
quality of tax administration, to customer service, and to a
strong, fair IRS, I don't see how they can enable you over the
next 5 years to live with basically a frozen budget, which
means absorbing $1 billion in cuts.
And so while I don't want to belabor this at this hearing,
because I don't think it's possible for you to respond, I would
urge you to develop the resources or the focus, you know, in
the coming months, to work with your regional research
agencies--and I am very pleased to hear that, because it's
absolutely true that you have different kinds of sectors
predominant in different areas of the country, and therefore
different compliance problems and enforcement problems and
administration problems and taxpayer questions.
But we tried hard in the Taxpayer Bill of Rights to send
the message that we have to know what actions of ours create
the biggest administrative problems, because your
administrative problems are people's fairness, equity,
frustration problems.
And when we give you unadministerable law, or law that you
cannot explain in a way that the ordinary person out there
says, Oh, yeah, that's fair, then we do you a disservice, and
we do the taxpayer disservice, and you do not do us a service
in protecting us from that information.
So one of the things that is increasingly clear to me is
that no amount of technology, and no amount of really
thoughtful common sense, and a lot of what you've done in the
last 2 years, the public doesn't realize quite how much you
have done to improve access and improve service, and slim down
and streamline the IRS. But no amount of that is going to work
unless we can jointly focus on also some of the most complex
and often unproductive in their complexity portions of the Tax
Code.
So I would hope that as you plan, particularly your work
for 1998, and preferably even in the next 6 months, that you
really press down hard on those issues. Because we have to make
the philosophical decisions. But philosophical decisions are
sometimes easier made, more easily made, if you know that one
is not going to work, and that another one might.
So when I look at the budget challenge you face, it's
meetable. And technology will matter, and you're going to have
good plans and we're going to move ahead.
But we also have to be realistic, honest and very tough
minded in terms of what constitutes administrable, enforceable,
fair tax law. And I thought it was just really wonderful that
one of your advocates spontaneously said, well, if you really
want to help, repeal the EITC.
Now, politically that's a bomb. She wasn't talking to us
politically. She was saying when I have to deal with people out
there, and try to explain to them on the merit of simplicity
and fairness this thing fails. It may meet the political
standard of rhetoric, but it doesn't meet the real world
standard when you're trying to help the very poorest people and
they have to hire someone to explain the program to them.
So we need to talk more honestly about the Tax Code
problems if we're going to back you in the changes you're going
to make, and if you're going to succeed in creating the next
generation of IRS bureaucracy, which is going to have to be
different, more like the private sector in responsiveness, more
like the private sector in number of management levels. It's
going to have to be far more preventive.
We see that in controlling health care costs. We see that
in productivity in the industrial sector. We have to really
engage ourselves now on those issues. And prevention means
Congress has to act in ways we haven't been willing to act
before.
And the only hope of that is oversight. So if we don't get
together and communicate about these things, and if you don't
begin to structure your reports so that we don't get frankly
the same kind of junk we used to get--now, we got it because we
asked for it, and we liked it because it was easy to deal with.
But we're beyond that. So I have some other questions, but
I am going on too long in this statement, so I am going to let
my other colleagues go first, but I will come back.
Mr. Dolan. I just wanted to respond directly to your
invitation, as well as your suggestion that we might have done
a better job with respect to the first report. I think
everybody who came back from the last hearing realized that we
need to and want to step up to your challenge of getting
explicit and candid in the dialog about what are the
impediments that we can do something about, and what are ones
that only you can do something about.
And so we have heard you and we take your invitation
seriously, and would very much look forward to that kind of
relationship.
Chairman Johnson. Thank you. I would just say that a lot of
our political rhetoric is outdated, and a lot of your
bureaucratic mindset is outdated, and we really have to get
real.
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. First of all, as a
member of the Restructuring Commission of the IRS and a Member
of this Subcommittee, I had written to Treasury Secretary Rubin
on March 11 specifically asking the administration to develop
and release on an expedited basis its proposal to restructure
the IRS.
I ask that the letter that I sent to Secretary Rubin on
March 11, plus his five points that he's responded to relative
to the restructuring in recent days, be included in the record.
Chairman Johnson. Mr. Coyne, I would be happy to do that.
And I'd be happy to include his response as well. I'm
particularly pleased to acknowledge that his response
recognizes a lot of things that Commissioner Richardson and the
IRS have accomplished and laid the groundwork to accomplish.
I appreciate those things. I do think as you see on the
Restructuring Commission that the issues are larger and I think
this issue of Tax Code complexity is fundamental. And I am
pleased that this Subcommittee has such capable Members as Mr.
Coyne and Mr. Portman on that Restructuring Committee, and I
would be happy to include in the record both your letter to
Secretary Rubin and this first response.
Mr. Coyne. Thank you, Madam Chair.
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Mr. Coyne. To Mr. Dolan, in light of the continuing
concerns about the quality assistance to taxpayers that we're
all concerned about, and the taxpayer advocate's report to this
Subcommittee concerning major problems facing the taxpayers in
dealing with the IRS, I wonder if you could respond to the
question that some of my constituents are asking me about to
the justification for moving work out of the Pittsburgh office,
when it was ranked 6th out of 65 districts in total efficiency,
while the Philadelphia office was ranked 45th.
The Pittsburgh office got a good grade, ranking 6 out of 65
districts. Philadelphia was ranked 45th, yet we're moving work
from Pittsburgh to Philadelphia.
Mr. Dolan. I'll be happy to answer that question. I think
perhaps the ranking that we're talking about is either in one
of two areas, and I don't have it right in front of me. It's
either a field office total performance index, or it has to do
with the individual call site.
But in either event, let me answer the question hopefully
in a way that would satisfy your constituents. As the Chair
just said, one of the things that we have found is that our
organizational structure was indeed a function of the fifties.
It remained relatively constant, in terms of its
consumption of our dollars and resources. And one of the things
we set out to do in 1992-93 was what most large corporations
have done, in looking at the overhead structure and in
satisfying ourselves that we made that overhead structure as
efficient as possible.
That was before we entered the declining resources. Our
objective at that point was to put every additional man or
woman we could on the customer service frontlines, on the
compliance frontlines.
It was not under the crush of the financial gun to our
head. It was, we thought, a prudent way to run a business. And
we did that. We looked at the seven region structures, and
said, Well, some people have been able to do away with regions
altogether. We looked at what kind of a business we were, the
number of customers, and said we can't do that. But we did not
need seven. So, we went from seven to four.
We did that, in part based on performance, but in part
based on what were some geographical things that made sense.
Then we got to the harder question, the one that affected
the Pittsburgh district. That is, we had 63 districts. In many
cases the districts were aligned with a particular State, or a
particular set of historical facts. They weren't always--it
wasn't always the same rationale by which something became a
district. And over time a few districts have been added, a few
have been subtracted, but for the most part we ran in the
middle sixties with the number of districts.
We looked at that and said There is an awful lot to be
gained by having similarly sized offices, where we could
concentrate some expertise. We didn't have to worry about the
smaller districts that maybe had only 100 people, and we had a
very hard time keeping engineer talent there, keeping
international talent there, or even keeping talent on a
particular part of the Tax Code that we wanted to give advice
on.
And so a good part of what we did, we spent the better part
of a year looking at the way we had our districts organized,
and found what we thought would be the most highly leveraged
combinations of 63. And we looked at whether it should be 20,
50, or 40. We ran data through various kinds of models, and at
the end of the day what we did in Pittsburgh was let me say
that Pittsburgh is an excellent work force. It has historically
been an excellent work force. Its call site personnel are
historically among the best we've had. And we did not for 1
second erode any of that operating base. But we looked at the
State of Pennsylvania, and said wait 1 minute, do we need two
entire district apparatus, district directors, division chiefs,
branch chiefs, support activities.
And when we looked at that and we looked at the
Philadelphia district being a significantly bigger district at
that point, looked at the pluses and minuses of where would you
locate the headquarters, that's kind of the way that decision
got made, and it got made that same way across the other 30
districts that got consolidated.
At the end of the day, what we have taken out of Pittsburgh
are only some of the compliance support activities, and some of
the resource management support activities that can be done
from a consolidated point. And we took the management overhead
out.
So it was in no way a shot at the quality of the Pittsburgh
office. As a matter of fact we continue to rely during this
filing season very heavily on the Pittsburgh taxpayer service
site.
Mr. Coyne. I will have additional questions on this matter.
My time has expired here, but I'd like to be able to submit
these questions to you to be able to get a response.
Mr. Dolan. I'd be pleased to respond to them.
[The following was subsequently received:]
IRS Answers to Questions Submitted by Rep. William Coyne
Question: In light of the continuing concerns about quality
assistance to taxpayers, and the Taxpayer Advocate's report to
this Subcommittee concerning the major problems facing
taxpayers in dealing with the IRS:
How can the IRS justify moving work from the Pittsburgh office
when it was ranked sixth out of 65 districts in efficiency,
while the Philadelphia office was ranked forty-fifth?
In May 1995, Internal Revenue Service (IRS) announced plans
to consolidate its 63 district offices into 33 district
offices. IRS' objectives in consolidating the district offices
were to (1) foster an integrated and consistent approach to
compliance over a wider geographic area, (2) decrease taxpayer
burden by creating consistency across wider geographic areas,
and (3) provide managers with greater flexibility to shift
compliance staff within the district to respond to changing
workload requirements.
Before the district office consolidation, Pennsylvania had
two districts, one headquartered in Philadelphia and the other
in Pittsburgh. As a result of the consolidation, the two
districts were merged to form the Pennsylvania District,
headquartered in Philadelphia. In deciding which districts to
merge nationwide, IRS attempted to create districts that were
more uniform in size than was the case under the structure of
63 districts. Accordingly, total staffing was a key criterion
that IRS used to decide which district offices should retain a
management structure and be designated as continuing districts.
Generally, smaller districts were merged into larger ones, as
was the case in Pennsylvania, where Pittsburgh was merged into
Philadelphia.
To assess the interactions of the various functional
reorganizations on district office responsibilities, the IRS
convened a task force for each functional area affected by the
consolidation. On the basis of input from these functional
teams, the IRS developed an Organizational Impact Analysis
report that outlined a standard approach for consolidation. One
of the recommendations was that all district office compliance
support functions be centralized in the continuing districts,
unless a business case (cost benefit analysis) could be made
for an exception.
As a result of a request for an exception, the IRS
ultimately allowed the Pennsylvania District to centralize its
collection support function in Pittsburgh. Of ninety-three
positions that were granted exceptions nationwide, sixty-three
were in Pittsburgh.
Question: How can the IRS justify RIFs in Pittsburgh and
rehiring additional employees in Philadelphia when locality pay
and rent per-square-foot are significantly lower in Pittsburgh?
In a Memorandum of Understanding (MOU) between IRS and
National Treasury Employees Union (NTEU) dated October 9, 1997,
the IRS agreed not to conduct a RIF. Consequently, employees
will not be RIFed in Pittsburgh nor will additional employees
be hired in Philadelphia.
Question: How can the IRS justify the loss of tax
administration in the entire western half of Pennsylvania?
We do not believe tax administration in the western half of
Pennsylvania will be affected by the restructuring. The
restructuring efforts did not impact the size of the front-line
compliance or customer service staffs in Pittsburgh. Positions
eliminated as a result of the restructuring were entirely
support and managerial positions.
Question: Considering these points, how can the IRS show that
there is a cost benefit to the field reorganization concerning
Pittsburgh?
As discussed previously, we believe there are solid
business reasons for the restructuring efforts. The
consolidation of support functions has resulted in the
elimination of support positions both in Pittsburgh and
Philadelphia. The elimination of these positions represents a
savings in itself. With the MOU signed October 9, 1997, with
NTEU, these positions will be redirected to front-line
compliance and customer service positions. As a result we
expect customer service and compliance to improve.
Taxpayer Services
Question: The IRS and others have conducted five ``customer
service surveys'' evaluating the IRS's ability to provide
efficient and satisfactory service to taxpayers. What
conclusions can be reached from these surveys?
The surveys that have been conducted have generally been
customer satisfaction surveys rather than customer service
surveys, however, these surveys have provided clear indicators
from taxpayers that they expect the same level of service from
IRS that they can receive from the non government business
community.
Question: To the extent specific IRS employees, or specific IRS
offices, have provided below-acceptable service to taxpayers,
what has the IRS done?
The surveys done by IRS were not structured to identify
individual employees or specific offices. Rather the surveys
were designed to measure customer satisfaction with the
corporate delivery and quality of assistance related services
and general level of customer satisfaction with compliance
related contacts.
Taxpayer Errors
Question: Again, for the 1997 tax return filing season, the
``most common'' errors taxpayers and tax preparers make in
filling out tax returns relate to calculating and correctly
claiming the earned income tax credit. This problem area
continues to make the ``top of the chart'' every filing season.
What, exactly, has the IRS done for the 1997 filing season to
reduce the number of innocent errors taxpayers and tax return
preparers make in claiming the EITC? Should the EITC form and
instructions be simplified to prevent unnecessary errors?
We made some editorial changes to the 1997 instructions to
highlight who can claim the credit. However, before making
extensive changes to the Schedule EIC and/or worksheets, we
need more detailed information about the kinds of errors being
made by taxpayers and preparers. We have tried to address the
most common errors by including a section titled ``How to Avoid
Common Mistakes'' in the tax forms instructions. We advise
taxpayers to provide the correct SSN for dependents and to
check their math, especially for the earned income credit.
We reorganized the 1997 Publication 596, Earned Income
Credit, to eliminate duplicate information, streamline it and
regroup qualifying information. Taxpayers will now find general
rules explained first, then information for those with
qualifying children and finally, information for those without
qualifying children.
As part of the EITC initiative, the Service will be
gathering information about taxpayers' filing behavior and what
marketing techniques are appropriate for the target audience.
We can use this data to decide what changes are necessary to
forms, instructions and publications.
The EITC has complex qualifying rules and computations
which involve both earned and unearned income. For 1998, we
will be changing the instructions again to reflect the
provisions in the Taxpayer Relief Act of 1997. In computing
modified Adjusted Gross Income (MAGI), for purposes of the
credit, taxpayers will have to add tax-exempt interest and
nontaxable distributions from pensions, annuities and
individual retirement arrangements. The Act also changed the
percentage of business losses disregarded in the computation of
modified AGI. For low-income taxpayers with little expertise in
tax matters, trying to determine their correct credit with
these complexities can cause errors.
Filing Fraud
Question: The IRS continues to implement anti-fraud measures,
including ``computer fraud screens'' and streamlined ``math
error procedures.'' How successful have the IRS's anti-fraud
actions been to date?
The actions taken since the inception of the Revenue
Protection Strategy several years ago have been impressive.
Most recently, over 2 million returns with missing or invalid
TINs were identified and processed using math error procedures.
Taxpayers who do not have a valid TIN for themselves, certain
dependents, children if claiming the earned income credit
(EITC) cannot claim the exemption for these dependents or the
EITC. In addition, the compliance functions continued to pursue
questionable refund returns. In FY 1996, we continued our
vigorous compliance efforts to identify and stop fraudulent
refund schemes and to pursue questionable claims through pre-
refund examinations. In FY 1996, we identified nearly 2,450
fraudulent refund schemes involving 24,000 returns and
prevented the issuance of $46.8 million in refunds. We
initiated 313 criminal investigations involving refund schemes.
Prosecution recommendations were forwarded on 279 cases and
indictments were obtained on 290 individuals and conviction in
304 cases. Through pre-refund examinations, we prevented the
issuance of an additional $864 million in refunds. Thus, last
fiscal year, our direct enforcement efforts prevented $932
million in erroneous or fraudulent refunds from being issued.
Question: What new anti-fraud controls are in place for the
1997 tax return filing season?
As in past years, the Service will not disclose detailed
information concerning plans for fraud control and revenue
protection. However, there are broad pieces of the revenue
protection strategy that we will share to assist taxpayers and
return preparers in filing accurate tax returns. Our main focus
continues to be the validation of taxpayer identification
numbers (TINs) on all tax forms and schedules requiring
identification numbers, including:
Security Numbers (SSNs) issued by SSA, Individual
Tax Identification Numbers (ITINs) issued by IRS for non-
citizens unable to obtain an SSN, Adoptive Tax Identification
Numbers (ATINs) issued by IRS to families in the adoption
process. (An SSN cannot be issued by SSA until the adoption is
finalized.) Missing or invalid tax identification numbers will
result in reduced refunds unless the appropriate information
can be provided.
Another segment of the strategy is to identify
questionable refunds; refunds will only be issued after the
taxpayer provides acceptable proof of eligibility for various
credits and deductions claimed on the return.
Other compliance/enforcement efforts will
continue. We will proceed with criminal investigation and
prosecution of fraudulent refund claims.
Although not necessarily new, the anti-fraud controls will
again identify problematic returns. The additional resources
recently approved will allow us to follow-up on a significantly
larger portion of the returns identified.
1997 Filing Season
Question: The filing season appears to be going well. How long, on
average, is it taking for the IRS to issue refunds for paper-file and
for electronically-filed returns?
Refunds for paper filed returns average 39 days. For Electronically
filed returns, however, the average turnaround for refunds is 14.5
days.
Question: Are all major tax forms and instructions available to
taxpayers immediately upon request?
Generally, all forms and instructions are scheduled for
development, production and delivery so that they are available (in
paper) for individual taxpayers during the first week of January.
Distribution of paper copies are made to IRS Posts of Duty, Area
Distribution Centers, many post offices, and libraries.
In addition to these paper copies, products are also made available
to the public electronically (IRS Bulletin Board, IRS Internet Web Site
and by Fax), usually within 72 hours of the approval to print an item.
This is obviously the most immediate source of IRS published products
especially for those behind scheduled late legislation or technical
development issues.
See attached copy of Publication 2053A ``Quick and Easy Access to
IRS Tax Help and Forms'' for details of these alternative sources.
(Attachment A)
Question: Are any forms or other materials currently on backlog?
There are generally items that are not ``immediately'' available
throughout the year for various reasons. These items are tracked and
reported on the ``Backorder Status Report.'' Attached is a copy of the
most current report as of October 18, 1997, showing items currently not
yet available in paper versions, listing projected availability, and
volume of orders on hand. (Attachment B)
Question: What are the major reasons taxpayers are calling the IRS?
Taxpayers call to obtain tax law information, in response to
notices or bills and to inquire about the status of their refunds.
Question: What are the most common questions taxpayers ask when calling
the IRS?
The most common question taxpayers ask is: ``Where is my refund?''
The five most common tax law topics (based on the frequency of tax
topics selected in Tele-tax) are:
--Electronic filing;
--Dependents;
--Medical and dental expenses;
--Earned income tax credit;
--Filing requirements, filing status, and exemptions; or
Question: Have taxpayer walk-in services and open IRS office hours been
expanded or reduced for this filing season?
During the FY 97 filing season our walk-in offices continued to
provide the same national level of service as during the prior year.
Walk-in offices also assisted individuals in the application process
for the Individual Tax Identification (ITIN), beginning 7/1/96. The
total number of walk-in offices open during this past filing season was
397. The hours of operation remained the same as FY 96 for most of our
headquarters offices: Monday thru Friday--8:00 a.m.-4:30 p.m. Posts-of-
duty days and hours of operations varied based on taxpayer demand and
resources.
IRS Telephone Taxpayer Assistance
Question: IRS data for early March shows that the ``level of
access'' for taxpayers calling the IRS is above 70%. This is an
improvement from earlier filing seasons. However, even at the
70% level, over 7 million taxpayers have not been assisted.
What level of access should taxpayers get when calling the IRS
(i.e., is 70% good enough)?
From an IRS/Customer Service perspective, 70% is not good
enough and we are moving toward a higher level of service for
1998.
Question: Does 70% level of service mean that 70% of the
taxpayers calling actually talk to IRS employees on their first
try?
The level of access means that 70% of the taxpayers who
called had their questions answered by an IRS employee or an
automated service. It does not address how many call attempts
they made before they received an answer.
Question: The Fiscal Year 1998 budget contains $39 million to
be used for the reprogramming of IRS computers to handle the
century date. Where is the IRS in the conversion process?
