[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
            THE 1998 TAX RETURN FILING SEASON AND THE IRS 
                      BUDGET FOR FISCAL YEAR 1999

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 31, 1998

                               __________

                           Serial No. 105-87

                               __________

         Printed for the use of the Committee on Ways and Means



                    U.S. GOVERNMENT PRINTING OFFICE
60-874                      WASHINGTON : 1999


                      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, Wisconsion
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 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.





                            C O N T E N T S

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                                                                   Page
Advisory of March 24, 1998, announcing the hearing...............     2

                               WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner; 
  accompanied by John M. Dalrymple, Chief Operations Officer.....     6
U.S. General Accounting Office, Lynda D. Willis, Director, Tax 
  Policy and Administration Issues, General Government Division; 
  accompanied by James R. White, Associate Director, Tax Policy 
  and Administration Issues, General Government Division, and 
  Randolph C. Hite, Associate Director, Governmentwide and 
  Defense Information Systems, Accounting and Information 
  Management Division............................................    62
                              ----------                              
National Association of Enrolled Agents, Joseph F. Lane..........   118
National Society of Accountants, and Padgett Business Services, 
  Roger Harris...................................................   133

                       SUBMISSION FOR THE RECORD

American Bar Association, statement..............................   151


 THE FISCAL YEAR 1999 BUDGET REQUEST FOR THE INTERNAL REVENUE SERVICE 
                 AND THE 1998 TAX RETURN FILING SEASON

                              ----------                              


                        TUESDAY, MARCH 31, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:07 p.m., in 
room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson [Chairwoman of the Subcommittee] presiding.
    [The advisory announcing the hearing follows:]

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    [GRAPHIC] [TIFF OMITTED]60874A.002
    