The FY 1998 Appropriations provided $376.7 million ($289.7
million of current year funds and $87 million in FY 1996 and FY
1997 funds) for Century Date Change requirements, which
includes $79 million for conversion and testing. The IRS
expects to expend 580 full time equivalents (FTEs) or
approximately $39 million for in-house conversion and testing
activities. In addition, $40 million is needed for 313
contractor FTEs and discretionary expenses. Current estimates
are that this funding is sufficient for the Service's FY 1998
conversion and testing efforts. If the IRS identifies other
conversion requirements it will try to obtain Congressional
approval to allocate some of the $42 million contingency
funding to other conversion efforts.
Status of Mission Critical Systems
--4 mission critical systems have already been converted.
--58 mission critical systems have been converted and will
be implemented by January 1998.
--All 121 mission critical systems will be converted by
January 1999.
------------------------------------------------------------------------
Status of
Information Status of All IRS
Conversion Milestone Systems Owned Applications (As
Applications (As of 10/17/97)
of 10/17/97)
------------------------------------------------------------------------
Assessment...................... Completed......... Complete 9/30/97
Renovation...................... 74%............... 53%
Testing......................... 31%............... 22%
Implementation.................. 4%................ 4%
------------------------------------------------------------------------
In the first quarter of FY 1998, the IRS will complete the
scheduling of the field and customer managed systems to be
retained for conversion (expected to be in Phases 4 and 5).
Conversion of telecommunications components will be conducted
from January 1998 through February 1999 (Phases 4 and 5). A
more detailed milestone schedule will be available by December
31, 1997.
Question: Will the various types of data received from the
outside and critical to the IRS, such as Social Security wage
information, also be reprogrammed in a timely and appropriate
manner?
The IRS is trying to ensure that its trading partners can
become Year 2000 compliant in a timely manner. The Century Date
Project Office has spoken at public meetings, including the
Information Returns Program Advisory Committee (IRPAC) and tax
preparers' symposiums. It will work through established
partnership organizations (e.g., CERCA, American Payroll
Association) to reach a broader audience. The IRS also will
provide Year 2000 conversion plans and date format standards
required for exchanging data with its external trading partners
on its Internet home page. The Project Office has included the
external trading partner strategy in its Year 2000 Project
Management Plan (version 3, September 12, 1997). There is
awareness, concern, and strong support for the external trading
partner efforts at the executive level within Information
Systems. The IRS has appointed an executive, the National
Director of Governmental Liaison and Disclosure, to lead the
effort from the business side. There will be a ``Communications
Package'' on this effort for field heads-of-office.
With the support of the Business owners, the IRS is
building a data base to document agreements on schedule and
Year 2000 compliance requirements between the IRS and all of
its external trading partners, as well as to track the progress
of these partners through the conversion process. The Project
Office developed testing plans for external data exchanges
which updated testing requirements in the Unit Test Procedures
Handbook. External data exchanges will be tested as part of
integration or ``compatibility'' testing at the IRS. The
Project Office will track the progress of the testing with
external trading partners.
By December 1997, the IRS will have a list of the key
systems (e.g., Electronic Federal Tax Payment System) which
exchange data with trading partners and their major trading
partners (e.g., Social Security Administration) to address
issues and focus its efforts. While the IRS will continue to
specify its data requirements (e.g., through revenue
procedures), and will document and test data formats for all
external trading partners, it will also conduct an outreach
program for the key trading partners which will entail site-
visits and expanded tracking of their Year 2000 efforts and
status. Further, the IRS will be doing additional verification
of its most critical data exchange partners' plans to bring
their systems into full year 2000 compliance. The external
trading partners reviews are scheduled to be conducted from
February 1998 through July 1998. The IRS has already begun
discussions with the Social Security Administration on the data
exchange requirements for wage information.
The IRS will incorporate contingency management measures
(e.g. bridge software) in its plans which will be executed if
any of its trading partners fail to become Year 2000 compliant
as scheduled. The Project Office requested that the executive
responsible for disaster recovery obtain certification that the
Service's external disaster recovery site was Year 2000 ready.
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Mr. Coyne. And also, Madam Chairwoman, I have a letter from
Commissioner Richardson relative to this subject and cutbacks
that I would like to be able to insert in the record at this
point.
Chairman Johnson. So ordered, Mr. Coyne.
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Mr. Coyne. Thank you.
Chairman Johnson. Congresswoman Dunn.
Ms. Dunn. Thank you very much, Madam Chairman, and I
apologize, Mr. Dolan for having missed almost all your
testimony. I was in a joint leadership meeting and wasn't able
to get here any earlier. And I am most interested in what you
have to say, and have had a chance to read through your written
comments.
Obviously the IRS is facing a very great workload with a
flatline budget, and fewer employees. Can you tell me how this
is going to be reflected in a couple of areas, the first being
the audits? How many audits will be conducted, of what type,
and how is this going to help you with your compliance
responsibilities?
Mr. Dolan. Well, just a tiny bit of background. I may have
mentioned before you came in, but in 1996 and 1997 we have
essentially been in a posture where we have done no new hiring
of revenue agents or tax auditors. So essentially wherever the
attrition has fallen, in 1996, and thus far into 1997, we've
taken the loss. We have not backfilled any revenue agents.
And one outcome of that is that it isn't the most rational
way to deliver an audit plan. So what we will do in
anticipation of 1998 is again look for ways to create a
presence or an involvement that may be less dependent on the
classic one on one audit, because the bottom line will be there
will be fewer audits in 1998 than there were in 1995.
One of the things, when you look at our charts in our
testimony, that we sometimes don't do a decent enough job of
explaining is that we have included in the 1995 and 1996 bar
charts what we call correspondence examinations. And that will
make them look a little more stark.
The correspondence examinations were used specifically in
the way that the Chair identified earlier as a part of this
revenue protection strategy. When we first tried to cure the
Social Security number problem, we went with all kinds of
publicity. We then held up a number of those and put them
through a correspondence examination.
With the help of this Subcommittee and Congress, this year
we have something called a math error capability which doesn't
require us to put one of those missing Social Security number
cases through the entire examination process.
We do it in a much more summary process. So some of what
will appear in the testimony as a fall off between 1996 audit
rate and what we will do in 1997 and 1998 is a function of this
kind of transaction no longer being required to be done through
the classic examination process.
Ms. Dunn. What is the number of employees currently in the
IRS?
Mr. Dolan. It's 102,000 and something. And I would be happy
to give you that as of the last pay period.
Ms. Dunn. That's fine.
[The following was subsequently received:]
The FTE count for fiscal year 1997 is 102,926.
Ms. Dunn. I wanted to ask you a question on electronic
filing. When we first discussed that, it seemed like it would
provide greater compliance, and would allow you to work on
improving compliance without a lot of negative benefits to
businesspeople.
Since then we have found that especially for small
businesses it's tough for them to have to move to that sort of
filing system. There is legislation out there that would allow
a taxpayer to make a choice between the old system and
electronic filing.
Tell me what your thoughts are on that, and how is it going
to affect your ability to improve compliance?
Mr. Dolan. I think we are very much still a believer that
the electronic filing process does both things. It creates a
tremendously more effective customer service environment, but
it also can be a terrific asset in compliance.
Because what it will do over time is allow us to know more
about the total population of filers, and be able to use on a
realtime basis the attributes of a return to not waste the time
of somebody on a return that fits within a particular pattern
that today we have to take through a more manual process of
pulling it out by a DIF score, putting it before a classifier's
eyes, putting it in the examination process, and then finding
out whether or not there really is the anomaly that there
appeared to be.
So there will be a compliance benefit. The other compliance
benefit, quite frankly, is to the extent that that data is
electronic and we can react to anomalies earlier, we can react
to somebody who is in trouble, someone who has a first quarter
delinquency, and we can react to that in the first quarter of
their delinquency, rather than three or four quarters later
where their alternatives are they've got no way to get the
money, they're confronted with a choice of do I go out of
business or do I pay my tax.
And so tremendous, small ``c'' compliance benefits, I
think, of moving more and more of the interfaces between--and
the business community I think again--I may have mentioned this
before you came in the room. We're doing something that's
exciting to us. That's in the southeast part of the country we
will take employers in 14 States and allow them to do their
quarterly tax return on a touch tone phone, much like we do
with the TeleFile.
Now, I think we want to develop some data to see whether
they'll do it as quickly, but we think we probably will do it
maybe even more quickly than the 8 to 10 minutes on average
that it takes a 1040-EZ filer.
We think that kind of a system will have a whole lot more
appeal to business than visions. Some businesses, I think,
misunderstand the threshold investment, either of time or
equipment. The other thing that you may have mentioned is our
EFTPS Program, which is based on a very successful tax link
program where we've had, I think, in the neighborhood of 72,000
to 75,000 people in this system voluntarily.
We now have something over 900,000 enrolled of the 1.2
million that are due to begin in July. And for the most part,
people who get past the entry shock and get themselves
enrolled, find out how tremendously simple it is. I mean,
basically, access again to a telephone.
What we've been trying to do with the banks, the payroll
houses, and all of the constituency groups is make sure that
the businesses who see this--and might in the first instance be
put off by it--understand how relatively simple it is, and how
inexpensive and nonintrusive it is.
So in part we've been trying to do a better job of
marketing and informing that group.
Ms. Dunn. I was just going to suggest, do you think you're
getting the word out?
Mr. Dolan. We could always do a better job.
Ms. Dunn. I continue to hear from my small business folks
that they really would like to have the choice because they're
fearful this would take a great deal more money and time. And
compliance, as we all know, is very expensive right now.
Mr. Dolan. We have worked very hard with the benefit of
some private marketers as well. We've established linkages with
the FMS and with the banking community. We've got a lot of
people who have tried to help us carry the message.
And we are in the very late stages now. We will put in the
hands of each of our district directors probably within the
next 15 or 20 days the residual 200,000 whose obligations will
accrue in July to make sure again that people aren't surprised
by that, that they've heard from us, that we've done some
direct outreach, so that as we get close to July, people aren't
again scared off by this impending government requirement.
Ms. Dunn. Thank you. Thank you, Madam Chair.
Chairman Johnson. Thank you. Mr. Dolan, Congresswoman Dunn
raises a very, very important problem, because the next round
of companies that have to comply are even harder to reach and
educate. And a lot of us are very concerned about that, and
that's really where that legislation comes from, and it is
something we're going to have to buckle down and see whether we
need to delay the date or whether we need to do something
different to reach them.
But I appreciate the good work that you've done in this
regard.
Mr. Hulshof.
Mr. Hulshof. Thank you, Madam Chair. Mr. Dolan, and perhaps
Mr. Gross, for you, each of you gentlemen was present as the
Chairman gave testimony and made reference to the amount of
resources we have committed to Tax Systems Modernization. And I
want to ask, either one of you, a couple of questions about
some budget requests.
It's my understanding that the Clinger-Cohen Act, as well
as the Government Performance and Results Act, as well as
memorandums from OMB require that information technology
investments be supported by accurate cost data.
And I think, particularly, looking at the information
systems request, you're asking for about $131 million for
developmental information systems. And yet I'm not sure that
your budget request includes plans of how this is going to be
used, in that the architecture and system deployment plan have
not yet been finalized. Is that true, Mr. Dolan?
Mr. Dolan. Mr. Hulshof, you essentially have it right. And
let me say, though, in saying that you have it right, to a
certain extent we are--collectively we are the victims of the
calendar year.
We are, as Art mentioned, very much on track doing the
required first steps of getting the architecture, the plan,
nailed down. He's got a timeline for that. The Modernization
Board will receive our work on that in the summer.
The difficulty we have is until that work is actually
complete, until some final choice is made, we would be guessing
at the actual sequencing of the priorities.
It is very clear to us that there is going to be a critical
mass of capital required for this architecture, for the
sequenced investments. It was difficult for us, as we made the
budget submission, to get ahead of the June/July timeframe;
when we have finished these deliberations and made the choices,
we will be much more sanguine.
And so, on the face of it, it is anomalous with the law
that says before the train starts to move at all, you have to
have taken certain steps. I think if you literally superimpose
such requirements on where we are today, we'll lose some
tremendous time during which we could leverage what we all
fully hope and expect will be plans that we're able to look at
this summer.
Mr. Hulshof. I agree, Mr. Dolan, that before the train
heads out of the station it needs to have a set of tracks for
that train to run over. And yet I am concerned, as I was back
in the district this weekend, and this was a specific concern
addressed to me by constituents.
And if we look back at the track record, 26 programs being
eliminated, about $1 billion of our tax moneys that have been
wasted--or that's the perception out in the real world
regarding the systems modernization. Would your answer be
essentially the same as far as the IRS' request for $1 billion
for fiscal years 1998 and 1999 for yet to be specified
developmental efforts regarding the investments account, or
capital investments?
Mr. Dolan. It would be a little different in this respect,
Mr. Hulshof. I think that represents a recognition within the
government budgeting process that something has to change when
it comes to anticipating and accounting for capital
investments.
And I think it represents as a part of the President's
budget an effort to find a nonpartisan way of suggesting that
no business in America does its capital thinking, capital
investing, and capital planning out of a single year operating
budget.
And so I think that represents, certainly with respect to
the dialog within Treasury and OMB, an attempt to say there is
a way of dealing with this problem within a capital budget so
that if the plans aren't there, and the dollars can't be spent
prudently, they won't be spent. They'll roll back into a
subsequent fiscal year in a way that in today's single year
budget environment is much more difficult to do.
Mr. Hulshof. As a final matter, Mr. Gross, you indicated a
partnership with the private sector was something that was
online, and that you needed to have a focused plan.
And I think the second prong of your three prongs--I didn't
get noted. What was that again?
Mr. Gross. We need discipline, process and practice in
place. Disciplined procedures for developing these investments.
Mr. Hulshof. And are those in place?
Mr. Gross. No, they are not, sir. Our commitment, and I
think we have been asked this over these many months, ``What
will be different about this next round of modernization?''
What will be different is the following: We will not move
forward until we have those capabilities. We will not move
forward until we have a partnership with the private sector.
And, most importantly, we will not move forward until we
have a proven, practical, disciplined and focused plan.
Mr. Hulshof. Thank you, Madam Chair.
Chairman Johnson. Ms. Thurman. Congresswoman Thurman. I'm
sorry. I'm recognizing you out of order, Congresswoman. I
didn't realize you'd come in.
Ms. Thurman. That's OK. Thank you, Madam Chair. I
appreciate it. Good afternoon. Thanks for being here.
After our last hearing in this Subcommittee from the
taxpayer advocate group, I had an opportunity to meet with some
of your folks who are actually the agents out there, the
telephone operators, the people that are being complained
about, at least from the taxpayer advocate's 20 suggestions.
I actually gave them a copy of the 20 most common questions
and concerns with IRS, and I said to them, I said Have you ever
seen this. And they said, No. And I said, But you all are the
ones that are being complained about, and you've not actually
seen what is being complained about.
And they said, No. Actually, they are going to send me a
written response to each one of the 20 complaints. My first
question is this, Mr. Dolan: In the agency itself, particularly
with the issues of trying to work from the bottom up, what are
you doing to get the information down to those frontline
people? Not just about the Tax Code, but the kinds of things
that they're not being responsive to from the taxpayer? I'm
interested to know how that system works from their situation.
Mr. Dolan. Thank you. There are a couple of components to
the problem resolution information that I think formed the
basis for Mr. Monk's 20 points. In the past, I will tell you,
we probably were more anecdotal about aggregating that
information. By that I mean we would make regular surveys of
our field personnel for them to essentially aggregate their
experience and we'd compile it and put it in reports.
What we have done very recently--really, we're in the first
full fiscal year of its availability to us--we've got a far
more differentiating management information system in place
today where I can tell you with great alacrity what exactly the
issues are that are being confronted by a Jacksonville or by a
Ft. Lauderdale.
I can tell you and I can look for the incidents with which
there are anomalies, or a different pattern from one center to
the other. And I can determine whether it is because people are
more or less effective at recognizing when it is a problem
resolution case.
So there is one body of data that helps me take what the
frontline problem resolution results are, bring the data up
into a management information construct that allows us to then
turn it back around to the regional commissioners, the district
directors and say, this is the data, this is what is broken,
this is what is not satisfying taxpayers on a regular basis,
and potentially--back to the Chair's comment--this is also what
may need a legislative remedy.
Ms. Thurman. But if they're not--if those frontline people
are not getting that information how do they correct----
Mr. Dolan. I'm being a little slow in getting to the second
prong.
Ms. Thurman. OK.
Mr. Dolan. The second prong is essentially what we try to
do every year when we prepare people for the opening of a
filing season. We take them through very specific training on
the new issues, the issues we know about, and where we've done
well or not done well with respect to the quality of our
answers.
And then throughout the filing season we also feed back
information to people. Where are we getting it wrong? Where are
people's needs not being met? Where are the bottlenecks in the
system?
So those are essentially the two prongs. Jim may want to
comment.
Ms. Thurman. Where do they get their input, though? I mean,
once you feed them that information, those folks who are trying
to correct those issues, when do they get the input into the
system? When do they get the opportunity to talk to those that
might be making management decisions?
Mr. Dolan. We probably do that more or less well. I would
say, like any big organization, we should probably do that
better.
Ms. Thurman. I'll share my letter with you.
Mr. Dolan. I would absolutely encourage you to do that. I
think that individually we expect that of the district
directors, the division chiefs. We expect our installation
managers to do that.
I think, though, if you rely on the anecdotal or on
somebody feeling strongly enough about an issue to float it up,
in a big organization it doesn't always get to us--and that's
why I'm hopeful this management information system allows us
with starting point data.
Mr. Donelson. Congresswoman, 2 of the last 4 years, we've
run survey feedback action programs, called SFA, which really
are to encourage our employees and managers to communicate
about issues like you're talking about.
And I think that's one of the many vehicles we use. One of
the other things I'd like to point out is the Ombudsman or the
Taxpayer Advocate brought to the table and talked to this
Subcommittee about issues such as telephone access, notices,
the clarity of the notices, the lack of clarity of the notices.
And that's not about our people being bad people, not doing
a good job. What that really is about is system problems.
Things that we have recognized through the Advocate pointing it
out to us, plus our own analysis, that you've got to fix that
telephone system.
The employees out there answering the telephone that you
talk to, they can't hire additional people to be there beside
them to answer more phone calls, or they can't necessarily--
because they're working on the phone--manipulate the telephone
lines to be more efficient in the way we route calls.
They certainly can't, if they're dealing with the taxpayer
on the telephone, on a notice, make changes to that notice.
They can make recommendations, and we have suggestion programs
to do that. But they are, if you will, the victims of the
system as well.
And it's the job of all of us up here to change that system
where possible. Some of those things listed on those items
identified by the advocate are things that we've been working
on with the help of our frontline employees, as well as the
managers that are working with them.
Ms. Thurman. Mr. Dolan, in your written testimony, you
talked about, I think 26 million people possibly being eligible
for some electronic, and those who would have direct deposit.
And then you suggest in there, I think, that there are about
3.2 million people that may be taking advantage of that.
What I wasn't clear on is whether all 26 million people
today tap into that system? Or are we limited? And then to
carry along, with Ms. Dunn and Ms. Johnson's questions, maybe
from a different standpoint, how much money do you spend in
your budgets for marketing, or getting this kind of information
out so that the taxpayer would know these issues are available?
And just as importantly, what could we in Congress be doing to
help you do that?
For example, I host a public affairs show called ``Capitol
Insights'' once a month for my constituents. We did a whole
series on the EITC, so our constituents would be informed. How
else could we help you with educating people?
Considering that your budget is staying constant, it would
seem to me, that if these new ways of filing are actually
creating a savings, that that information ought to be shared
with the taxpayers. If you do electronic filing, guess what,
taxpayers, this is going to cost or save the government x
amount of dollars.
I know that was a long question, Madam Chairman, but I'm
sorry.
Chairman Johnson. It's a reasonable one, and we're all
interested in the answer.
Mr. Dolan. It's a great question, and it's also a kind of
window into our soul. We have never historically had within the
ranks of the IRS any particular marketing capacity.
We are tax administrators and not marketers. And that's to
our peril, in some instances. What really has brought about our
need for and use of marketers--and I don't want to mislead you
that we've got huge contracts where we're spending lots of
dollars--is the combination of the EFTPS and the other suite of
electronic products. There is a marketplace of 26 million
people, and you know that at least on the surface the
characteristics of what you're inviting them to do ought to be
fairly appealing.