    Chairwoman Johnson. The hearing will come to order. Good 
afternoon, everyone. Today the subcommittee will examine the 
current tax return filing season and the budget request for the 
Internal Revenue Service for Fiscal Year 1999.
    The IRS is caught up in a whirlwind of change I think it's 
fair to say. Beyond the current filing season, the IRS still 
must implement the remaining tax code changes contained in last 
year's Taxpayers Relief Act. Second, Congress will soon finish 
legislation to restructure and reform the IRS. The new Taxpayer 
Bill of Rights 3 will include the important new taxpayer 
safeguards, such as expanded relief for innocent spouses and 
that will require a response from the Department. Third, the 
Commissioner has proposed the most ambitious reorganization of 
the IRS in 40 years for which we commend him. Fourth, the IRS 
must assure that its computer system is compliant with the 
century date change. And finally, the IRS must oversee a 
multibillion dollar contract with the private sector to upgrade 
its aging computer system into the 21st Century. The IRS looks 
like a juggler trying to keep one too many plates in the air.
    The administration is requesting $8.3 billion for the IRS 
in Fiscal Year 1999 to support a workforce of approximately 
102,000 employees. These resources should enable the IRS to 
collect $1.7 trillion in revenue. The budget request represents 
a $529 million increase over the current fiscal year. Part of 
this increase will fund over 1,400 additional IRS employees in 
Fiscal Year 1999.
    This budget request marks the first real increase in 
several years. The increased resources are necessary to meet a 
growing workload and to improve customer service. For example, 
the number of primary tax returns will increase from 203 
million to 212 million in just two years. And, the number of 
telephone inquiries which the IRS must answer will increase 
from 104 million to 127 million over the same period.
    Beyond the statistical growth in the IRS' workload, the 
complexity of the subject matter is becoming more difficult to 
administer. Some of this may stem from the Taxpayer Relief Act 
of 1997. The changes affecting capital gains and the sale of 
principal residences were effective in 1997 so they are 
affecting the current filing season. Many more tax law changes 
became effective in 1998 so they will affect the 1999 filing 
season. This includes educational tax credits related to the 
Hope Scholarship and to the Lifetime Learning Program, as well 
as the new deductible Roth IRA.
    In addition, the IRS must strive to make sure that its 
computer system is compliant with the century date change. The 
IRS will spend almost a billion over five years on this effort.
    In view of the changes in the next few years, it is a 
welcome relief that the current filing season appears to be 
mostly trouble-free. The IRS is processing tax returns at good 
pace and issuing refunds in a timely manner. There also has 
been a significant increase in the number of persons filing 
their tax returns electronically, as well as receiving their 
refunds by direct deposit to their bank accounts. This is all 
very good news. It suggests that the IRS is making good 
progress towards its goal of promoting electronic filing as 
well as significant progress towards better customer service.
    The subcommittee wants to review the IRS' budget and its 
operations in order to see if the budget meets all of the 
challenges in a balanced and timely manner. I welcome today's 
witnesses and I particularly welcome the new Commissioner, 
Commissioner Rossotti.
    At this point, I'd like to yield to my Ranking Member, Mr. 
Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman. Today we will hold 
the annual hearing to discuss the administration's proposed 
Fiscal Year 1999 budget for the IRS and the status of the 1998 
tax return filing season.
    The issues we will discuss today are critically important 
to the integrity of our tax collection system and the public's 
expectations of customer service, fairness, and efficiency. 
While it is easy to attack the IRS and its workforce, such an 
approach does not solve any of our problems. What is needed, in 
my opinion, is: No. 1, better focused IRS management; No. 2, 
better IRS employee training; No. 3, better IRS tax 
administration technology systems.
    The President's proposed budget targets each of these areas 
and does so in a very accountable fashion. The President has 
proposed $8.2 billion in funding for the IRS in Fiscal Year 
1999. This is a significant increase from IRS funding levels in 
prior years. The President's budget would provide for a net 
increase of $530 million over the IRS' Fiscal Year 1998 
operating level. Almost half of this increase would be for 
investment in IRS information systems and organizational 
modernization.
    Further, the administration's budget request calls for $323 
million to fund a second year of the IRS investment technology 
account. This is seed money which the IRS needs to continue its 
modernization of IRS computer and technology systems.
    The President's budget also calls for $143 million for EITC 
activities. This Earned Income Tax Credit account was 
established last year outside the budgetary caps to: number 
one, expand EITC customer service and public outreach programs; 
number two, to strengthen EITC enforcement activities; and 
number three, to research efforts to reduce EITC overclaims and 
erroneous filings. I am pleased that we are continuing to 
improve administration of the EITC on a bipartisan basis.
    Finally, I believe that the administrative actions that IRS 
Commissioner Rossotti has taken to streamline the way the IRS 
does business and to expand the availability of taxpayer 
services are fundamental to development of a first-class 
federal tax system. The current tax return filing season 
appears to be going well and, undoubtedly, the Commissioner's 
decisions to expand the IRS' hours of operation to nights and 
weekends across the country and to shift IRS auditors and 
collection staff to taxpayer assistance activities have 
contributed to a problem-free filing season. I commend 
Commissioner Rossotti for his efforts and I thank the 
subcommittee Chairwoman, Mrs. Johnson, for holding this hearing 
today. Thank you.
    Chairwoman Johnson. Thank you.
    Commissioner Rossotti.

   STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL 
                        REVENUE SERVICE

    Mr. Rossotti. Thank you, Madam Chairwoman and members of 
the committee. Before I begin my testimony, I would like to 
make one announcement that I think will please the committee, 
and that is that our electronic federal tax payment system has 
made a very substantial amount of progress with existing 
business users, and, therefore, it will not be necessary to 
impose a penalty on July 1, 1998, as was previously planned 
and----
    Chairwoman Johnson. Excellent.
    Mr. Rossotti [continuing]. This penalty waiver will extend 
to those employers who were first required to use the EFTPS on 
or after July 1, 1997, and who continue to make timely deposits 
by paper coupons. So, I'm sure that will be good news for your 
constituents.
    Chairwoman Johnson. And just to that point, what percentage 
of the small businesses required to file under the EFTPS at 
this point are filing electronically?
    Mr. Rossotti. Well, I believe that there is about 1.1 
million that are required and there's only about 80,000, if I'm 
correct, who are not filing. So, it's the majority of people 
that are enrolled. But, I'll get you those precise numbers, 
Madam Chairwoman.
    [The following was subsequently received:]