But then you have to get beyond that, as we have tried to
do, particularly the last 2 years, with the use of district
office research capacity, which has allowed us to take that 26
million people and stratify that population.
We stratify the population because both the retired person
who is within the dollar eligibility of that program and the
college sophomore who is within that dollar eligibility are
moved by two different brands of influence.
To wit, in your part of the country today, and all the rest
of this week, we have people shadowing the MTV onsite studios.
Apparently they're moving around Florida in some 20 different
places during spring break week.
And so we have made a huge push this week and last week
with college kids. Fifty of the biggest universities are giving
us widespread publicity. We've got CBS' Web site--the one that
gives the scores on the NCAA tournament--to run our banner
across their site--and a lot of that is a function of the help
we've gotten from marketers. They have given us ways of
thinking about getting to that marketplace in ways that in the
past, quite frankly, we would not have had the capacity or the
creativity to do.
And so--I wouldn't want to tell you that we're as good as
we're going to get. But we clearly have recognized that
marketing is a skill, and when you take that plus the
references Art made you see we are listening to an industry
that is already out there in their business environment, day in
and day out, dealing in this electronic commerce environment.
One of the major practitioners came to us and said, You
know, I've got 6 million returns here that if I just flipped a
switch I could send you electronically. But guess what, the
people who file those returns with me aren't so sure they want
you to get them electronically, because they're not sure what
it means to have that data come to the IRS that way.
Those are some of the same people who for years haven't
wanted to use our preprinted label because they were convinced
that if they used the label that we sent with the package, that
meant they were going to get audited.
We, for years, said no. What that means is we can enter a
couple of key strokes instead of all the key strokes, because
we've got that label on it. So there is a part of learning what
the behavior sets are, what the motivations are, what it takes
to track some of that marketplace. We clearly understand that
we need help and we need other people's insights. And I think
we're very much committed to using those kinds of skills.
Ms. Thurman. Is there a significant savings?
Mr. Dolan. There is a savings. What we're right now doing--
in connection with something we've mentioned in the longer
testimony, as we have indicated, and in response to this year's
appropriations language--is look at outsourcing.
We propose to go to the marketplace with a request for
information kind of dynamic, where we will ask people to bid on
what they think they--the private marketplace--might want to do
with the front end of sending us data and sending us
information.
As a part of that, we're going through a study that Mr.
Musick is now doing, to pin down not only the front-end costs,
but a lot of the downstream benefits of electronic filing as
well. Everything from the obvious, you don't have to store the
paper, to the less obvious, I can call up 100 percent of the
data on a screen for customer service. This means customer
service will be a lot more effective than if I can only call up
what's transcribed.
So we're right now trying to document that baseline in a
way that I hope to give you a more precise answer in the future
on that.
Ms. Thurman. Thank you.
Chairman Johnson. Very briefly, Mr. Gross, you're supposed
to report in May, are you not, in regard to your plan for the
Tax Systems Modernization Proposal? Do you think by then you
will have a plan and the disciplines governing it, as you've
spoken about today?
Mr. Gross. Our projection by May 15, 1997, is to submit to
the Congress what's known as the modernization architecture.
That is regrettably only one element of the program. It will
take us longer to establish the disciplines, and to acquire the
partnership with the private sector.
On the other hand, I would want to reinforce Mike Dolan's
comments that given the nature of capital budgeting, it's
essential for the government to plan in advance in anticipation
that we will be prepared for modernization once those funds
become available.
It's my understanding that the first of the two projected
$500 million segments would first become available no earlier
than July 1, 1998. And by that time, we aim to have both our
capabilities and hopefully the contractor relationships, the
requisite contractor relationships, together with the
architecture and the practical implementation plan.
Chairman Johnson. So you need those funds to be available
to you 1 year earlier?
Mr. Gross. Our projection is that the availability of those
funds, as set forth in the President's budget, is appropriate
for the timing of our preparedness.
Chairman Johnson. Oh, is appropriate.
Mr. Gross. Is appropriate, yes. Which I understand to be no
earlier than July 1, 1998, with the first of the two $500
million increments.
Chairman Johnson. Thank you. And, Mr. Dolan, last, why did
you make the decision to divert money from examination and
document matching, that kind of program that has to do with
enforcement, into customer service, telephone access, as
important as those things are.
Was this the best place to take money, so that you end up
not collecting $3 billion that last year we were able to
collect?
Mr. Dolan. Well, Madam Chair, it wasn't quite as clean a
choice as that. I'll go back to the description that I was
trying to give at the outset. For starters, in a perfect world,
what I would have done if I was trying to leverage my
compliance accounts to the maximum, I would have looked at
perhaps people who were sitting in permanent revenue officer,
revenue agent positions, and moved around along that spectrum
of compliance, my assets.
And so I would have cut less deeply from the matching. The
coincidence of employment categories happens to be that
matching program is largely done with seasonals.
And so when I ended up in that predicament of 6,300 people
that I couldn't pay for, and I looked for dollars that were
otherwise fungible, that weren't tied to a person who was on
the payroll getting paid every 2 weeks, the places I had to go
were the seasonal hours, and, as I said, the training, the
travel.
And my other alternative would have been to go through some
general or some targeted furlough, and put permanent people at
home for periods of time in order to create some cash savings
for the payroll process.
I would like to tell you that I sat in some pristine way
and made a true value choice to trade this dollar for this
dollar. Last year, when we first made this transition, we did
not invest in customer service as much as we'd like.
Even this year, we have moved very modest compliance
resources from our office audit occupation over to support,
phones. So we were very conscious about not savaging a
compliance program in order to do exclusively customer service.
We've been trying----
Chairman Johnson. Of course, one of the challenges is to
coordinate some of the other things you're doing. If you're
doing market segmentation by region, and, I mean, all of that
should enable you to use your compliance resources far more
effectively.
Mr. Dolan. But there is one thing that I really missed by
not being more explicit about this. We're in this--we're kind
of in this no man's land now of trying to complete our
reorganization. One of the things that is at issue is--Mr.
Coyne talked about it as it pertained to Pittsburgh--that we
are in a position where we knew that what used to take 2,500
people to do in 63 districts could be done with 1,500 people in
33.
And we are sort of midstream trying to get that taken care
of. And when we get that taken care of, it creates the
flexibility of those thousand--essentially the dollars
associated with those thousand staff years, that can be placed
back in the right places.
We've got holes up and down the organization. It happens to
show up graphically because of the outcome measure on the
document matching. But we've got groups that are not supported
clerically, and so we've got some revenue agents off doing
that.
We've got lots of healing to do once we can accomplish this
last phase of our reorganization. And I think that will go a
long way toward rerighting some of those balances.
Chairman Johnson. Thank you very much. Are there any other
questions or comments? Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairman. Mr. Dolan,
Commissioner Richardson had asked some of us on the
Subcommittee to consider introducing legislation that would
make it a felony for an IRS employee to access tax information
in an unauthorized manner.
I wonder if you could shed some light on the necessity for
doing that?
Mr. Dolan. Yes. The Commissioner, as I know this
Subcommittee knows, has been passionate about the issue of
unauthorized accesses, as have the rest of us. And we have
identified over time a series of corrections, in what--as I
think the Commissioner in her most recent correspondence was
pointing out--was the need to supplement what's already on the
books that deals with the unauthorized access to electronic
records.
What is left open is the unauthorized access to paper
records, and what she's asking for is some help in sort of
applying to the paper world the same regime that the Congress
helped us with on the electronic world.
So in a sort of thumbnail, that's what her request is, and
it's an extension of our objective. You don't make this go away
by criminal penalties, but you do create a deterrence by having
the same brand of prohibition on the paper side as you do on
the electronic side.
Mr. Coyne. Is it currently a felony relative to information
that's accessed electronically?
Mr. Dolan. Electronic. Yes, it is.
Mr. Coyne. And you want it extended to paperwork access?
Mr. Dolan. That's correct.
Mr. Coyne. Thank you.
Chairman Johnson. We have been working with you and intend
to be working with you on a bipartisan fashion to get this
legislation right.
Mr. Dolan. We very much appreciate it, too.
Chairman Johnson. There are lots of questions that could be
asked, but we need to move on to the next panel, and I
appreciate the quality of your testimony. And I would just
suggest that if you have the information management capability
that you were discussing, perhaps you could actually go back
and pull up the three or four areas of complexity that are
causing tax administration problems, and even frontline
advocate problems.
Because we are going to have to move in that direction, and
we can't wait until we have that hearing again next year. So I
would appreciate it, understanding more clearly now what we
need. Not a list of 20. But if you have that management
capability you really ought to be able to give us some guidance
as to what we ought to be looking at.
Because when I look at your budget, and the demands on you
and the planning--I mean, just the transition, as you described
that you can't get certain resources until you complete certain
reforms, and then you can fill in some of the holes.
It's very important that as you do this, we begin to take
our part of the responsibility to address some of the
complexity issues. And I know how volatile they are. I know
that they are AMT and they're EITC, and they are other things.
But we have to find a way to do some of those things, so
that as you move toward a better system, you do it with a
better law.
So thank you very much for being here today, and thanks to
all your staff for their good work, and for their presence.
Mr. Dolan. Thank you.
Mr. Coyne. Madam Chairwoman.
Chairman Johnson. Mr. Coyne.
Mr. Coyne. Several of my colleagues from Pennsylvania have
asked that a letter that they sent to Commissioner Richardson
be included in the record, relative to the reorganization of
the IRS in Pennsylvania.
Chairman Johnson. I would be happy to do that.
I know that in my region they have worked very hard on
this, and it has at this point seemed to serve the taxpayers of
all the States involved very well. And I would be happy to
include this letter on our behalf, Mr. Coyne.
[The following was subsequently received:]
[GRAPHIC] [TIFF OMITTED] T0671.009
[GRAPHIC] [TIFF OMITTED] T0671.010
Ms. Thurman. Madam Chairman.
Chairman Johnson. Yes, Congresswoman Thurman.
Ms. Thurman. Could they also submit any of the educational
pamphlets or whatever they do in targeting for businesses or
seniors.
Chairman Johnson. I'm sure they can provide those to the
Subcommittee, and we'll see that they get to you.
Ms. Thurman. I'd like to see those just so we could have
them. I think it might be helpful for us as well.
Chairman Johnson. I think if you just submit those, not as
part of the record, but as part of the service to this
Subcommittee, we'd appreciate it.
Mr. Dolan. We will do that.
Chairman Johnson. Thank you.
Apologies to the GAO for the delay in your appearance.
These are difficult issues, and it's important for the
Subcommittee to understand them.
Lynda Willis, the Director of Tax Policy and Administration
of the General Government Division of the GAO; and Rona
Stillman, Chief Scientist, Accounting and Information
Management Division of the GAO.
STATEMENT OF LYNDA D. WILLIS, DIRECTOR, TAX POLICY AND
ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S.
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY RONA STILLMAN, PH.D.,
CHIEF SCIENTIST, ACCOUNTING AND INFORMATION MANAGEMENT
DIVISION, U.S. GENERAL ACCOUNTING OFFICE
Ms. Willis. Good afternoon, Madam Chairman, and Members of
the Subcommittee. One of the advantages or disadvantages of
going second is that you have a lot of your prepared statement
that's already been presented by the panelists before you.
With your permission I will submit my written statement for
the record, and I will make a very brief overview of some of
the key points that we make in the statement, and then open it
up for any questions that the Members of the Subcommittee may
have.
Chairman Johnson. Thank you.
Ms. Willis. This Subcommittee has asked us to look at three
things basically for the Subcommittee today. First is IRS'
actions to implement the fiscal year 1997 appropriation; second
is the status of the 1997 filing season; and third is to
comment on the administration's budget for fiscal year 1998, or
the budget request.
Turning first to IRS' 1997 appropriation, in 1997 Congress
was concerned about the lack of progress in implementing TSM
and about the level of taxpayer service. In response to
congressional concerns about TSM, IRS has realigned its 1997
information system spending plan.
IRS has canceled projects that were included in those plans
that it had estimated would cost a total of $36 million in this
fiscal year. According to IRS' Chief Information Officer, these
projects were canceled because they did not have business case
analyses that justified their continued development. I would
note that several of those projects were discussed in reports
that we prepared for this Subcommittee earlier this year.
The CIO also stated that IRS does not plan to start any new
systems development projects, as he stated here this morning,
until they have the internal capability to effectively develop
systems. And that it would be 12 to 18 months before they could
do that.
Therefore, we believe Congress should consider rescinding
the $36 million that will not be spent on those canceled
projects in fiscal year 1997.
Also in 1997, given congressional concerns about the level
of taxpayer service and the low level of telephone
accessibility, IRS decided this year, as it has stated, that
one of its highest priorities would be to improve the ability
of taxpayers to reach IRS by telephone.
IRS did allocate about 1,000 additional staff years to
taxpayer service, and the increased staffing is having a
positive effect.
Moving to the 1997 filing season, we're finding, as IRS
indicated, that the filing season is going relatively smoothly
this year. We have seen significant increases in two areas
where we have criticized IRS' performance in the past--
electronic filing and telephone accessibility.
As of March 7, the number of returns filed electronically
was almost 25 percent more than at the same time last year.
This increase is even more significant considering that the
total number of individual income tax returns filed as of that
date was 1.5 percent less than at this time last year.
The largest percentage increase is in the number of returns
filed using TeleFile. This increase may be due in large part to
a change in the tax package IRS sent to eligible TeleFile users
this year.
This year IRS eliminated the form 1040-EZ and related
instructions from the package, hoping that more taxpayers would
be inclined to use TeleFile if they only received the TeleFile
materials, and from all indications it's worked.
And I would like to digress here a moment from my prepared
statement to observe that this is exactly the sort of thing
that IRS needs to do to better target its programs to the
market they're trying to reach.
When we understand why people don't participate in
electronic filing programs, or when we understand why people
are concerned about the new EFTPS Program, we are then in a
better position to either provide the educational assistance,
the different types of systems or programs, or perhaps even
different timing of delivery of those services to meet taxpayer
needs.
And I think in this case, IRS' use of a different package
of filing information for these taxpayers successfully enhanced
IRS' ability to improve electronic filing.
The accessibility of IRS' telephone assistance has
increased substantially. IRS has answered 52 percent of
taxpayer call attempts during the first 2 months of the filing
season, compared to 21 percent during the same period last
year.
The number of taxpayers assisted was also up, with 71
percent of the callers getting through, compared to 52 percent
last year. And I think we would agree that those are
substantial improvements.
There are several factors that appear to have contributed
to IRS' increased telephone service. One is an increase in the
number of staff assigned to answer the phone, some of which was
achieved by detailing staff from other IRS functions.
And I would note here that the last time we looked at the
resources going into telephone assistance was in 1994, and at
that time the IRS was only budgeting enough resources to answer
52 percent of the calls.
So based on the budgeted resources it was not surprising to
us or the IRS that the accessibility was at the rate it was.
The second reason is an attempt to reduce the need for
persons to call the IRS by eliminating certain notices that the
IRS deemed to be unnecessary. And, finally, IRS revised its
procedures for handling calls.
Turning finally to the 1998 budget request, included in
that request is $131 million for developmental information
systems, the same amount that was provided in 1997.
As a Member of the Subcommittee pointed out, the Clinger-
Cohen Act, GPRA and OMB require that information technology
investments be supported by accurate cost data and convincing
cost/benefit analyses.
However, IRS' request does not include a credible,
verifiable justification. The budget request states, and this
Mr. Dolan acknowledged, that IRS does not now have plans to
spend these funds, because its modernization architecture and
system deployment plan have not yet been finalized.
The administration is also proposing an information
technology investments account of $1 billion; $500 million for
1998 and $500 million for 1999. This is to fund yet to be
specified developmental efforts.
Again, the Clinger-Cohen Act, GPRA and OMB require that
these requests be justified, and that agencies develop
accurate, complete cost data and thoroughly analyze the
business need for the systems. IRS has not prepared such an
analysis for its investment account.
Given IRS' poor track record in delivering cost beneficial
systems, persistent weaknesses in its software development and
acquisition capabilities, and the lack of justification and
analysis for proposed system expenditures, we believe Congress
should consider not funding either the $131 million request for
systems development, or the $1 billion capital account until
the management and technical weaknesses in IRS' Modernization
Program are resolved, and the required justifications are
complete.
That is not to say that we think IRS will not need money to
modernize their systems, but rather before the money is
authorized for spending that IRS be required to have the
appropriate cost/benefit analysis and justifications for these
systems, and that they have developed the capability to deliver
the projects they propose to deliver.
The budget request for 1998 also includes $84 million for
IRS' turn of the century date change. However, the 1998 request
was based on September 1996 cost estimates for IRS' main tax
processing systems. It did not include estimates for IRS'
secondary systems that are also critical to tax administration.
It also did not factor in many other activities related to
the century date change effort that have since been identified.
Thus far in fiscal year 1997, IRS has identified funding
requirements for the century date conversion that would exceed
its 1998 budget request. Consequently we believe it's
reasonable to question whether the amount requested for this
effort in fiscal year 1998 is going to be adequate.
The largest staffing increase in IRS' budget request is for
195 FTEs to process a projected increase in the number of tax
returns filed in 1998. However, IRS expects that most of the
additional returns will be filed electronically.
Data IRS used to determine how much more money and staff it
needed to process these additional returns show only a small
difference between the number of FTEs needed to process 1
million electronic returns and the number needed to process 1
million paper returns.
That small difference is inconsistent with what we would
have expected, and may reflect at least in part that electronic
filing is not truly paperless. Most electronic filers still
have to submit a paper signature document.
Finally, I would like to turn to some of the challenges
that we believe the IRS and the Congress face in moving the tax
system into the next millennium--some of the things that
reflect directly on conversations that were held earlier today.
The funding limits and program tradeoffs faced by IRS in
1997 and anticipated for 1998 are likely to continue for the
foreseeable future. As has been observed, the administration's
projections actually reflect a decline in IRS' funding when
inflation is considered.
At the same time, the IRS is faced with competing demands
and pressure from external stakeholders, including Congress, to
improve its operations and resolve longstanding issues.
In recent years, the statutory framework has been put in
place for helping Congress and the executive branch make the
difficult tradeoffs that the current budget environment
demands. This framework includes the Chief Financial Officers
Act, the Clinger-Cohen Act, and the Government Performance and
Results Act.
GPRA requires each agency to develop a strategic plan that
lays out its mission, its long-term goals and strategies for
achieving these goals. GPRA requires agencies such as the IRS
to consult with the Congress as they develop these strategic
plans.
For IRS, these consultations provide an important
opportunity for Congress, IRS and Treasury to work together to
ensure that IRS' mission is focused, its goals are specific and
results oriented, and strategies and funding expectations are
appropriate and reasonable.
The consultations may prove difficult as they are likely to
underscore the competing and conflicting goals of IRS programs,
as well as the sometimes different expectations of the numerous
parties involved.
Madam Chairman, that concludes my statement. I would be
happy to answer any questions you may have, as would Dr.
Stillman.
[The prepared statement follows:]
Statement of Lynda D. Willis, Director, Tax Policy and Administration
Issues, General Government Division, U.S. General Accounting Office
Madam Chairman and Members of the Subcommittee:
We are pleased to be here today to participate in the
Subcommittee's inquiry into the Internal Revenue Service's
(IRS) actions to implement its fiscal year 1997 appropriation,
the status of the 1997 tax return filing season, and the
administration's fiscal year 1998 budget request for IRS.
This statement is based on our review of the
administration's fiscal year 1998 budget request, the interim
results of our review of the 1997 tax return filing season, a
review of IRS' fiscal year 1997 spending plans for information
systems, and our past work on Tax Systems Modernization (TSM).
Our statement makes the following points:
--IRS' fiscal year 1997 appropriation act and accompanying
conference report indicated that Congress was concerned about,
among other things, the level of taxpayer service and the lack
of progress in implementing TSM. In response to congressional
concerns and direction, IRS allocated about 1,000 additional
full-time equivalent (FTE) staff to taxpayer service activities
and realigned its fiscal year 1997 information system spending
plans. IRS has since cancelled some of the projects that were
included in those plans and that it had estimated would cost a
total of $36 million in fiscal year 1997.