    Currently, there are about 1.4 million employers who are 
required to pay using EFTPS. (There is no requirement to file 
electronically). Of that number, about 1.3 million are enrolled 
to pay using the electronic system. In addition to the required 
taxpayers, we have more than 500,000 business taxpayers who are 
voluntarily enrolled.

    Chairwoman Johnson. But almost the whole group is filing 
electronically?
    Mr. Rossotti. Of those that were mandated to----
    Chairwoman Johnson. Right. Well, that's very good news----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. And I think that reflects 
well on the small business community, their----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing.] Ability to learn and 
change, but it also reflects that the IRS did make quite 
dramatic change in its presentation of how to do this and of 
its information to the small business community after the 
program kind of ran amuck----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. And it was those changes 
and the improvements in your materials and your outreach to the 
small business community that certainly brought about this 
compliance and in a way that none of us had any--heard from any 
of our troubled small businesses about it. I commend you on 
that and I think the fact that you did respond to the 
difficulties that the program was having constructively ought 
to be noted for the record.
    Mr. Rossotti. Yes. Actually, Madam Chairwoman, I'm glad you 
mentioned that because it's one of the first things that I 
looked into when I became Commissioner, having heard about it 
from a number of members, and, you know, it immediately became 
apparent to me that this was an excellent program that had not 
been presented, as you put it, very well--
    Chairwoman Johnson. It had not been excellently described 
and so it was not beloved----
    Mr. Rossotti. And we're continuing now to actually do some 
additional things. I mean, the decision we made to waive the 
penalty anticipates the results of some additional outreach 
we're going to do----
    Chairwoman Johnson. Excellent.
    Mr. Rossotti [continuing]. To help people use it.
    I'm pleased to go on now to discuss the 1998 filing season 
as well as our 1999 budget request and some other issues of 
interest to the subcommittee, especially the commitment that 
we've made to customer service.
    Of course, one of the IRS' most important responsibilities 
is to manage a successful filing season and, as you noted, 
Madam Chairwoman and Mr. Coyne, we are doing that this year. 
Total return receipts are about even with last year but our 
electronic filing and TeleFile are up 24 and 26 percent, 
respectively, over the same time period, and, as of March 20, 
refunds are up 6 percent and the average refund is $1,397.
    As of March 20, 4.8 million individual taxpayers have filed 
by phone and, continuing this approach, this spring small 
businesses nationwide will also be able to file the 941 
Employers Quarterly Federal Tax Return by telephone and we 
expect this year that 1.2 million 941's will be filed using 
this option.
    Beginning in January, as Mr. Coyne noted, we expanded our 
telephone service to 16 hours a day, Monday through Saturday. 
And, largely through better scheduling, the overall access, as 
defined by GAO, for telephone assistance has increased from 
only 30 percent in 1996 to about 91 percent so far this season. 
This means that there have been 12.7 million fewer busy signals 
experienced by taxpayers.
    We've also just very recently begun a pilot technology 
program called the ``Intelligent Call Router'' which will 
enable us on a real-time basis to route calls to the next 
available assister anywhere in the United States which is part 
of our program to improve access even more.
    We also expanded walk-in service hours during the last six 
Saturdays of the filing season. Over 150 IRS walk-in offices 
are open from 9:00 to 3:00. This recent Saturday was designated 
as ``EITC Awareness Day'' and the last two Saturdays are 
designated as ``Problem Prevention Days.'' And I will say that 
this Saturday I visited one of those cites at a mall in Charles 
County, Maryland and found that many taxpayers were, in fact, 
very pleased at the ability to get service on a Saturday 
morning in a location that was convenient to them.
    A growing number of taxpayers are also getting the tax 
information they need from our Internet cite, from IRS CD-ROMs 
and our fax system. So far this fiscal year, our Internet site 
has had over 277 million hits, which is about triple the number 
for the same period last year, fax traffic is up 63 percent, 