--The 1997 filing season has seen significant increases in
two areas where we have criticized IRS' performance in the
past--electronic filing and telephone accessibility. To help
achieve those increases, IRS (1) revised the tax package sent
to persons eligible to file by telephone, hoping, as a result,
to encourage them to file by phone; (2) assigned more staff to
answer the phone; and (3) revised its procedures for handling
more complicated telephone requests for assistance.
--IRS' basic budget request for fiscal year 1998 is for
$7.4 billion and 102,385 FTEs. Included in that request is $131
million for developmental information systems, the same amount
that was provided in fiscal year 1997. In addition to that
basic request, the administration is proposing a capital
account for information technology investments at IRS--$500
million for fiscal year 1998 and another $500 million for 1999.
Neither the $131 million or the $1 billion is supported by the
type of analysis required by the Clinger-Cohen Act, the
Government Performance and Results Act (GPRA), and the Office
of Management and Budget (OMB).
--The budget request also includes $84 million for IRS'
turn of the century date change effort. IRS has already
determined that it will need several million dollars more for
this effort in fiscal year 1997 than had been allocated. Given
that and because IRS' overall conversion needs are still being
determined, it seems reasonable to question whether the amount
requested for this effort in fiscal year 1998 will be
sufficient.
--IRS is also requesting funds to replace two old systems
used to process paper returns and remittances. Because extra
money is being spent on those replacement systems in 1997, all
of the funding being requested for 1998 may not be needed.
--The largest staffing increase in IRS' budget request is
for 195 FTEs (with an associated cost of $11 million) to
process a projected increase in the number of tax returns filed
in 1998. IRS expects that most of the additional returns will
be filed electronically. Data IRS used to determine how much
more money and staff it needed to process those additional
returns show only a small difference between the number of FTEs
needed to process a million electronic returns and the number
needed to process a million paper returns. That small
difference is inconsistent with what we would have expected and
may reflect, at least in part, the fact that electronic filing
is not truly paperless.
--Finally, IRS and Congress face many challenges in moving
the nation's tax system into the next millennium. Funding
limits faced by IRS in fiscal year 1997 and anticipated for
fiscal year 1998 are projected to continue until at least 2002.
Fiscal constraints as well as longstanding concerns about the
operations and management of IRS make consensus on IRS
performance goals and measuring progress in achieving those
goals critically important. The provisions and requirements of
the Chief Financial Officers Act, Clinger-Cohen Act, and
Government Performance and Results Act provide a mechanism for
accomplishing this.
Overview of 1997 Appropriation Issues
IRS' fiscal year 1997 appropriation act \1\ and
accompanying conference report \2\ indicated that Congress was
concerned about various aspects of IRS' operations. Among other
things, Congress expressed concern about (1) TSM and the need
to direct more systems development work to the private sector;
(2) TSM funds being directed at ``feeding the beast'' rather
than at true modernization; (3) the ability of taxpayers to
reach IRS over the telephone; (4) the need to maintain taxpayer
service at fiscal year 1995 levels, at a minimum; \3\ and (5)
the need to develop a strategic plan and performance measures
for inclusion in IRS' fiscal year 1998 budget request.
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\1\ The Omnibus Consolidated Appropriations Act (P.L. 104-208,
Sept. 30, 1996).
\2\ H.R. Report No. 863, 104th Cong., 2d sess. (1996).
\3\ Congress added this requirement because it was concerned that
IRS' pending reorganization of certain field activities would adversely
affect taxpayer service.
---------------------------------------------------------------------------
As shown in table 1, IRS' final appropriation for fiscal
year 1997 was $7.2 billion--$142 million less than its fiscal
year 1996 appropriation. The fiscal year 1997 appropriation
also rescinded about $174 million in information systems funds.
Table 1 also shows that the fiscal year 1997 appropriation
provided (1) all of what IRS requested for processing,
assistance, and management; (2) $424 million less than
requested for tax law enforcement; and (3) $365 million less
than requested for information systems.
In response to its fiscal year 1997 appropriation and the
congressional direction specified therein, IRS (1) revised its
spending plans for information systems; (2) reallocated
resources within the processing, assistance, and management
account to direct more resources to taxpayer service
activities; and (3) reduced the number of compliance staff.
IRS' Fiscal Year 1997 Systems Spending Plans Are Consistent
With Congressional Direction, But $36 Million May No Longer Be
Needed
For fiscal year 1997, IRS was appropriated about $1.3
billion to fund its information systems. The appropriation act
specified that the $1.3 billion be spent as follows:
--$758.4 million for legacy systems,
--$206.2 million for TSM operational systems,
--$130.1 million for TSM development and deployment,
--$83.4 million for program infrastructure,
--$62.1 million for ``stay-in-business'' projects,
--$61.0 million for staff downsizing, and
--$21.9 million for telecommunication network conversion.
IRS' plans for spending its fiscal year 1997 information
systems appropriation and IRS' obligations through December 31,
1996, appear consistent with the act's direction. Specifically,
at the beginning of fiscal year 1997, we judgmentally selected
eight projects, totaling approximately $197 million, that IRS
planned to fund with its information systems appropriation and
analyzed each relative to the categories and amounts specified
in the act. Our analysis showed that IRS identified its
projects in accordance with the legislative categories and that
all of the projects we reviewed appeared to be consistent with
the act's categories and spending levels.
Table 1: IRS' Fiscal Year 1997 Appropriation Compared to Its Fiscal Year
1997 Budget Request and Fiscal Year 1996 Appropriation
In billions
------------------------------------------------------------------------
Fiscal
Fiscal year year 1997 Fiscal year
Appropriation account 1996 budget 1997
appropriation request appropriation
------------------------------------------------------------------------
Processing, assistance, and
management.................... $1.724 $1.780 $1.780
Tax law enforcement............ 4.097 4.528 4.104
Information systems............ 1.527 1.688 1.323
Total \1\...................... $7.348 $7.995 $7.206
------------------------------------------------------------------------
\1\ Totals may not add due to rounding.
Source: P.L. 104-52, fiscal year 1997 President's budget request for
IRS, and P.L. 104-208.
In analyzing IRS' spending, we also found that IRS has
ongoing or completed one-half of the projects (with fiscal year
1997 costs totaling about $87.3 million) that were used to
justify the allocation of $130.1 million for systems
development and deployment. IRS is reviewing one other project
for $7 million and has canceled the remaining projects, which
had projected fiscal year 1997 costs totaling about $36
million.
According to IRS' Chief Information Officer (CIO), IRS
canceled these systems because business case analyses did not
justify continued development. The canceled projects include
the Corporate Accounts Processing System, the Integrated Case
Processing System, and the Workload Management System.
The CIO also stated that IRS does not plan to start any new
system development projects until it has developed the internal
capability needed to effectively manage system development
projects, which includes developing a modernization systems
architecture and a systems deployment plan. The CIO said that
it would be 12 to 18 months before IRS begins acquiring and
developing new systems. Therefore, Congress should consider
rescinding the $36 million that IRS will not be using for
systems development and deployment in fiscal year 1997.
As noted earlier, $61 million of IRS' fiscal year 1997
information systems appropriation was allocated for staff
downsizing. We question whether all of the $61 million will be
needed for that purpose. IRS had requested those funds to
downsize its information systems staff by 819 positions.
According to IRS' Chief for Management and Administration,
however, attrition among information systems staff has been
higher than expected and IRS' current downsizing plans include
only 228 information systems positions.
Increased Resources Provided for Taxpayer Service in 1997
Given congressional concerns about the level of taxpayer
service and the low level of telephone accessibility documented
in our annual filing season reports,\4\ IRS decided that its
highest priority in 1997, other than processing returns and
refunds, would be to improve taxpayer service, especially the
ability of taxpayers to reach IRS on the phone. One important
step IRS took to achieve that end was to increase the number of
FTEs devoted to taxpayer service. According to IRS estimates,
the number of taxpayer service FTEs will increase from 8,031 in
fiscal year 1996 to 9,091 in fiscal year 1997. The estimated
number of FTEs for fiscal year 1997 is also higher than in
fiscal year 1995, which is in accord with congressional
direction in IRS' fiscal year 1997 appropriation. According to
IRS budget officials, some of these additional FTEs were
achieved by reallocating resources originally targeted for
submission processing; the rest were funded with user fees that
IRS is authorized to retain.
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\4\ Tax Administration: Continuing Problems Affect Otherwise
Successful 1994 Filing Season (GAO/GGD-95-5, Oct. 7, 1994); The 1995
Tax Filing Season: IRS Performance Indicators Provide Incomplete
Information About Some Problems (GAO/GGD-96-48, Dec. 29, 1995); and
IRS' 1996 Tax Filing Season: Performance Goals Generally Met; Efforts
to Modernize Had Mixed Results (GAO/GGD-97-25, Dec. 18, 1996).
---------------------------------------------------------------------------
The bulk of the staffing increase for taxpayer service is
directed at helping taxpayers reach IRS by telephone. To
augment that increase, IRS has also been detailing staff from
other functions to help answer the phone, including staff who
would normally be doing compliance work. As discussed later,
this increased staffing, along with other steps IRS took, seem
to have succeeded in significantly improving telephone
accessibility this filing season.
IRS Reduced Compliance Staff in 1997 to Accommodate Roll-over
of 1996 Funding
The fiscal year 1997 appropriation for tax law enforcement
was essentially a roll-over of the 1996 appropriation. However,
IRS, in its budget request for 1997, said that it needed an
increase of $116 million just to ``maintain current levels''
for enforcement. According to IRS, getting a roll-over in
funding for 1997 rather than an increase forced it to reduce
staffing levels for compliance activities so it could pay on-
board staff. Specifically, IRS reduced certain compliance
positions (i.e., revenue agents and revenue officers) by more
than 1,000. As one result of this reduction, IRS estimates that
audit coverage will drop from 1.6 percent to 1.2 percent. We
should note, however, that these reductions were directed at
those enforcement staff that IRS has characterized as
``representing the least efficient use of IRS resources on the
margin.''
The 1997 Filing Season
By various statistical measures traditionally used to
assess a filing season, the 1997 filing season is going well.
Especially noteworthy are significant increases in electronic
filing and telephone accessibility. One major change this year
involves a new procedure IRS is using to deal with returns that
have missing or incorrect Social Security Numbers (SSN).
However, the impact of this procedure will not be evident until
after the filing season. Another area that we cannot address at
this time is refund fraud. IRS had not compiled data on the
number of fraudulent returns and refunds identified this year
as of the time we prepared this testimony.
Significant Increases in Electronic Filing and Telephone
Accessibility
As of March 7, 1997, the number of returns filed
electronically, including those filed over the telephone, was
24.7 percent more than at the same time last year. This
increase is even more significant considering, as shown in
table 2, that the total number of individual income tax returns
filed as of March 7, 1997, was 1.5 percent less than at the
same time last year.
Table 2: Individual Income Tax Returns Received
------------------------------------------------------------------------
March 7, March 8, Percent
Type of filing 1997 1996 of change
------------------------------------------------------------------------
Traditional paper................ 28,057,000 31,980,000 -12.3
1040PC \1\....................... 2,746,000 2,373,000 15.7
Total Paper.................. 30,803,000 34,353,000 -10.3
Traditional electronic \2\....... 10,921,000 9,273,000 17.8
TeleFile......................... 3,495,000 2,284,000 53.0
Total Electronic............. 14,416,000 11,557,000 24.7
TOTAL.................... 45,219,000 45,910,000 -1.5
------------------------------------------------------------------------
\1\ Under the Form 1040PC method of filing, taxpayers or tax return
preparers use personal computer software that produces paper tax
returns in answer-sheet format. The Form 1040PC shows the tax return
line and the data on that line. Only lines on which the taxpayer has
made an entry are included on the Form 1040PC.
\2\ Traditional electronic returns are those that are filed through
third parties, such as tax return preparers.
Source: IRS' Management Information System for Top Level Executives.
As table 2 shows, the largest percentage increase is in the
number of returns filed by telephone (i.e., TeleFile). That
increase may be due, in large part, to a change in the tax
package IRS sent eligible TeleFile users this year. In past
years, IRS sent taxpayers who appeared eligible to use TeleFile
a package that included not only TeleFile materials but also a
Form 1040EZ and related instructions. Thus, taxpayers who could
not or did not want to use TeleFile had the materials they
needed to file on paper, assuming they were still eligible to
file a Form 1040EZ. This year, IRS eliminated the Form 1040EZ
and related instructions from the package sent eligible
TeleFile users--hoping that more taxpayers would be inclined to
use TeleFile if they only received the TeleFile materials.
A second noteworthy trend this year is an increase in the
ability of taxpayers who have questions about the tax law,
their refunds, or their account to reach IRS by telephone. As
shown in table 3, the accessibility of IRS' telephone
assistance, as we have defined it in the past, has increased
substantially.\5\
---------------------------------------------------------------------------
\5\ Accessibility, as we have traditionally defined it, is the
total number of calls answered divided by the number of call attempts,
which is the sum of the following: (1) calls answered, (2) busy
signals, and (3) calls abandoned by the caller before an IRS assistor
got on the line.
Table 3: Accessibility of IRS' Telephone Assistance \1\
------------------------------------------------------------------------
Number of Number of
call calls
Filing season attempts answered Percent
(in (in accessibility
millions) millions)
------------------------------------------------------------------------
1997.......................... 21.6 11.3 52.3
1996.......................... 42.3 9.0 21.3
------------------------------------------------------------------------
\1\ These data are for January 1 through February 22, 1997, and January
1 through February 24, 1996.
Source: IRS data.
As table 3 indicates, the increase in accessibility is due
to a combination of fewer calls coming in and more calls being
answered. The two factors are not unrelated. The more
successful IRS is in answering the phone, the fewer times
taxpayers should have to call in an attempt to get through.
IRS has another way of measuring accessibility, called
``level of access,'' which tracks the percentage of callers who
were eventually able to get through to IRS rather than the
number of call attempts. As of February 22, 1997, according to
IRS data, the level of access was 71 percent, a substantial
increase over the 52-percent level of access as of the same
time last year.
There are several factors that appear to have contributed
to IRS' increased telephone service: (1) an increase in the
number of staff assigned to answer the phone, some of which was
achieved by detailing staff from other IRS functions; \6\ (2)
an attempt to reduce the need for persons to call IRS by
eliminating certain notices that IRS deemed to be unnecessary;
and (3) revisions to IRS' procedures for handling calls.
---------------------------------------------------------------------------
\6\ In one service center, for example, 26 staff from the
Collection area were detailed on an as-needed basis to answer the
phones, 45 staff from that center's Adjustment/Correspondence Branch
have been detailed to answer phone calls during the filing season, and
another 24 staff from that Branch have been detailed to answer calls
for 2 hours each afternoon.
---------------------------------------------------------------------------
As an example of the latter, this year, unlike past years,
callers who indicate, through the choices they select on the
automated telephone menu, that they have a question in a
complex tax area (such as ``sale of residence'') are to be
connected to a voice messaging system. Those callers are asked
to leave their name, telephone number, and best time for IRS to
call back, and they are told that someone will be calling back
within 2 working days. Those return calls are being made by
staff detailed from IRS' Examination function. According to
IRS, it made this change after a study showed that several
areas of complicated tax law involved 20 to 30 minute telephone
conversations and that an assistor could answer about 5 simpler
calls within the same amount of time.
Too Soon to Assess Impact of IRS' New SSN Procedure
One important change this filing season involves the way
IRS is handling returns filed with missing or incorrect SSNs.
Over the last few years, when IRS identified a missing or
invalid SSN, it delayed the taxpayer's refund and corresponded
with the taxpayer to resolve the issue. As we noted in our
report to the Subcommittee on the 1996 filing season, IRS was
unable to pursue many of the problem SSNs it identified under
those procedures.\7\
---------------------------------------------------------------------------
\7\ IRS' 1996 Tax Filing Season: Performance Goals Generally Met;
Efforts to Modernize Had Mixed Results (GAO/GGD-97-25, Dec. 18, 1996).
---------------------------------------------------------------------------
Effective with this filing season, IRS was given the
legislative authority to treat missing or invalid SSNs as an
error made by the taxpayer, similar to the way IRS handles math
errors. Under that new authority, when IRS detects a missing or
invalid SSN, it is to disallow any related deductions and
credits and adjust the taxpayer's tax liability.
For example, if a taxpayer claims one dependent and the
child care credit, but lists an invalid SSN for the dependent,
IRS is to increase the taxable income by the personal exemption
amount claimed for the dependent and not allow the child care
credit. IRS is then to adjust the taxpayer's tax liability and
reduce the taxpayer's refund, if any. The taxpayer is to
receive a notice explaining the changes to his or her tax
liability and refund. The standard notice IRS is using provides
a special toll-free telephone number that taxpayers can call if
they want to discuss the changes and/or provide corrected
information to support their claims. Taxpayers can also write
to IRS to resolve the issue.
IRS estimated that about 2.4 million taxpayers will receive
these ``SSN-math error'' notices in 1997. According to an IRS
official, IRS had issued about 70,000 such notices as of
February 21, 1997. At the time we prepared this testimony,
officials at three IRS customer service centers, which are
responsible for answering taxpayers' inquiries, told us that
assistors were not yet getting many calls or letters from
taxpayers who received the notices. Thus, it is too early to
assess the impact of this new procedure.
Data Not Yet Available on Refund Fraud
As we noted in our report on the 1996 filing season, IRS
identified many fewer fraudulent returns last year than it did
in 1995. According to IRS, the decline was due to a 31-percent
staffing decrease in IRS' Questionable Refund Program. Program
officials told us that the reduced level of staffing has
continued in 1997. However, we do not know how the reduced
staffing has affected the number of fraudulent returns and
refunds identified this year because IRS had not compiled that
data as of the time we prepared this testimony.
Fiscal Year 1998 Budget Request for Information Systems Raises Several
Questions
IRS' fiscal year 1998 budget request includes $1.27 billion
and 7,162 FTEs for information systems. Of the $1.27 billion,
$1.14 billion is for operational systems, including funds for
IRS' century data change effort and for replacing two old
processing systems. The rest of the request ($131 million) is
for developmental systems. In addition to the $1.27 billion,
the administration is requesting $1 billion over 2 years to
fund a multi-year capital account, referred to as the
Information Technology Investments Account, for new
modernization projects at IRS.
Our analysis of the information systems request raised
several questions: (1) Should Congress approve the $131 million
for developmental systems and the $1 billion capital account
given the absence of the kind of supporting analyses required
by the Clinger-Cohen Act, GPRA, and OMB? (2) Is the money being
requested for IRS' century date conversion effort sufficient?
and (3) Will IRS need all of the money requested for replacing
two processing systems?
Budget Request for Systems Development Not Justified
The Clinger-Cohen Act, GPRA, and OMB Circular No. A-11 and
supporting memoranda require that information technology
investments be supported by accurate cost data and convincing
cost-benefit analyses. For fiscal year 1998, IRS is requesting
$131 million for system development. However, IRS' request does
not include a credible, verifiable justification. The budget
request states that IRS does not know how it plans to spend
these funds because its modernization systems architecture and
system deployment plan have not yet been finalized. These
efforts are scheduled for completion in May 1997 and are
intended to guide future systems development. According to IRS
budget officials, $131 million was requested for fiscal year
1998 because it was approximately the same amount IRS received
in fiscal year 1997 for system development.
No Justification to Support Billion Dollar Information
Technology Investments Account
The administration is proposing to establish an Information
Technology Investments Account to fund future modernization
investments at IRS. It is seeking $1 billion--$500 million in
fiscal year 1998 and another $500 million in fiscal year 1999--
for ``yet-to-be-specified'' development efforts. According to
IRS' request, the funds are to support acquisition of new
information systems, expenditures from the account will be
reviewed and approved by Treasury's Modernization Management
Board, and no funds will be obligated before July 1, 1998.
The Clinger-Cohen Act, GPRA, and OMB Circular No. A-11 and
supporting memoranda require that, prior to requesting multi-
year funding for capital asset acquisitions, agencies develop
accurate, complete cost data and perform thorough analyses to
justify the business need for the investment. For example,
agencies need to show that needed investments (1) support a
critical agency mission; (2) are justified by a life cycle
based cost-benefit analysis; and (3) have cost, schedule, and
performance goals.
IRS has not prepared such analyses for its fiscal year 1998
and 1999 investment account request. Instead, IRS and Treasury
officials stated that, during executive-level discussions, they
estimated that they would need about $2 billion over the next 5
years. This estimate was not based on analytical data or
derived using formal cost estimating techniques. According to
OMB officials responsible for IRS' budget submission, the
request was reduced to $1 billion over 2 years because they
perceived the lesser amount as more palatable to Congress.
These officials also told us that they were not concerned about
the precision of the estimate because their first priority is
to ``earmark funds'' in the fiscal year 1998 and 1999 budgets
so funds will be available when IRS eventually determines how
it wants to modernize its systems.
In 1995 we made over a dozen recommendations to the
Commissioner of Internal Revenue to address systems
modernization management and technical weaknesses.\8\ We
reported in 1996 that IRS had initiated many activities to
improve its modernization efforts but had not yet fully
implemented any of our recommendations.\9\ Since then, IRS has
continued to address our recommendations and respond to
congressional direction. But, there is still no evidence that
any of the recommendations have been fully implemented and, as
we reported in February 1997, IRS' systems modernization effort
continues to be at risk.\10\ Much remains to be done to
implement essential improvements in IRS' modernization efforts.
IRS has not yet instituted disciplined processes for designing
and developing new systems and has not yet completed its
systems architecture.
---------------------------------------------------------------------------
\8\ Tax Systems Modernization: Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July
26, 1995).
\9\ Tax Systems Modernization: Actions Underway But IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June 7,
1996).
\10\ GAO High-Risk Series, IRS Management (GAO/HR-97-8, Feb. 1997).
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Given IRS' poor track record delivering cost-beneficial TSM
systems, persisting weaknesses in both software development and
acquisition capabilities, and the lack of justification and
analyses for proposed system expenditures, Congress should
consider not funding either the $131 million request for
systems development or the $1 billion capital account until the
management and technical weaknesses in IRS' modernization
program are resolved and the required justifications are
completed.
Funding Needs for Century Date Change Are Uncertain
IRS, like other federal agencies, is in the midst of a
major project aimed at making its computer systems ``century
date compliant.'' Currently, IRS' computer systems can not
distinguish between the years 1900 and 2000 because the systems
year is represented by two-digit date fields (i.e., 00 in both
cases). IRS estimates that the failure to correct this
situation before 2000 could result in millions of erroneous tax
notices, refunds, and bills. Accordingly, IRS' CIO has
designated this effort as a top priority. The CIO established a
year 2000 project office to coordinate work among the various
IRS organizations with responsibility for assessing,
converting, and testing IRS systems.
IRS' fiscal year 1998 budget request includes $84 million
for the century date change effort, an increase of $39 million
over the $45 million included for that effort in IRS' fiscal
year 1997 budget. However, the fiscal year 1998 request was
based on September 1996 cost estimates that, in turn, were
based on an estimate of lines of computer code for IRS' main
tax processing systems. The request did not include estimates
for IRS' secondary tax processing systems that are also
critical to the tax administration process. It also did not
factor in many other activities related to the century date
change effort that have since been identified, such as the need
for additional hardware and software for testing, operating
system upgrades, and possibly additional storage capacity due
to expanded date fields.
Thus far in fiscal year 1997, IRS has identified
requirements for the century date conversion that would exceed
its fiscal year 1997 budget by as much as $49.5 million. Of
this amount, $13.5 million is for additional labor costs and
the remaining $36 million is for nonlabor costs (i.e., the
purchase of updated operating system environments, contractor
support for software conversion and testing, and additional
hardware for expected capacity increases). IRS' Investment
Review Board recently approved a request for these additional
funds. However, according to IRS budget officials, a funding
source has not been identified. Once that source is identified,
they said they plan to notify the Appropriations Committees.
IRS is currently assessing what it needs to do to make its
main tax processing systems century date compliant and what
that will cost. However, there are other potentially
significant project costs, including those associated with
converting and testing secondary tax processing systems. IRS
project officials told us that they hope to have a complete
cost estimate for the century date conversion effort by this
summer. In the meantime, given the status of IRS' needs
assessment, it seems reasonable to question whether the amount
requested for this effort in fiscal year 1998 will be
sufficient.
Replacement of Systems That Process Paper Tax Returns and
Remittances
Also as part of its information systems request, IRS is
asking for a $35 million increase over the $9 million it
received in fiscal year 1997 to replace two systems--the
Distributed Input System (a 12-year old system used to process
paper returns)and the Remittance Processing System (an 18-year
old system used to process tax payments). IRS reports that the
systems are unreliable, costly to operate and maintain, and not
year 2000 compliant. IRS is requesting $44 million for fiscal
year 1998 to develop a replacement for these two systems and
begin pilot testing in January 1998.
Project officials told us that to meet the January 1998
milestone for piloting the new systems, they accelerated the
project schedule. As a result, they requested and the
Investment Review Board approved, on March 4, 1997, an
additional $11.8 million--$5.7 million for fiscal year 1997
requirements and $6.1 million for fiscal year 1998
requirements. Consequently, the project will not need this $6.1
million in fiscal year 1998. Accordingly, Congress should
consider reducing the fiscal year 1998 request for this project
by $6.1 million.
Request for Additional Returns Processing Staff Raises Questions about
Benefits of Electronic Filing
IRS' largest requested budget increase is for $214 million
and 195 FTEs to maintain its fiscal year 1997 program levels in
fiscal year 1998. According to IRS, most of the $214 million is
needed to cover pay and benefits for the employees it has on
board. However, $11 million and all 195 FTEs are intended to
cover ``mandatory workload increases'' in its returns
processing function. More specifically, IRS has projected that
the number of primary tax returns filed will increase from
197.9 million in 1997 to 200 million in 1998. IRS has also
projected that 91 percent of the increase in primary tax
returns (or 1.9 million returns) will be filed electronically.
The data IRS used to determine its need for $11 million and
195 FTEs indicated that IRS only saves about 5 FTEs for every 1
million returns that are filed electronically. This is contrary
to what we would have expected. Because up-front filters keep
certain taxpayer errors that are common on paper returns from
contaminating electronic returns and because electronic returns
bypass the labor intensive and error prone key punching process
IRS uses for paper returns, we would expect that the labor and
related costs to process electronically-filed returns would be
substantially lower than the labor and costs associated with
processing paper returns.
Part of the explanation for the smaller-than-expected
savings is that electronic filing is not truly paperless.
Taxpayers filing electronically, other than through TeleFile,
must submit a paper signature document to authenticate the
electronic portion of their return. And IRS has to process that
document. In January 1993, we reported that IRS needs to
resolve various issues that adversely affect the appeal of
electronic filing.\11\ One of those issues is the need to
submit paper documents with an electronic return.
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\11\ Tax Administration: Opportunities to Increase the Use of
Electronic Filing (GAO/GGD-93-40, Jan. 22, 1993).
---------------------------------------------------------------------------
Challenges for the Future
Probably the most noteworthy part of IRS' performance
during the 1997 filing season to date is the dramatic increase
in telephone accessibility. The improvement, however, is not
without cost. IRS is using various strategies to improve
accessibility, one of which involves detailing staff from other
functions to answer the phone. The funding limits and program
tradeoffs faced by IRS in fiscal year 1997 and anticipated for
fiscal year 1998 are likely to continue for the foreseeable
future. The administration's outyear projections actually
reflect a decline in IRS funding when inflation is considered.
At the same time, IRS is faced with competing demands and
pressure from external stakeholders, including Congress, to
improve its operations and resolve longstanding concerns.
Modernization of IRS' processes and systems is critical to
doing this. So is reaching consensus on IRS' strategic goals
and performance measures.
In recent years, Congress has put in place a statutory
framework for addressing these challenges and helping Congress
and the executive branch make the difficult trade-offs that the
current budget environment demands. This framework includes as
its essential elements the Chief Financial Officers Act;
information technology reform legislation, including the
Paperwork Reduction Act of 1995 and the Clinger-Cohen Act; and
GPRA.
In crafting these acts, Congress recognized that
congressional and executive branch decisionmaking had been
severely handicapped by the absence in many agencies of the
basic underpinnings of well managed organizations. Our work has
found numerous examples across government of management-related
challenges stemming from unclear missions accompanied by the
lack of results-oriented performance goals, the absence of
detailed business strategies to meet those goals, and the
failure to gather and use accurate, reliable, and timely
program performance and cost information to measure progress in
achieving results. All of these problems exist at IRS. To
effectively bridge the gap between IRS' current operations and
its future vision while living within the budget constraints of
the federal government, these challenges must be met.
Under GPRA, every major federal agency must ask itself some
basic questions: What is our mission? What are our goals and
how will we achieve them? How can we measure performance? How
will we use that information to make improvements? GPRA forces
a focus on results. GPRA has the potential for adding greatly
to IRS performance--a vital goal when resources are limited and
public demands are high.
GPRA requires each agency to develop a strategic plan that
lays out its mission, long-term goals, and strategies for
achieving those goals. The strategic plans are to take into
account the views of Congress and other stakeholders. To ensure
that these views are considered, GPRA requires agencies to
consult with Congress as they develop their strategic plans.
Congress and the administration have both demonstrated that
they recognize that successful consultations are key to the
success of GPRA and therefore to sustained improvements in
federal management. For IRS, these consultations provide an
important opportunity for Congress, IRS, and Treasury to work
together to ensure that IRS' mission is focused, goals are
specific and results oriented, and strategies and funding
expectations are appropriate and reasonable. The consultations
may prove difficult because they entail a different working
relationship between agencies and Congress than has generally
prevailed in the past. The consultations are likely to
underscore the competing and conflicting goals of IRS programs,
as well as the sometimes different expectations of the numerous
parties involved.
As a GPRA pilot agency, IRS should be ahead of many federal
agencies in the strategic planning and performance measurement
process. Nonetheless, IRS remains a long way from being able to
ensure that its budget funds the programs that will contribute
the most towards achieving its mission goals. While IRS needs
more outcome-oriented indicators, it also has difficulty in
measuring its performance with the indicators it has. For
example, IRS' top indicator is its Mission Effectiveness
Indicator. This is calculated by subtracting from the revenue
collected the cost of IRS programs and taxpayer burden and
dividing that result by true total tax liability. While this
approach may be conceptually sound, IRS does not have reliable
data to calculate taxpayer burden nor can it calculate true
total tax liability.
In summary, IRS' 1997 filing season is going very well in
two areas that we have criticized in the past. Telephone
accessibility is much higher and more taxpayers are filing
electronically.
Regarding IRS' fiscal year 1997 spending and IRS' fiscal
year 1998 budget request, there are several questions that
Congress may wish to consider as it continues its oversight and
appropriations activities. Among these are:
--Should the $36 million that IRS will not be using for
systems development and deployment in fiscal year 1997 be
rescinded?
--What level of funding will IRS need to make its
information systems century date compliant, and will those
changes be made in time?
--Does IRS need all of the fiscal year 1998 funding it is
requesting for the Distributed Input System/Remittance
Processing System replacement project?
--What level of funding should Congress provide for
developing new information systems, given the lack of any
justification for the $131 million requested for fiscal year
1998 and the $1 billion investment account for fiscal years
1998 and 1999?
--What reliable, outcome-oriented performance measures
should be put in place to guide IRS and Congress in deciding
how many resources should be given to IRS and how best to
allocate those resources among IRS' functional activities?
That concludes my statement. We welcome any questions that
you may have.
Chairman Johnson. Thank you very much, Ms. Willis. Two
questions come to mind. Until the Taxpayer Systems
Modernization is moving forward, and some of the other major
projects that you referred to, there aren't likely to be
savings that can be used to fund other functions.
So how is this agency going to continue to deliver the
current level of service, and at the same time prepare itself
for the future? The money is not there yet for the Project
2000. Clearly the major Systems Modernization Program is not
going to be implementable until toward the end of the century.
Then a flat budget is going to be an enormous problem in terms
of service delivery and preparation for the future, is it not?
Ms. Willis. Absolutely. And I think, Madam Chairman, that
one of the things we need to know more about is the
effectiveness of current programs, and where existing programs
are providing us good return on our investment and are moving
us forward in a results-oriented fashion and achieving IRS'
goals.
We frequently don't know when we make tradeoffs among the
different programs what impact we are going to have, either in
terms of improving service in one area, or decreasing service
in another. If we understood more about certain types of
programs, we would have a better understanding of how to
allocate the money.
Let me give you an example, and I would use taxpayer
service or telephone accessibility as one good place to start.
Funding enough money to have every phone call answered is not
the most efficient way, as Mr. Dolan observed, to meet the
needs of taxpayers.
A key part is also understanding where we can reduce the
demand that's coming in by getting rid of unnecessary calls--
you know, anticipating where we can eliminate a notice and get
rid of calls that are coming in. We also need to look at more
efficient ways of providing that service.
Some of the new interactive systems that IRS is designing
and their Web site are ways of providing the same service at a
lower cost. We also need to look at more efficient ways of
using the resources that we have to reach those taxpayers who
need to be reached by an individual assister or by an IRS staff
member.
So I think when you look at a particular program, we need
to disaggregate it into its component parts and the causes of
the service that we're looking to provide, and then understand
what's the best way to provide that service.
Chairman Johnson. Isn't their effort to look regionally at
sort of sector specific demands going to help with this?
Ms. Willis. Yes. I think their market segment approach
should provide them with additional information on local
conditions in the local economy and the nature of noncompliance
that will allow them to better target the resources going into
an individual location, and better identify and better design
programs to both put preventative measures in place as well as
to better target compliance efforts.
Chairman Johnson. In looking at the IRS Programs, in your
estimation, both of you, do we understand, does somebody
understand enough, about what programs work for us to be able
to effectively target our dollars at the programs that work
now, while we're making those plans for the architecture and
discipline of TSM and the Project 2000 effort, and some of the
other major efforts that are going on?
Could we use that approach to target our resources now to
maintain a certain level of functioning and service while we
leapfrog ourselves into this next era?
Ms. Willis. I think on the margin we know enough about
certain programs and certain parts of the function of IRS and
the types of service it is trying to deliver to make
improvements within the existing resource framework.
And I would put into that category such things as
electronic filing, and things that provide new ways of getting
information into the system, while we wait for the new major
modernization efforts to come in place after the turn of the
century.
So I think we can't afford to wait until we have everything
modernized in place to move forward. And there are
opportunities. I think one of the first things that we need to
do in identifying those opportunities however is to come up
with better performance measures, and performance measures that
the various stakeholders can agree to, so that when we measure
what performance a particular program is giving us, we know
exactly what we're talking about, and it's targeted to the
strategic goals of the organization, as well as its strategic
mission.
I also think--and I'm going to anticipate your question
here, Madam Chairman--that there are ways to look at the Tax
Code, and to decide whether that's an effective way to deliver
a particular service given the resource constraints that face
us.
Decisions that we made 5 or 10 years ago about delivering a
particular service within the constraints of the Tax Code may
no longer be ones we would make today. And I think there are a
variety of ways that we can go about identifying those areas of
the Code that we could simplify while waiting for the
structural reform debate to take place.
One of those is looking at recurring audit issues. Are
there certain issues that IRS audits repetitively among
businesses year after year? And that's true. There are. What
are the issues that are coming up when taxpayers call the IRS?
Where are they running into problems?
If the IRS is having problems administering a particular
provision I can guarantee you that the taxpayer is having
difficulty being compliant with that provision, and vice versa.
So looking at where taxpayers are having difficulty being
compliant, as well as where IRS is having difficulty
administering this system will give us a real window into parts
of the Code that we could potentially simplify.
Chairman Johnson. And you think we could mobilize
information that's already there in a way that would help us
begin this project now?
Ms. Willis. I think there is information out there that we
can use. We may have to manipulate it. We may have to clean it
up, but I think there is information out there that we can use
to help do that, yes.
Chairman Johnson. I think that's enormously important for
us to start on. I'm talking about in the next 2 and 3 months.
Because if we don't strip out some of the, in a sense, costly
and nonproductive activities of the IRS, then I don't see how
they have the resources to continue, in a sense, to hold, and
to make the improvements in certain areas as they have been,
and as we see they can do, and at the same time deal with the
major problems that face them.
You were very effective in identifying early some of the
contracts that were nonproductive and the systems projects that
were not going to prove to be worth it. And if you would like
to give some thought to what you think needs to be focused on
in terms of funding and things of lesser importance, and how we
get the information about where Code simplification could have
actually an administrative cost impact, I'd appreciate it.
I don't even know whether it's possible under the IRS
system right now to identify the administrative cost of certain
Code requirements.
Ms. Willis. No, I don't think it is. And it's also very
difficult to quantify the compliance costs on the taxpayer's
side. And it is frequently difficult to tease out of any
compliance or taxpayer burden question what part IRS can
control and can enhance as opposed to the underlying statute,
which is one of the things in looking at tax administration
that we always have to be very careful about--can we manage to
tease the component parts apart far enough to be able to
identify strategies for addressing them.
Chairman Johnson. There are some particular glitches that
we know about that we ought to be able to sort of tease apart a
little bit. We know there are lots of companies that are having
to do a second tax exercise to identify their alternative
minimum tax even though they aren't going to pay an alternative
minimum tax, in order to determine other tax liabilities that
they may have.
Now, while we may not be able to exactly identify the costs
of that problem, we ought to be able to have some rough
estimate of how many companies have to do this, what part of
the private sector is affected, what the rough cost of that
would be, and what the alternatives are in this area.
Certainly with the EITC we know how many of those people
have to hire someone to help them apply, and what the costs of
submission are the way we require the forms to be submitted,
and how much of the benefit to the low-income person is taken
by the costs of applying, and therefore what the net effect is.
So I think if we can get some better insight into those
kinds of transactional costs to both the taxpayer or the
taxpayer's beneficiary, it would help us to make the kinds of
changes we really have to begin making.
And there are certainly other areas that you are far better
prepared to bring to my attention than those ones that I have
mentioned. But I really invite you to help us over the next
couple of months focus in on these areas as we have invited the
IRS to do, because we can't wait until next year to start on
this.
Ms. Willis. We would be happy to do that. In fact, we have
a body of work that is kind of crosscutting that has identified
areas of the Code that we think could be improved, some related
to the earned income tax credit.
We have done some work on the alternative minimum tax, and
you're absolutely right. A lot more people have to keep books
and records than ever qualify to have to file under the
alternative minimum tax regime.
And so we could certainly go through and take an inventory
of those provisions that we've looked at and work with you on
it.
Chairman Johnson. And then we have some problems waiting to
explode, in terms of number of taxpayers affected.
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. Ms. Willis, staff
of the Appropriations Committee recently testified before the
National Commission on Restructuring of the IRS that it's not
likely that the appropriators are going to give the full
funding that was requested for 1998 to the IRS.
Would you be able to gauge the results of that relative to
the IRS' performance in providing taxpayer services, collecting
taxes, and preventing fraud?
Ms. Willis. Congressman Coyne, without knowing specifically
where the appropriators are anticipating making cuts, I
couldn't comment on that. If, for example, the cuts are in the
information systems developmental budget, the $131 million that
I spoke of, where IRS has not even decided where it's going to
spend that money, not appropriating that money would not affect
compliance, taxpayer service, and so forth.
But I am not aware of where the appropriators are proposing
to do additional cuts, perhaps within compliance or taxpayer
service, that would result in the sort of impacts you're
talking about.
Ms. Stillman. I could amplify that a little. Consistent
with the $131 million that hasn't been justified is an
additional $500 million in the information technology
investments accounts whose use has not been specified. There is
no explanation of what it would be for, how it would be used,
when it would be used. Mr. Gross has testified that money would
not be spent before July 1, 1998. He said the IRS and Treasury
would exert their own discipline in not spending it until they
could ensure that it would be wisely spent.
July 1, 1998, is just 3 months before the start of fiscal
year 1999. That gives IRS just 3 months to spend a fund of $500
million, the purpose of which is unknown today. I can't imagine
that they would need $500 million at that point in fiscal year
1998.
Mr. Coyne. Thank you.