and over 530,000 successful transmissions of tax forms and 
information have been made by fax. And I would like to say that 
just today,--the form to claim innocent spouse relief has gone 
up on our website.
    Chairwoman Johnson. Excellent.
    Mr. Rossotti. The IRS has also made considerable progress, 
as we've noted at the beginning, in electronic payment methods. 
Last Fiscal Year 1997, more than $655 billion was deposited 
electronically which was an increase over $416 billion the 
previous year. But, as of March 20 of 1998, deposits are 
already over $520 billion through 21 million transactions. 
Enrollment, as we noted, continues to grow in the EFTPS system 
with 1.8 million taxpayers currently enrolled, and that 
includes 500,000 small business volunteers who are not required 
to use the system. That success, of course, is why we were able 
to waive the penalty.
    In addition, in Fiscal Year 1997, over $213 billion went 
through the Lock-Box payment system which is a $4 billion 
increase over the prior year and, as of February 28 of this 
year, $53.6 billion was deposited. So, Lock-Box is also 
growing.
    Madam Chairwoman, without exception, the century date 
change conversion together with the annual filing season 
changes are our highest technology priorities. I stress that we 
are very aggressively managing the program so as to identify 
risks and be able to take timely actions when necessary to see 
that our overriding goal--which, of course, is to maintain 
continuous service--is realized. As part of this management 
process, we do need to adjust on a regular basis deadlines and 
timetables to reflect the work in progress. The program remains 
not only a high priority but a high risk that will require 
continued intense management focus to succeed.
    As members of the subcommittee are aware, I've also 
proposed a large-scale and long-term modernization program for 
the IRS. Despite the short-term progress we are making, we will 
only reach our goal--first quality service to each and every 
taxpayer--through changes in five key areas, each complimenting 
the other. And I'll just briefly describe these.
    The first is revamped business practices that will focus on 
understanding, solving and preventing taxpayer problems. The 
second is an organization structure that each divides the IRS 
into four units; each specializes in serving a particular set 
of taxpayers with similar needs. Third, the creation of 
management roles with more clear responsibility. Fourth, 
measuring our organizational performance by balancing customer 
satisfaction, business results, employee satisfaction and 
productivity. And fifth, of course, new technology.
    The IRS' current computer systems simply cannot support the 
agency's missions and goals in the long term. We have engaged 
the consulting firm of Booz, Allen, and Hamilton to validate 
this concept in terms of risk, cost, and impact on customers, 
both external and internal.
    For Fiscal Year 1999, we have prepared a budget that 
supports the beginning of the transformation of the IRS that I 
have outlined above and that can be also identified into five 
major priorities.
    One, of course, is preparing for the century date change 
which is the most critical of all elements and the funds I have 
requested are essential to continuing customer service and 
avoiding the potentially disastrous effects of an uncorrected 
century date change problem.
    Second, during Fiscal Year 1999, we will pursue a highly 
focused initiative to improve customer service through improved 
clarity of notices, forms, and publications, better telephone 
service, more walk-in service, expanded electronic filing, 
improved training of customer service representatives, 
strengthened support for small businesses, increased staffing 
for the taxpayer advocate's office, and creation of citizen 
advocacy panels.
    Third to ensure that customer service remains a top 
priority, the budget request also includes some near-term 
investments that are necessary in order to enable us to 
maintain an acceptable level of service. This includes the Call 
Router, which I mentioned earlier, deployment of computers to 
field collectors who currently have no computers, and 
replacement of old computers used by field agents who depend on 
them to do examinations of taxpayers.
    Fourth, in 1999, the process of modernization will continue 
with the strengthening of the IRS' internal systems management 
processes and capabilities and the award of the ``Prime 
Contract.'' The Fiscal Year 1999 budget request for long-term 
technology modernization comes in two parts; IRS capabilities 