Chairman Johnson. If I could pursue that just for 1 minute,
certainly money shouldn't be spent until the justification is
clear, the plan is clear, the justification is clear. However,
if we don't allocate it in an orderly process, in anticipation,
when it goes out, it's going to go out in big amounts.
There are going to be big contracts. And if we don't start
in a sense laying it aside now, perhaps with stronger fencing
language or something, then in my experience when the time
comes we will phase it in.
And we went through this with fuel assistance, when we
transferred--we took the money from the windfall profits tax,
and substituted it for our own money, and we have never put our
own money back in because you have to take it from someplace
else.
So I am terribly concerned that if we don't make some
commitment to a capital fund, even if we fence it off more
clearly than we have, when the time comes, we'll not allocate
the money at the pace we need to then implement the plan.
Ms. Stillman. One of the lessons that history has taught us
is that organizations in general and IRS in particular do not
do well trying to build and deploy huge projects. Laying out
money in huge amounts has not led to successful systems.
Clinger-Cohen specifically says that, as much as is
possible, IT projects ought to be incrementalized. Projects
should be smaller, the planning should be better, the
performance measures should be clearer, and, at the end of each
increment, it ought to be clear that we got the benefit that
was intended when we made the investment. This is much better
than the older paradigm of allocating humongous amounts of
money for huge projects.
If TSM has taught us anything, it ought to be to develop
systems more slowly.
Chairman Johnson. So in your view even when we get TSM
planned, and we understand what the macroplan is, then the
individual projects should be implemented in a way that allows
us to look and see if it worked before we go forward.
That's interesting. Thank you. That's very helpful.
Ms. Stillman. Absolutely.
Chairman Johnson. Congresswoman Dunn.
Ms. Dunn. Thank you, Madam Chairman. I feel like I want to
ask you for a value judgment, Ms. Willis, but maybe you can
help me answer the question in my own mind. I am interested in
how the IRS stacks up against other agencies as you do these
evaluations.
How, for example, have they done under the Results Act?
Ms. Willis. I think we could give IRS credit for being
ahead of a lot of Federal agencies in terms of its strategic
planning processes and getting itself ready to implement the
Government Performance and Results Act.
IRS has had a strategic planning process and performance
measures for some years that have been incorporated into its
budget. And while we might take exception to some of the
performance measures, and how well they're linked to the
strategic outcomes, and whether they're truly results oriented,
at least you have an acknowledgment within the organization
that this type of planning is important.
As a GPRA pilot agency, and IRS was one of two agencywide
pilots, IRS has been initiating the process to operationalize
these type of activities, and has taught us a number of lessons
as we move out to implement GPRA across the government, not the
least of which is this is not going to be easy.
Agencies have not traditionally avoided doing results-
oriented measurement because they didn't think it was good, but
because it's very hard. It's very critical and has become even
more critical as we're allocating short resources, and I think
IRS is certainly at the point of recognizing that.
Although I think the IRS can be given a positive value
judgment in terms of where they are in GPRA compared to some
other Federal agencies, I wouldn't want that to imply that they
don't have a long way to go, as does the whole government.
Ms. Dunn. That helps me a lot. Thank you very much. One of
the things you talked about was the taxpayer phone calls for
information and that the number of folks gaining access had
multiplied by, I think you said, 100 percent, something like
that. There were fewer phone calls because taxpayers were
getting information in other ways.
And I guess what I would like to do is sort of get a bottom
line answer from you--is there a way of evaluating the degree
to which those telephone callers who gained access were given
correct answers to their questions?
Ms. Willis. The IRS actually has a procedure that they
worked out with us some years ago to evaluate the accuracy of
the questions in which they test the response rate in terms of
are taxpayers getting the correct answers.
I have not seen figures for this year's filing season yet,
but last year the accuracy rate was over 90 percent. And I have
no reason to believe that it has declined this year, but again
I have not seen any numbers.
Ms. Dunn. That's very encouraging. I did talk to a group of
employees in my local IRS department, and one of the problems
that they brought to my mind was that when they increased the
number of employees answering those phone calls, that people
were moved over from management positions, other positions
where they didn't necessarily have the right answers to the
questions.
Ms. Willis. Always a concern.
Ms. Dunn. Yes. All right, thank you. Thank you, Madam
Chairman.
Chairman Johnson. Thank you very much, and thank you for
your testimony. Is there any comment you wanted to make in
closing?
Ms. Willis. No.
Chairman Johnson. Thank you very much. It was a pleasure to
have you.
Ms. Willis. Thanks for the opportunity.
Chairman Johnson. I'd like to call Beanna Whitlock, an
enrolled agent, from the National Association of Enrolled
Agents and Michael Mares, the chairman of the tax executive
committee of the American Institute of Certified Public
Accountants.
STATEMENT OF BEANNA J. WHITLOCK, ENROLLED AGENT, NATIONAL
ASSOCIATION OF ENROLLED AGENTS
Ms. Whitlock. Madam Chairman, my name is Beanna Whitlock. I
am an enrolled agent. I am here today to represent the National
Association of Enrolled Agents, as their government relations
cochair. I also am privileged to sit on the Commissioner's
Advisory Group.
I would like to first of all, on behalf of our 9,000
members, thank this Oversight Subcommittee for the work it's
done. We have certainly seen a great change in the Internal
Revenue Service in the last several years.
I am personally a practitioner of almost 30 years, and an
enrolled agent 20 of those. And, as an enrolled agent, I am
licensed by the U.S. Treasury. In 1884 we represented taxpayers
before their government when they had problems with their
government, and of late we represent those same taxpayers
before the Internal Revenue Service.
We want to give as a filing season report card a
verification of what you've heard from GAO and from the IRS. We
feel this is a very smooth filing season, and our national
office that hears complaints of our members reports that this
is the smoothest filing season in recent years.
We report to you four instances that we think are problems.
First of all a delay causing practitioners a problem. We did
not receive our volume II of package X which is our bible. It
has the tax forms. It has the instructions. And we didn't
receive it until mid to late February as reported by most of
our members--much into the tax season.
Second, we received a lot of customer or taxpayer concerns
that they did not receive their tax package, which usually came
about Christmastime, nor did they receive the card that had
their label for it. Even though most of those taxpayers didn't
use them, because they were afraid that it would subject them
to audit, they were concerned that they did not receive them.
We do, however, applaud the IRS in this move omitting their
issuance. We felt it was a cost savings move, and one that the
taxpayer would not mind having their funds diverted to another
use for.
We are concerned about the ITIN, Individual Tax
Identification Number, Program. In many of the districts, our
members report that taxpayers are having difficulty getting
those identification numbers.
These are individuals wanting to file tax returns or use as
dependents those individuals that do not qualify for Social
Security numbers. And because of legislation in the fall, this
new legislation caused those individuals to have to get those
ITIN numbers.
Finally, as far as a glitch in the system toward electronic
filing, early in February, the Internal Revenue Service
reported they were having trouble with electronic filing.
Several who had filed electronically were actually coming up
showing as deceased, and that's one of the glitches in the
program. A deceased taxpayer cannot file his return
electronically.
But we applaud the Service because immediately information
went out to all electronic filers, on this problem, how they
could best go around the problem, and how soon it would be
fixed by the IRS, and when they could go ahead and file those
returns electronically once again.
Overall, we think it's a very smooth filing season, but we
attribute that to the very focus that the Internal Revenue
Service put on this filing season, and we encourage that this
focus will become the norm and the standard operating procedure
for all filing seasons.
I have listened to the testimony this morning, and I agree,
and the practitioner community agrees, that this is not the
same old IRS. And we attribute that in great part to the
Oversight Subcommittee.
Indeed, it's not the same IRS, because they are listening
now with full and open ears, and they don't react as much as
they act.
Some of the instances I can give you as to how the IRS is
listening to the practitioner and to the taxpayer community is,
number one, in this independent contractor issue.
This is a tremendous problem for our small business owners.
They don't understand the term of contract laborer as much as
they understand the term casual laborer. Now when does that
casual laborer or contractor become in actuality an employee?
And the Internal Revenue Service has addressed that very
effectively with the settlement program of last season.
Indeed, they are taking a look at the collection standards.
These are the new standards applied to individuals who are
trying to set up installment agreements, or offers in
compromise with their government. And those new standards
should be released very quickly.
And as practitioners, we are looking at the ability to use
the form 656, which is the offer in compromise form, that is
now able to be computer generated.
Heretofore, the IRS has been very reluctant to let us use
our own computer-generated forms. But in this one particular
instance, they listened to the practitioner community, felt
that there were advantages and reasons why they should relax
their attitude toward this, but yet they were very sensitive to
this being a legal document entered into between the taxpayer
and their government, compromising the integrity of the
document.
But working with the practitioner community, they did
develop one that can be computer generated and used much more
easily by the practitioner community and the taxpayer.
And finally I would just lift up several changes that
happened in my own district this year. I practice in Plano,
Texas, and our district is the North Texas District.
We were very heavily hit with a requirement for these
ITINs, the completion of a form W-7 which would give those
individuals who could not have a Social Security Number an
identification number so that they could either file a tax
return, have a spouse reported on the tax return, or a
dependent.
We live in a large community that is Hispanic and Spanish
speaking. The Internal Revenue Service went outside of its box.
It went outside to the community, visiting several Catholic
Churches in both Fort Worth and in Dallas, and they had this
tremendous outreach, having an opportunity to be with the
taxpayer or these individuals in settings in which they were
very comfortable, in their church setting.
They had interpreters there who could speak to them in
their own language and, indeed, had interpreters for the deaf
there as well.
In this comfortable setting, they instructed them as to why
they needed these numbers, how it would facilitate the filing
of their tax return, and in many instances result in a refund
to them.
I am proud to tell you that over 10,000 taxpayers were
helped through this outreach program by volunteers of the
Internal Revenue Service. In addition to that, they have kept
their telephone hours open much longer than that 8 to 5 period
of time.
Most taxpayers don't have an opportunity to be on the
telephone waiting during their break or their lunch hour. So
this became very important to them, that they could go home,
and in the privacy of their own home, call the Internal Revenue
Service and get answers.
In addition to that, the time spent on the telephone
waiting, from 1995, where it was 3.5 minutes, has now been
reduced to only 1 minute and 10 seconds, to wait for either an
assister or to be prompted through the telephone lines.
And one other thing about the North Texas District, makes
my practice there much easier. They have enlisted the community
in this effort in order to get information out to the public.
They've enlisted the DART service, which is our bus service in
Dallas, and the little message that goes around the inside of
the bus that tells them about community affairs also told them
about all the outreach opportunities, where the Internal
Revenue Service had VITA, Volunteers in Taxpayer Assistance,
sites where the taxpayer could be helped preparing tax returns,
when the office hours would be extended, and, in fact, two
Saturdays be available for the taxpayer to come into the
Internal Revenue Service.
We feel the Internal Revenue Service has made many
improvements in the way that they have administered the Tax
Code in this filing season and encourage even more endeavors in
this way.
Finally I would only mention to you the things that as a
practitioner community we think are very vital. Because we are
the eyes and the ears, and oftentimes the conscience of the IRS
as it deals with the American taxpayer, we know that there is a
credibility gap between the IRS and the taxpayer.
We're further concerned that without the budget to provide
what the American taxpayer sees as their individual needs,
taxpayer assistance, forms, accessibility to the IRS, that the
budget limitations will further erode the taxpayer's confidence
in the IRS, and therefore encourage noncompliance, putting
further burden on the Internal Revenue Service.
We would further say that we feel that indeed the employee
morale issues of the Internal Revenue Service are indeed a
concern to us. American taxpayers, when they call the taxman,
aren't oftentimes as courteous as they should be. And when the
press comes down on the IRS, as it has in several months, then
it does breed those morale issues within the Internal Revenue
Service.
Finally, I was very encouraged to hear everyone who
participated in these hearings today, acknowledged that indeed
not only is the practitioner community a real part of tax
administration with the IRS, but so is Congress. And we would
simply encourage this, that when Congress considers a bill,
before Congress considers sending a bill to the President to
sign, that perhaps at those initial stages of planning that the
Internal Revenue Service who is charged with administering
those tax laws be consulted, and that, indeed, one step
further, that the practitioner community be consulted as well,
so that we might be those eyes and the ears and the conscience
of Congress in how the American taxpayer will view that
legislation. Thank you.
[The prepared statement follows:]
Statement of Beanna J. Whitlock, Enrolled Agent, National Association
of Enrolled Agents
Madame Chair Johnson, Members and guests, my name is Beanna
J. Whitlock and I am an Enrolled Agent engaged in private
practice in both Houston and Plano, Texas. I have been an
Enrolled Agent for more than 20 years and am an instructor in
small business tax and accounting. I currently serve as Co-
chair of the NAEA Government Relations Committee and am a
member of the Commissioner's Advisory Group (CAG).
I am very pleased to have this opportunity to present
testimony on behalf of the more than 9,000 Members of the
National Association of Enrolled Agents, all of whom are small
business owners and tax professionals. NAEA receives no Federal
grants or contracts.
As you know, Enrolled Agents are licensed by Treasury to
represent taxpayers before the Internal Revenue Service.
Enrolled Agents were created by legislation signed into law by
President Chester Arthur in 1884 to remedy problems arising
from claims brought to the Treasury after the Civil War. We
represent taxpayers at all administrative levels of the IRS,
thereby affording us the opportunity to be the eyes, ears and
oftentimes the conscience of the IRS in its administration of
the tax laws. Since we work closely with more than 4 million
taxpayers each year, we are at the front lines of tax
administration and know just how well the IRS is doing its job
of administering the nation's tax laws.
We would like to express our appreciation to the Oversight
Subcommittee members and staff for your annual review and
evaluation of the direction and programs administered by the
Internal Revenue Service. NAEA believes you are making an
invaluable contribution to improving tax administration by this
effort.
1997 Filing Season Report Card
This is definitely not the filing season of two years ago.
The perception of Enrolled Agents around the country is that
filing season is going very smoothly. More taxpayers have come
in earlier this year than last and we are seeing more nonfilers
who want to come back into compliance. The NAEA national office
staff reports the lowest level of filing season complaints in
the last several years. In fact, only a handful of significant
issues have come to our attention and we would like to share
them with you:
1. Late distribution of Volume 2 of Package X, tax forms
and filing instructions. The package was not received until
well into February by most practitioners. The delay may have
been the result of late Congressional legislative action last
year because several forms were not ready for printing. More on
that later.
2. Early in the filing season, electronic filers
experienced a ``glitch'' in the system whereby certain
taxpayers, filing their tax returns electronically, were
precluded from doing so with the system reporting the taxpayer
as deceased. Immediately, the Service notified electronic
filers and tax practitioner groups with instructions on the
program error, how to correct and alternatively file, and when
the system error would be corrected and electronic filing
resumed.
3. Many taxpayers who regularly use paid tax preparers
continue to be concerned that they received neither a tax forms
package nor a postcard with a label this filing season. We
understand that in order to economize, the Service cut down on
needless paperwork and mailings. NAEA strongly supported that
decision. Too often, our Members reported, they did not use the
forms, instructions and labels their clients brought in because
as practitioners they use computer generated forms. Instead the
paper and postcards were thrown away. However, it's going to
take taxpayers a little while to get acclimated to this change.
In the meantime, IRS continues to evaluate the suitability of
its forms, instructions and publications in consultation with
practitioner groups and is eliminating those that are obsolete
or can be obtained in some other manner. We applaud this cost-
cutting effort because in addition to being tax practitioners,
Enrolled Agents are also taxpayers.
4. Individual Tax Identification Numbers (ITINs): We have
surveyed our Members as to how the new ITIN program for
taxpayers who are not eligible for Social Security Numbers has
been working. Taxpayers who do not have SSNs must have an ITIN
in order to file. The reaction has been mixed. Some of our
Members report that their clients have had no problem at all
while others are finding it difficult to work through the
requirements. To get quick service from IRS, most EAs say they
send clients directly to the local IRS office with their
documents. Others have praised IRS outreach efforts, notably in
IRS' North Texas District where approximately 10,000 taxpayers
have been reached. The Acceptance Agent process for ITINs has
gone slower than expected. Again, this is a new program,
started just this year, and it will take some time for tax
practitioners and taxpayers to get accustomed to it. Some
additional education work would probably be helpful, including
more outreach by local IRS offices.
Overall, however, we are very pleased that the IRS appears
to have focused its efforts on the 1997 filing season in an
unprecedented fashion.
The Service is to be commended for its public awareness
efforts on alternative ways of filing and the availability of
the IRS website. The website makes it possible for taxpayers
and tax practitioners to download forms, instructions for those
forms, and publications at any time of the day or night, any
day of the week. In addition, the IRS fax on demand service
makes available the most widely used forms and instructions in
a very convenient and user friendly fashion for taxpayers and
tax practitioners alike.
We hope these efforts to divert telephone calls out of the
system will pay off by providing alternative ways of obtaining
information. We believe that they will continue to improve as
more taxpayers and tax practitioners become familiar with them.
This year's increased use of TeleFile is certainly an example
of how it may take a year or two for taxpayers to become
comfortable with the technology and then you can see usage
skyrocket.
If I were to summarize what NAEA is seeing in terms of IRS
operations, it would be that a more business-like, customer
service approach to tax administration is being adopted in the
National Office. There is a great deal more innovation and
outreach to practitioner organizations. The culture of the
National Office has changed dramatically over the past two
years. They are doing a lot more listening to practitioners and
taxpayers. In recent months, practitioner groups have been
consulted on worker classification issues, strategies for
electronic filing, the implementation of Congressionally
mandated Electronic Federal Tax Payment System (EFTPS). We are
awaiting revision of national collection standards which we
hope will address and resolve problems raised by practitioners
around the country.
Within the week or so, we received word about resolution of
a major problem for practitioners. For some time now,
practitioners have complained that IRS would not accept a
computer generated Form 656 for Offers in Compromise. After
collaborative work with Enrolled Agents and the Commissioner's
Advisory Group, among others, the IRS has arrived at a
solution. Practitioners--the vast majority of whom now do their
work on computers--can now use the computer generated Form 656
without sacrificing the integrity of the agreement between the
taxpayer and the IRS.
Is everything perfect? No. Employee morale is a major
problem which I address later in my remarks. And following the
recent wave of retirements and the consolidation of Districts
and Regions, we have many Districts with new Directors and
Assistant Directors who are just getting their bearings. Since
they are just getting to know their staff and districts, some
haven't been able to initiate all the outreach efforts we'd
like to see. We feel confident that this will change in the
coming months. If not, rest assured we'll be back to let you
know.
I would like to share with you some other examples about
how we are seeing a 180-degree shift in approach at IRS on a
number of levels. In my own North Texas District, IRS personnel
have done a superb job. Their outreach work on ITINs has been
outstanding. In an effort to meet anticipated walk-in traffic
demand and to maintain the same level of service as last year,
the North Texas District trained eight Revenue Officer Aides
and one Revenue Officer to provide back up assistance at the
Post of Duty walk-in counters. In addition, five temporary
employees were hired to handle the Form W-7 (ITINs) program.
Approximately 5,000 W-7s have been certified through the walk-
in operation.
I would also mention improvements to the much maligned
telephone system. Here you can see the more business-like
approach and more targeting of effort. The North Texas District
Customer Service Division has as its objective to answer 5.2
million calls during this filing season. Through Feb. 15, a
total of 1,289,287 calls were answered compared to 1,170,394 at
the same time last year. The average hold time is running 1
minute 10 seconds compared to 3\1/2\ minutes in 1996.
Callers requesting Customer Service Division assistance may
do so by either dialing one of two 800 telephone numbers. (Both
practitioners and taxpayers give high marks to toll free
numbers, by the way.) This leads to an automated assistance
feature which gives the caller much faster service than waiting
for a ``real person.'' However, assistors are available for
callers who are unable to work with the automated system or who
have problems not addressed by the automated system. IRS has
identified the most frequent needs a taxpayer has to call so
the automated list includes:
Automated installment agreements: Under this
system, callers who qualify may make an installment agreement
for a balance due tax account.
Refunds: A taxpayer may check the status of their
current refund of overpaid taxes.
Locator: Tells where to send a completed tax retu
Personal identification number: Callers can
establish or modify their PIN which is needed to access account
information.
Transcripts: Callers can obtain transcripts of
their past tax year accounts or photocopies of returns filed
with the IRS.
Inquiries into certain technical tax law issues are
currently being referred to a call-back messaging option. The
caller is advised that due to current heavy demand for
assistance in the subject selected, assistance is being
provided via the call-back service. The caller is then prompted
to leave their name, day time telephone number, and the best
time of day for contact. The caller is told he/she will receive
a call back within two business days. Answers to these
inquiries are provided by Examination Division personnel.
If the queue time is excessive on other selected technical
topics normally answered ``on-line,'' the caller is advised
that recorded tax information is available elsewhere and
referred to the topic number of that recorded information. The
caller may then choose to be transferred to TeleTax to listen
to the recorded information. The important point here is that
the caller is given the option of choosing to go to TeleTax or
staying in the queue and waiting to speak to the next available
IRS representative.
We are seeing better measurement of IRS efforts. For
example, a total of 43,636 forms have been distributed at the
IRS walk in offices in North Texas this year, compared with
36,551 last year, a 20% increase. There have been 33,364
requests for assistance in other IRS program areas such as tax
law, collection, account questions compared to 29,874 last
year, a 12% increase.
In an effort to discourage procrastination, the IRS is not
promoting its annual April 15 Texas Stadium filing event.
Instead, two filing events, called IRStravaganza, have been
scheduled. One was held February 15 and another is planned for
March 22. At these events, IRS trained volunteers provide free
tax help in an event open to all taxpayers. Spanish-speaking
assistance and interpreters for the deaf are provided. Local
businesses help sponsor the event in cooperation with local
media.
Besides these special events, the District currently has
238 VITA (Volunteers in Taxpayer Assistance) sites to help
taxpayers needing assistance with their tax return preparation.
All of the VITA sites are open, with several one-day sites
having held special events including Dallas, Ft. Worth,
Longview, Amarillo, Tyler, Abilene, Texarkana, Lubbock, Lufkin,
Midland and Wichita Falls.
Alternative Ways of Filing
As we are all aware, the IRS is choking on paper returns
and has embarked on an effort to promote electronic filing. In
the North Texas District, we are seeing substantial growth in
the number of tax preparers who are participating in the
Electronic Filing (ELF) program and in the number of returns
filed.
The North Texas District has embraced a number of marketing
efforts--when did you last hear of IRS involved in market
analysis?--which include:
conducting demographic market analysis
identifying the top 20 zip codes receiving
TeleFile packages for marketing strategy
identifying zip codes which meet demographics of
the targeted population and with less than 50% ELF penetration
writing letters to financial institutions
suggesting they offer ELF as a customer benefit
contacting federal credit unions to offer ELF to
new or existing customers
coordinating with Public Affairs to develop news
releases on alternatives ways of filing
conducting media appearances--TV, radio, newspaper
interviews
providing information stuffers to various large
companies for inclusion in employee pay statement and/or
customer billing statements.
They also developed a marketing plan for ELF. And, in view
of last year's smooth operation of ELF, the effort seems to be
paying off with a 22% increase in traditional ELF, a 30%
increase in TeleFile; and a 283% increase in online filing as
of 2/21/96.
The 1997 filing season found the IRS facing the expectation
of doing more with fewer resources. Additionally, burdened with
negative public perception, declining employee morale, coupled
with a number of late tax law changes, the Service has focused
on what it needed to do and has met the challenge of the filing
season. We have about a month to go and while the pressure is
clearly on the IRS, tax practitioners and taxpayers alike, we
have had no indication that the process will not conclude
successfully.
At this time, we think it appropriate to express our
appreciation to those Service employees and administrators who
dared to accept the challenge amid the many obstacles they
faced and have endeavored to succeed. They dared to arrange
assistance for taxpayers in settings the taxpayer felt
comfortable with. They dared to extend taxpayer assistance
telephone lines beyond the normal working hours and have
arranged for taxpayer assistance walk-in offices to be open two
Saturdays during March. They enlisted the community in taxpayer
awareness, so even the Dallas Area Rapid Transit buses now
flash ELF information for daily bus riders. They utilized other
resources, enlisting Examination personnel to assist taxpayers
with tax law questions. They talked with practitioners and
taxpayers, anticipated the needs, shifted resources and
addressed specific concerns. This year's focused effort must
become the standard operating procedure for filing season.
Looking to the Future
There are three areas--public perception, employee morale,
and greater communication--to which this Subcommittee must pay
attention if the IRS is to succeed in its mission.
A. Public Perception
Key to successful tax administration is taxpayer
confidence. Taxpayers, as they attempt to meet their legal
obligations to file complete and accurate returns, get very
frustrated if they cannot acquire the necessary forms and
publications. They are further angered if they cannot get
answers to their questions when telephone lines to the IRS are
backed up and wait time is unduly long. Many working taxpayers
call the IRS on their break and lunch time and cannot afford a
lengthy wait. Unavailability of tax forms and information,
coupled with difficulty in getting answers to filing questions,
breeds contempt of the tax system by the public and therefore
encourages noncompliance and inaccurate reporting. In order to
address these problems, NAEA respectfully requests that you
recommend to the Appropriations Committee the allocation of
sufficient financial resources to IRS so that it can meet its
obligations to this nation's taxpayers.
B. Morale Issues
In our testimony before this Subcommittee last year, we
urged that Congress request that GAO study this issue. We
continue to be concerned due to the dependency of our voluntary
compliance system on competent, motivated individuals who have
the ability to insure that the laws are administered
consistently and fairly.
The perception of taxpayers about the fairness and
impartiality of the tax administration system is dependent upon
confidence that their interests are adequately represented by
the officers and agents of the Service. We believe the current
state of employee morale is so low that it jeopardizes this
perception of adequate representation of the public interest.
Our Members around the country continually provide us with
information about dispirited employees and how their attitudes
have detrimental effects on taxpayers. Government agents who
feel put upon and victimized by continual criticism and harping
in the media and political arenas easily develop a callousness
when dealing with taxpayer cases assigned to them. This is a
human reaction and is very understandable. However, it is as
serious a threat to our voluntary system as anything
confronting it today.
By the very nature of its function, the IRS is not a
popular place to work and will always encounter problems in
recruiting the best talent available. They are further hampered
in their effort to bring in new talent when morale falls to the
level where employees are discouraging prospective employees
from applying. This leaves the Service with the unenviable task
of revising job criteria to fill jobs with the people available
rather than recruiting choice personnel. Often those selected
have limited promotion potential within the organization. We
have recently testified before the National Commission on
Restructuring the IRS on this subject and have urged the
Commission to study the whole issue of employee morale and task
the GAO with addressing what incentives could be pursued to
bolster the IRS recruitment of competent, well-educated,
promotable individuals for government service. One suggestion
we've made is that the IRS explore the possibility of paid
internships for tax accounting students to work within the
Service for several years prior to commencing private practice.
This would provide excellent on the job training and
development experience for future practitioners; insure a
steady supply of well-educated government employees; regularly
give the IRS an infusion of new view points with the end
product being increased taxpayer confidence and satisfaction.
C. Congressional/IRS/Practitioner Cooperation in Tax Administration
Finally, Enrolled Agents view themselves as an integral
part of tax administration. We would boldly suggest that there
is another partner, the Congress. We respectfully request that
with regard to matters involving implementation of proposed
laws, that IRS and tax practitioners be consulted early and
often to smooth the way.
Earlier I made reference to the delay in Volume 2 of
Package X. This may seem like a small issue but considering
that Package X is the tax practitioner's Bible, it's timely
availability is critical to the smooth functioning of tax
season. Late Congressional action on tax legislation--anything
much beyond July--plays havoc with the operation of the next
filing season. Once Congress has approved a bill and the
President has signed it, a whole series of steps must be taken
to implement the law. Regulations may need to be written. Forms
need to be developed, instructions drafted, publications
created. These documents must be printed and distributed. All
of this is labor intensive and requires that most elusive of
all commodities--time.
A few days ago, expired aviation excise taxes were
reinstated. We just received an e-mail message from one of our
Members whose clients have been caught crosswise in the new
law. He's hoping that petroleum distributors and suppliers will
have the opportunity to recoup the lost revenue in taxes paid
on product that remained in inventory when the prior law
terminated at midnight, Dec 31, 1996.
This Member's reaction is hardly unique. We receive this
type of message regularly. It points to the need for greater
communication among Congress, the IRS, and the practitioner
community. With all due respect to Treasury's tax policy role,
we think it absolutely imperative that IRS be at the table as
you conduct your deliberations so that you can be made aware of
implementation problems. I can think of no action you can take
which would have a more beneficial impact on tax administration
at virtually no cost and I hope you will give it serious
consideration.
On behalf of the National Association of Enrolled Agents, I
thank you for this opportunity to present this testimony. I
will answer any questions you may have.
Chairman Johnson. Thank you very much.
Mr. Mares.
STATEMENT OF MICHAEL E. MARES, CHAIRMAN, TAX EXECUTIVE
COMMITTEE, TAX DIVISION, AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS
Mr. Mares. Thank you, Madam Chair, and Members of the
Subcommittee. My name is Michael Mares, and I am here today on
behalf of the American Institute of Certified Public
Accountants.
I would like to first thank you for inviting the AICPA to
testify here today. We are the national professional
organization of certified public accountants, comprised of
331,000 members.
Our members advise clients on Federal, State and
international tax matters as well as prepare returns for
millions of Americans. Our clients range from individuals to
nonprofit organizations, to small- and medium-sized businesses
as well as to the largest businesses in America. It is from
this base of experience that I draw my comments.
The mission statement of the IRS provides that
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve the
public by continually improving the quality of our products and
services; and perform in a manner warranting the highest degree
of public confidence in our integrity, efficiency and fairness.
To achieve this mission, the Internal Revenue Service has
developed three strategic initiatives: Increase compliance,
improve customer service, and increase productivity--all of
which you heard testimony about today.
Although the AICPA does not always agree with the Internal
Revenue Service in its attempts to achieve these objectives, we
do agree that these objectives are very important, both to the
Service's mission, and to its objectives.
The efficient and effective administration of the tax laws
are critical to the success of this Nation. We have long been
concerned that insufficient IRS budget allocations might weaken
the Service, and thereby erode public confidence in the
Internal Revenue Service, which is an essential component of
our self-assessment system.
Because of this concern, in 1986 we participated in funding
a study of the Internal Revenue Service financing process. C.
Eugene Steuerle, in a book entitled ``Who Should Pay for
Collecting Taxes,'' set forth the results of that study.
In the introduction to that book, Mr. Steuerle stated,
``the agency's ability to perform its mission ultimately
depends upon the sufficiency of its funding.'' We could not
agree more.
It is widely acknowledged, and you heard some testimony
this morning, that the IRS has serious problems that need to be
resolved. It is also acknowledged, although not perhaps as
widely and certainly not as frequently, that the Internal
Revenue Service is in many respects doing a good job.
The National Commission on Restructuring the IRS, this
Subcommittee and many other groups are presently studying the
strengths and weaknesses of the Internal Revenue Service with a
view toward recommending reforms.
While this studying continues, and reform proposals are
being developed, however, it is crucial to the well-being of
our country that the IRS be adequately funded so that it can
fulfill its mission.
We hope that these hearings result in constructive action
for continued improvement of the Internal Revenue Service.
Where there are problems, we expect Congress will work to help
the IRS solve them, rather than attempt to chastise them by
withholding needed funding.
Any such action would likely be detrimental to us all, not
just to the Internal Revenue Service. With insufficient
funding, the IRS would not be able to adequately perform its
job, and taxpayers would become increasingly frustrated in
their dealings with the agency.
We believe also that lack of congressional support for the
IRS could adversely affect individuals' attitudes toward
participation in our voluntary compliance tax system.
Finally, the inability of the IRS to adequately perform its
job would undoubtedly mean less revenue for our Nation.
We are not commenting on the merits of specific dollar
amounts or allocations in the budget proposal. Such comments
would be beyond the analysis we performed to create these
comments.
What we do urge is a businesslike approach be taken to the
Internal Revenue Service budget. The IRS performs an essential,
albeit unpopular role, by collecting the revenue needed to
operate our government. To continue and improve that activity,
it needs to be provided with adequate funds.
This is not to say that nothing should be done to improve
the IRS. Indeed, to the extent problems exist, reforms should
be implemented and monitored so that those reforms can continue
to be effective.
However, budget cuts should not be used to penalize the
IRS. In my written comments, I provided a list of proposals
that we believe will help not only decrease customer
dissatisfaction with the IRS, but also increase the
effectiveness of the tax system.
I would urge the Subcommittee to take appropriate notice of
those comments.
We recognize that Congress faces a challenge in reducing a
multibillion dollar budget deficit, and an enormous task in
trying to balance the budget.
Conceptually, asking all Federal agencies to bear a fair
share of the cuts makes sense. However, the IRS is in the
unique position among agencies in that changes to the IRS
budget have a converse revenue effect.
While the exact amount of that correlation is debatable,
Mr. Steuerle's study concludes that additions to IRS resources
would lead to an increase in enforcement revenues several times
larger than costs.
We urge you not to lose sight of the big picture during
these deliberations.
Once again, I would like to thank you for the opportunity
to testify here today, and I'll be happy to answer any
questions you may have.
[The prepared statement follows:]
Statement of Michael E. Mares, Chairman, Tax Executive Committee, Tax
Division, American Institute of Certified Public Accountants
I. Introduction
Madam Chairperson and members of the Subcommittee: Thank
you for inviting the American Institute of Certified Public
Accountants (``AICPA'') to testify before you today. The AICPA
is the national, professional organization of certified public
accountants comprised of 331,000 members. Our members advise
clients on Federal, state, and international tax matters and
prepare income and other tax returns for millions of Americans.
They provide services to individuals, not-for-profit
organizations, small and medium-size businesses, as well as
America's largest businesses. It is from this base of
experience that we offer our comments.
II. Need for Adequate Funding
The Mission Statement of the IRS provides: ``The purpose of
the Internal Revenue Service is to collect the proper amount of
tax revenue at the least cost; serve the public by continually
improving the quality of our products and services; and perform
in a manner warranting the highest degree of public confidence
in our integrity, efficiency, and fairness.'' To achieve its
mission, the IRS has developed three strategic initiatives:
increase compliance; improve customer service; and, increase
productivity.
Although the AICPA does not always agree with the actions
of the IRS in attempting to achieve these objectives, we do
agree with the importance of the Service's mission and
objectives. The efficient and effective administration of the
tax laws and collection of tax are of benefit to taxpayers and
the nation. The AICPA has long been concerned that insufficient
IRS budget allocations might weaken the Service and erode the
public confidence in the IRS that is essential to our self-
assessment system of taxation. Because of this concern, in 1986
the AICPA participated in funding a study of the IRS financing
process. C. Eugene Steuerle, in a book entitled Who Should Pay
For Collecting Taxes, set forth the results of that study. In
the Introduction of that book, Mr. Steuerle stated: ``The
Agency's ability to perform its mission ultimately depends upon
the sufficiency of its funding.'' We could not agree more.
It is widely acknowledged that the IRS has serious problems
that need to be resolved. It also is acknowledged, although
perhaps not as widely and certainly not as frequently, that the
IRS is in many respects doing a good job. The National
Commission on Restructuring the Internal Revenue Service, your
Subcommittee, as well as other groups, are studying the
strengths and weaknesses of the IRS with a view toward
recommending reforms. While this studying continues and reform
proposals are being developed, however, it is crucial to the
well-being of the country that the IRS be adequately funded so
it can fulfill its mission.
We hope this hearing results in constructive action for the
continued improvement of the IRS. Where there are problems, we
expect Congress to work to help the IRS solve them, rather than
attempt to chastise the IRS by withholding needed funding. Any
such action would likely be detrimental to us all, not just to
the IRS. With insufficient funding, the IRS would not be able
to adequately perform its job and taxpayers would encounter
additional problems and frustrations in their dealings with the
IRS. We believe the lack of Congressional support for the IRS
could adversely affect individuals' attitudes towards
participation in our voluntary compliance tax system. Finally,
the inability of the IRS to adequately perform its job would
undoubtedly mean less revenues for our nation.
The AICPA is not commenting on the merits of specific
dollar amounts or allocations in the budget proposal. Such
issues require analysis beyond the scope of our review. What we
do urge is that a businesslike approach be taken to the IRS
budget. The IRS performs an essential, although unpopular, role
by collecting revenue needed to operate our government. To
continue and to improve that activity, the IRS needs to be
provided with adequate funds. This is not to say that nothing
else should be done. Indeed, to the extent problems exist
within the IRS, reforms should be implemented and monitored.
However, budget cuts should not be used to penalize the IRS.
Congress faces a tough challenge in reducing a multi-
billion dollar budget deficit and an enormous task in trying to
balance the budget. Conceptually, asking all Federal agencies
to bear a fair share of the cuts makes sense. However, the IRS
is in a unique position among agencies in that changes to the
IRS budget have a converse revenue effect. While the exact
amount of the correlation is debatable, Mr. Steuerle's study
concludes that ``additions to IRS resources would lead to an
increase in enforcement revenues several times larger than
costs.'' We urge you not to lose sight of the big picture
during these deliberations.
III. Consequences of Inadequate Funding
Training
We are currently seeing effects of the IRS budget cuts over
the last few years. A few months ago, the AICPA asked members
of the Tax Division to provide comments and suggestions which
would be submitted to the National Commission on Restructuring
the IRS. A high percentage of those responding commented that,
to a large extent, the problems they encounter with the IRS are
the result of a lack of training for the IRS agents.
Inappropriate issues are being raised in examinations and, as a
result, taxpayers and their representatives have to expend time
and resources to educate the IRS agents on the applicable law.
This can lead to frustration and a loss of respect for the IRS
and the tax system on the part of taxpayers and their
representatives. It also can lead to frustration and low morale
on the part of IRS agents. Considering the complexity and ever-
changing nature of the tax laws, extensive and frequent
training of agents is essential. Without it, the IRS cannot
effectively perform its mission.
Customer Service
In May 1989, the AICPA conducted a nationwide survey of its
members who are sole practitioners and/or members of the
Institute's Tax Division, in an effort to ascertain their views
and attitudes toward the IRS. To be able to measure changes in
these views over time, an updated version of the 1989 survey
was sent in mid-July 1995, to 3,000 of those members, randomly
selected from a stratified list.
Members surveyed were presented with a variety of
statements about the IRS and asked to indicate whether they
agreed or disagreed with each. On balance, the 1995 survey
responses tended to paint a negative picture of the IRS. For
example, nearly 9 out of every 10 respondents agreed that
``there are often delays in responses from the IRS'' and three-
fourths agreed ``it is difficult to communicate with the IRS.''
In addition, 7 out of every 10 respondents disagreed that ``IRS
communications are adequate,'' or that ``the IRS provides good
customer service,'' while about two-thirds disagreed that ``IRS
employees are adequately trained,'' or that ``the ability of
the IRS to resolve problems is adequate.''
It should be noted that the 1995 survey results indicated
some improvement in these areas since the 1989 survey. It also
should be noted that not all results were negative. For
example, two-thirds of members responding to the survey agreed
with the statements that ``IRS employees are consistently
courteous'' and that ``the IRS keeps clients' tax return
information confidential,'' while 54 percent agreed that ``IRS
employees are reasonable/fair.'' Further, 49 percent agreed
that ``the IRS maintains the highest standards of integrity.''
Despite these positive responses, the overall ratings for
the IRS's customer service in 1995 were not good. IRS
management has tried hard to prevent budget cuts from affecting
customer service. Nevertheless, since 1995, we have heard
reports from members that there has been a noticeable reduction
in the services available and in the timeliness of responses
from the IRS, allegedly due to budget cuts. Thus, it appears
the budget cuts have already hurt the IRS's customer service
activities--activities which already were poorly rated.
Customer service is a very important function of the IRS.
Adequate funding needs to be provided to enable the IRS to
properly fulfill that function.
Taxpayer Rights Issues
Three weeks ago, the AICPA testified at a hearing of the
National Commission on Restructuring the IRS on taxpayers
rights issues. (A copy of the AICPA's written testimony from
that hearing is being submitted to this Subcommittee with this
testimony.) Included in that testimony was a discussion of
taxpayer rights issues the AICPA felt should be addressed. It
appears that three of those taxpayer rights issues are, at
least in part, the result of inadequate funding of the IRS.
Those three are: the need for a ``realistic possibility of
success'' standard for the IRS to raise an issue on audit; the
need for comprehensive interest netting; and, the desirability
of presenting taxpayers with detailed interest computations in
connection with adjustments in tax liabilities. Thus, IRS
budget shortfalls may be linked to the denial of rights of
taxpayers.
1. Need for a Realistic Possibility of Success Standard for
the IRS to Raise an Issue in an Exam.
As mentioned above, currently, presumably due to a lack of
adequate training, IRS agents often raise inappropriate issues
in examinations. Treasury Department Circular No. 230, IRC
section 6694, and professional ethics guidance of the AICPA and
the American Bar Association (``ABA'') provide that tax
advisers may not recommend a position in a return that lacks a
realistic possibility of being sustained on its merits. A
position is considered to have a realistic possibility of being
sustained on its merits if a reasonable and well-informed
analysis by a person knowledgeable in the tax law would lead
such a person to conclude that the position has approximately a
one in three, or greater, likelihood of being sustained on its
merits.
Although the AICPA and the ABA prefer not to assign
mathematical probabilities to the realistic possibility
standard, nevertheless, both professions subscribe to the
standard. Unfortunately, the IRS has not chosen to instruct
revenue agents to apply the same ``realistic possibility''
standard before raising issues in examinations and, in many
instances, has not provided adequate training so that the
agents would know whether they have a ``realistic possibility
of success.''
For example, in a recent IRS examination, a revenue agent
asserted in his Revenue Agent's Report (``RAR'') that a
taxpayer corporation must switch from the cash method of
accounting to the accrual method of accounting based on an IRS
Industry Specialization Paper for Health Care. Although the
taxpayer was a personal service corporation (with no
inventories), entitled by statute (IRC sec. 448) to be on the
cash method of accounting, the revenue agent insisted the
taxpayer had to change to the accrual method of accounting. The
taxpayer protested to the Appeals Office, which dropped the
issue. The taxpayer incurred the expense of protesting the
revenue agent's adjustment to the Appeal's Office even though
there was no realistic possibility of the IRS prevailing on the
accounting method issue.
As a matter of fairness and consistency to taxpayers, we
recommend that the IRS require revenue agents to have concluded
that there is at least a realistic possibility of success
before proposing an adjustment against a taxpayer. We also
recommend that the IRS budget include sufficient funding for
training of IRS agents so they will be able to make
knowledgeable determinations regarding the issues.
2. Need for Comprehensive Interest Netting
Currently, there is a differential between the interest
rate a taxpayer pays on a deficiency and the interest rate the
government pays to a taxpayer on an overpayment; the
differential rate can vary from 1 percent to 4.5 percent.
Situations often arise when a taxpayer is indebted to the
government at the same time that the government is indebted to
the taxpayer. Absent netting, a taxpayer who owes the
government the same amount that the government owes the
taxpayer would incur an interest obligation in favor of the
government.
The Service's current policy with respect to interest
netting is fundamentally unfair, both because of the manner in
which the Service makes interest netting calculations and also
because of the Service's inconsistent application of netting
principles, resulting in similarly situated taxpayers receiving
disparate treatment.
Interest provisions in the Code are intended to compensate
the government or the taxpayer for the use of the money. (Rev.
Proc. 60-17, 1960-2 C.B. 942) Interest applies only if there is
an amount that is both due and unpaid. (See, e.g., IRC
Sec. 6601(a); and Avon Products, Inc. v. United States, 78-2
U.S.T.C. (CCH) para. 9821 (2d Cir. 1978).) To the extent there
is a ``mutuality of indebtedness'' between the taxpayer and the
government (i.e., to the extent the government and the taxpayer
owe each other the same amount of money over the same period of
time), there is no unpaid balance and, therefore, no amount on
which interest should accrue.
The Service's current policy (See Treas. Reg.
Sec. 301.6402-1.) of only netting outstanding overpayments
against outstanding liabilities for both computational and
collection purposes is unfair to taxpayers that promptly pay
contested amounts of tax and, therefore, have no
``outstanding'' liabilities. This is illustrated by the recent
case of Northern States Power, in which the company's prompt
payment of alleged deficiencies cost it $460,000 more in
interest than it would have had to pay if it had delayed in
making the payment. (See Northern States Power Co. v. United
States, 73 F3d 764 (8th Cir. 1996), cert denied 117 S.Ct. 168.)
Finally, and of significant import, despite the Service's
stated policies toward interest netting (i.e., that netting can
legally occur when both deficiencies and overpayments are
outstanding and unpaid, see, e.g., Notice 96-18), netting
continues to be performed on an ad hoc basis. A revenue agent's
decision to deny a taxpayer netting is supported and justified
by language in the Eighth Circuit's opinion in Northern States
Power, which states that such netting is discretionary.
However, the Service's discretionary application of the law
without any formal or enforced guidelines, policies or
procedures is inherently unfair to taxpayers. The virtual
absence of any clear legal standards for interest netting also
is unacceptable from a systemic standpoint, because it affords
the IRS unfettered power to convert a taxpayer from a creditor
to a debtor, with the size of a potential interest debt quickly
becoming astronomical.
Further, viewing comprehensive netting as entirely within
the discretion of the Service interjects serious fairness
concerns into the settlement process. The Service has used the
netting issue as a bargaining chip in negotiations to extract
concessions from taxpayers on issues under examination. This
inappropriately distances negotiations from the merits of the
underlying issues. It also has the inappropriate effect of
using netting (or the absence of netting) as a tool to raise
revenue, rather than as a means to compensate for the use of
money.
The Service counters taxpayer comments regarding unfairness
with claims that netting in all situations is not
administratively feasible. While comprehensive interest netting
raises concerns of administrative feasibility, more progress
must be made in balancing these concerns against concerns of
taxpayer fairness. Congress must be aware that IRS budget cuts
may result in cuts in taxpayer rights, as has been the case in
the interest netting area.
We recommend that adequate funding be provided to enable
the Service to provide comprehensive interest netting in all
situations. In the meantime, we recommend that guidance be
issued to implement comprehensive netting in all situations in
which the IRS currently has the administrative capability to do
so. In all other situations, as an interim measure, guidance
should be issued providing that the Service will net
comprehensively at the request of the taxpayer, provided the
taxpayer furnishes the Service with relevant information and
interest computations. By ``comprehensive netting'' we mean
netting for all interest accruing after December 31, 1986 for
all types of taxes and all years (open or closed) to the extent
necessary to compute interest accurately for a refund or an
assessment in an open year. This interim recommendation is
similar to the elective approach recently recommended by this
Subcommittee, as well as the approach of a draft revenue
procedure submitted by the Compliance Subgroup of the
Commissioner's Advisory Group at its January 1995 meeting.
3. Desirability of Detailed Interest Computations
We believe the IRS should provide interest computations, as
a matter of course, to taxpayers when adjustments involving
interest are made. Although it is not clear why this is not
done currently, it appears at least part of the reason may be
lack of adequate funding.
Currently, a taxpayer only receives a notice showing the
amount of tax and the interest due on such amount. IRC section
7522, which is applicable for notices mailed on or after
January 1, 1990, requires that such notices describe the
``basis for, and identify the amounts (if any) of, the tax due,
interest, additional amounts, additions to the tax, and
assessable penalties included in such notice.'' At the present
time, the starting date for the interest, the principal amount
upon which such interest is based, and the rate charged on such
amount are not provided to taxpayers as part of the notice
procedure.
We believe the ``basis for'' description in the notice
should apply to interest computations and should include
interest rates and the dates for which the interest applied,
the dates and amount of payments and credits, and the interest
compounding method. With this information, taxpayers and
practitioners will be able to verify the accuracy of interest
computations and expeditiously resolve any discrepancies. We
recognize that detailed interest computations could result in a
burden to the IRS. Therefore, an exception could be made for de
minimis interest amounts such as less than $50 or $100.
IV. Potential Cost Savers
Also included in the AICPA's written testimony to the
National Commission on Restructuring the IRS were proposals
that, if implemented, would likely reduce some of the IRS's
costs. These proposals deal with: penalty abatements;
disclosure changes utilizing a PIN; and notification of
intention to offset. We recommend that consideration be given
to these proposals as a means not only to improve IRS's
customer service but also to achieve a more efficient tax
administration system.
Penalty Abatements
The IRS assesses numerous penalties in response to which
taxpayers spend a great deal of time documenting reasonable
cause for having the penalties abated. The process is both time
consuming and expensive. However, based on both reasonable
cause and IRS errors, the IRS abates as much as 50 percent of
some types of penalties it proposes. Unfortunately, taxpayers
without representation are often unaware of the opportunities
for abatement. It may be possible to achieve a more cost-
effective outcome by establishing criteria for reducing
assessments that are likely to be abated.
To reduce the burden on both the IRS and taxpayers, the IRS
could establish safe harbor provisions for a variety of
penalties which would automatically be deemed to be reasonable
cause for abatement. This could be confined to late filing,
late deposit and certain information return related penalties.
The object would be to concentrate on those penalties that are
regularly assessed and abated. Safe harbor provisions could
take the form of:
No penalty assessments for an initial occurrence;
however, the taxpayer would receive a notice that a
reoccurrence will result in a penalty;
Automatic non-assertion based on a record of a
certain number of periods of compliance; or
Voluntary attendance at some type of educational
seminar on the issue in question, as the basis for non-
assertion or abatement.
Use of this approach would encourage and create a vested
interest in compliance, since a good history of compliance
could automatically result in relief. Additionally, the
likelihood of future abatements would diminish if the taxpayer
has a history of non-compliance. Furthermore, a system of
automatic abatements would reduce the time spent and costs
incurred by the IRS and taxpayers on proposing assessments,
initiating and handling correspondence, and subsequently
abating a high percentage of penalties. The ability to abate a
penalty for a reasonable cause other than those used for
automatic abatements would exist; however, reasonable cause
abatements requiring independent evaluation may be reduced.
Disclosure Changes (PIN/POA)
IRS statistics indicate approximately 50 percent of all
returns are prepared by commercial preparers. We believe,
especially because of the complex nature of the tax law, that
taxpayers have a right to expect that the hiring of a preparer
will avoid personal inconvenience and unnecessary loss of their
own productive time in having their return accepted in the
processing phases by the IRS. Our experience and IRS records
show that the processing of notices during the return
perfection and processing phase is a significant workload
factor and must, therefore, result in significant costs to the
IRS. Many practitioners and taxpayers, unaware of the strict
enforcement of the disclosure rules, attempt to resolve these
notices by having a preparer ``do what the preparer is being
paid to do''--prepare the return, solve any processing
problems, and appropriately interact with the Service.
We believe changes in the disclosure rules would reduce IRS
correspondence and costs in dealing with ineffective contacts
by preparers without a power of attorney, reduce taxpayer
burden, and support the taxpayer's rights to be represented.
Accordingly, we recommend that third parties be allowed to
discuss a notice and its related account with the IRS by use of
a Personal Identification Number (``PIN'') on the notices sent
to taxpayers.
The use of a PIN was under active discussion between the
AICPA Tax Practice and Procedures Committee and the IRS in the
past, but we were unable to reach agreement with the Service
regarding implementation of such a procedure.
The ability of a practitioner, parent, child or neighbor to
assist a taxpayer who does not understand, see well, hear well,
etc., in handling his or her business affairs with the IRS
immediately (i.e., a telephone reply or discussion), would
reduce burden (both time and cost) and frustration, in addition
to the cost of tax administration for the IRS, taxpayers, and
preparers. A system of interacting via telephone with the IRS
is the future of ``one-stop'' service and efficiency in a
modern-day tax system. Holding two-way conversations with the
IRS to discuss notices, payments, penalties, errors, missing
information, etc. must be distinguished from representing
taxpayers before the Service and entering into binding
agreements on their behalf, for which there is a need for a
formal power of attorney.
Notification of Intention to Offset
Current IRS procedures require that before any overpayment
is refunded or credited to estimated tax, as requested by the
taxpayer, there must be a review of a taxpayer's accounts for
any balances due. If a balance due is showing for the taxpayer
on another account or module, the overpayment will be offset
and the remaining balance, if any, refunded or credited. The
taxpayer is not given an opportunity to verify the correctness
of the IRS data before this action is taken.
We believe the IRS should provide taxpayers with
notification of its intention to offset an overpayment from one
account to a balance due on another account or module. We
recognize the IRS's authority to credit amounts due the
taxpayer to any other liability of the taxpayer, in accordance
with IRC section 6402. However, the taxpayer should be notified
of such credit application before the action is taken. In many
instances, the balance due is erroneous or subsequently abated.
Also, the credit application may have serious ramifications for
the taxpayer, particularly an individual or a smaller business
that cannot afford to engage a representative to deal with the
IRS on such issues.
For example, a taxpayer may elect to apply an overpayment
of income tax from one year to the next as an estimated tax
payment. This overpayment is sufficient to cover the taxpayer's
first quarter estimate for the subsequent year. The taxpayer, a
sole proprietor, may have been assessed an employment tax
penalty on a given quarter. The penalty is due to the fact that
a proper liability breakdown was not included with the Form
941. Once this information is supplied by the taxpayer, the
penalty will be abated.
Under the IRS's current system, the taxpayer's overpayment
of income tax will be applied to the outstanding assessment for
the employment tax penalty. The remaining amount applied to the
first quarter estimated tax payment for the subsequent year may
then be insufficient to cover the required quarterly payment
and cause the taxpayer to be subject to an estimated tax
penalty on the subsequent year. If the employment tax penalty
is subsequently abated, the amount credited to the account will
then be refunded to the taxpayer from the employment tax
account; the estimated tax penalty will not be abated
automatically.
We recommend that taxpayers be notified prior to the
application of overpayments to balances due on other accounts
or modules. There may be other actions in progress to rectify
such accounts or significant mitigating factors under
consideration by another area within the IRS. The application
of such overpayments, without providing the taxpayer an
opportunity to address the situation, is a denial of ``due
process'' and may create unnecessary complications and
frustrations and costs for both the IRS and taxpayers.
Rounding
We believe requiring the rounding of numbers on most tax
returns would decrease the number of errors and, therefore, the
costs involved in tax return preparation and processing.
Rounding could greatly enhance efficiency in processing tax
returns and would not affect the rights of individual
taxpayers.
V. Conclusion
The AICPA appreciates the opportunity to testify at today's
hearing and is willing to provide the Subcommittee with
additional assistance and comments as requested. Thank you for
your attention.
Chairman Johnson. Thank you very much for your testimony.
Both of you were very interesting and very helpful. It was very
helpful, Ms. Whitlock, to hear you go through the problems that
occurred.
They are, luckily, relatively narrow compared to the
problems we've identified in the past. I would say that this
Subcommittee has had a very good working relationship with the
IRS in the last couple of years.
We have tried to listen to them at the same time we have
also tried to prod them forward, through the Taxpayer Bill of
Rights. And it was interesting that when we had trouble moving
it in a timely fashion, they were able to implement part of it
administratively, but not the major recommendations.
So good government really is a team effort between
administrators and legislators. And I believe that the hearings
we're having this year as a result of the Taxpayer Bill of
Rights, and the actions of the agency in terms of focus, do
reflect that closer working relationship and the legitimacy of
solid input through representatives into administrative
priorities.
I did want to ask you, Ms. Whitlock, whether you felt that
the IRS' administrative actions in regard to the independent
contractor issue were sufficient to solve the problems in that
area, or whether we still need to legislate to clarify a number
of the issues raised in the last session?
Ms. Whitlock. I believe what was done in the last session,
as far as being able to resolve the issues, early intervention,
and an examination where independent contractor issues were
involved, brought us a long way.
The Commissioner's Advisory Group is also addressing
independent contractors, as it looks at the whole life of a
small business. Indeed, the startup of a business, as the
business increases, if there is a need for employment,
educating that taxpayer on his responsibilities as an employer,
and, indeed, should that taxpayer really have the availability
to use contract labor in the true sense of the word.
And I believe the legislation enhanced the need that the
IRS had in order to educate the taxpayer. And in fact we're
developing a whole line of taxpayer information that will keep
that taxpayer in compliance.
Chairman Johnson. I certainly do believe that the IRS'
actions have been helpful. But it doesn't seem to me that we
are--and I also recognize you can't have an absolute bright
line in this area.
But given the pace of change in the way we do business, and
the relationships between business entities and various
functions that they used to hold within them, and, frankly, the
need for expertise of a level that most businesses can't
afford, and really need to contract, I see the number of
independent contractors as growing.
I think this could be a very healthy thing in a society
that has always gained its strength from entrepreneurial
enterprise. But I am conscious of the dangers of arbitrarily
pushing people off payroll to eliminate the requirement to fund
benefits, and yet hire them back in exactly the same positions.
So there are problems that we need to be conscious of. But
it seems to me that we have not moved far enough in dealing
with this problem, and that we still need to legislate this
year.
I appreciate if you would give that some thought, and
perhaps give us your recommendations on that.
Ms. Whitlock. I would certainly do that, and I appreciate
the opportunity.
Mr. Mares. We are in the process of developing some
legislative proposals to bring before Congress that address
that specific issue.
Chairman Johnson. We do expect to come back to it, because
that's an example of complexity or lack of clarity that also is
very costly to the taxpayers and to the agency.
I do appreciate, Mr. Mares, in your written testimony, your
suggestions for how we could save money, what could be more
efficient, and some of the changes that need to be made, and we
will certainly take those under advisement.
Mr. Mares. Thank you.
Chairman Johnson. Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. You have commented
already on adequately funding the IRS in order for it to be
able to successfully conclude its mission. I wonder if funding
for the administration's five-point plan should be included
relative to making sure that that five-point plan is
implemented.
Would you advocate that adequate funding be included for
implementing the five-point plan that was outlined yesterday by
Deputy Secretary Summers?
Mr. Mares. Mr. Coyne, I have not really had an opportunity
to review it. I flew in this morning. So I really have not had
an opportunity to go through it. It is certainly something that
I will get back to you on, once I've had an opportunity to go
through the administration's plan.
Mr. Coyne. Would you care to comment, Ms. Whitlock?
Ms. Whitlock. I would simply say--in fact, I sat in on the
Deputy Secretary's meeting earlier this morning--that that
five-point plan can only be successful if it's adequately
funded, and monitored to reach its goal.
Mr. Coyne. OK. I wonder if either one of you, or both of
you, would want to comment on the IRS' efforts to reduce tax
refund fraud. Has it been successful, or have you had an
experience with it to the point where you could comment?
Ms. Whitlock. From the standpoint of a practitioner, we are
put in a very unusual position. We are there to serve the
taxpayer, but we are also taxpayers ourselves.
And oftentimes when there is an apparent fraud being
presented before us, as a preparer, the Internal Revenue
Service has given us a fraud hotline to call. Not putting
ourselves in a difficult position, but just informing the
Service that there is a potential for fraud in what we might be
seeing developed in the taxpayer community.
From that standpoint, from the practitioner point of view,
I do feel like the Service has tried to protect us and stay in
tune to what the practitioner community is seeing.
Mr. Coyne. OK.
Mr. Mares. And I think where appropriate the Internal
Revenue Service has adopted programs such as they did with the
earned income tax credit problems that arose. I know in my
dealings with the service center personnel, in Memphis and in
Philadelphia, that there is an ongoing concern about
identifying programs or taxpayers who may be committing fraud,
and addressing those needs as they arise.
Mr. Coyne. Thank you very much.
Chairman Johnson. Are you going to in your recommendations
that you referred to, Mr. Mares, are you going to have any
comment on how to simplify the EITC, or how to change it so
that it would be easier to administer and possibly easier for
recipients for apply for?
Mr. Mares. Yes, we are. As a matter of fact, we will be
presenting a substantial number of simplification proposals to
the National Commission on Restructuring the Internal Revenue
Service very shortly.
And we would be delighted to make a copy of those available
to this Subcommittee as well.
Chairman Johnson. Thank you. We would appreciate that.
Thank you very much. Thank you for your testimony today. And
the hearing is concluded.
[Whereupon, at 1:52 p.m. the hearing was concluded.]
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