for managing and supporting modernization and funding for the 
information technology investment account for the prime 
contractor itself.
    And finally, the Fiscal Year 1999 budget includes $25 
million to support the organizational modernization proposal 
that I've advanced. This money is not yet fully specified in 
detail but it will include recruiting, relocation, and 
retraining of people as well as development of detailed plans 
for the reorganization.
    I would only note, Madam Chairwoman, that over the last 
three years, the IRS budget--when you subtract out the extra 
cost of the century date change--has actually declined by 7 
percent while the dollars collected have grown by about 24 
percent. Returns processed have increased by 8 percent and, as 
you know, the Taxpayer Relief Act of 1997 has added about 800 
changes to the Tax Code.
    In conclusion, I believe we can transform the IRS into an 
agency that helps taxpayers meet the obligations imposed by the 
tax laws while ensuring the compliance is fair. And I think we 
can do this while increasing productivity and shrinking 
gradually the size of the IRS in relation to the economy. It 
will take time and investments to modernize technology, 
business practices, and organization. But, with the support of 
Congress, I'm optimistic that we will succeed. Thank you, Madam 
Chairwoman.
    [The prepared statements and attachments follow:]
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    Chairwoman Johnson. Thank you, Commissioner. I'd like to 
start with a couple of questions that emanate from preceding 
hearings and from your testimony.
    First of all, in your budget brief, you make the point and 
you make it in italics, that the investment in technology--this 
section is entitled, ``Inadequate Near-Term Technology 
Investment Pending Long-Term Solutions Through Modernization 
Blueprint''--and I understand the difference between the 
modernization blueprint and the enormous investment in 
technology that you need to make to comply with the Year 2000 
challenge and also to meet some of your service goals in the 
near-term.
    Nonetheless, it is a startling statement. You say here, it 
will--while this blueprint and the funding that goes with it 
are essential for the long-term viability of the IRS, it will 
provide no improvement in support of current operations for at 
least three more years.
    Now, I would assume that your technology investments that 
you're going to make in the near term to meet the challenge of 
the Year 2000 and also to meet some of your service goals and 
to improve management and all the other things that you have 
laid out in your testimony, I would imagine that they would 
make, (a), some near-term improvement in operations and in 
service, but that they are coordinated with your long-term 
blueprint and, for the most part, would not have to be repeated 
in 2001, except for software changes. Now----
    Mr. Rossotti. Yes, Madam Chairwoman; the point that I made 
about the three years is that we really are operating on two 
tracks here because it's just the nature of where we are in the 
technology in the IRS. The one track which you were mentioning 
contains some of the things that are in the budget for this 
year which have immediate impact; like the Call Router and 
computers for collection agents who don't have any. Those will 
be useful for some years to come.
    The blueprint and the longer-term technology modernization 
really won't even begin until 1999. We've recently--just within 
the last week--issued the final version of the RFP. The ``Prime 
Contract'' award is designed to be made right at the end of 
this year in December and then the early stages of that--most 
of the work will be required to put in some of the sort of 
management processes--the system's lifecycle, as it's called--
that GAO, among others, has noted is necessary in order to 
really have the management tools to manage a large program like 
this, along with some relatively limited early releases along 
the blueprint. By the time those get rolled out, that will be 
into about the 2001 timeframe, which is, you know, almost three 
years from now and that will be about the time that we will 
start to begin to see the impact in terms of practical use of 
the investment we're making in this long-term blueprint.
    Chairwoman Johnson. I guess my question went to an issue 
that has been an issue for the IRS for as long as I've been 
Chairwoman of the subcommittee. And that is, whether or not 
your short-term investments are harmonious with your long-term 
blueprint and whether the investments we're making--recently, 
you were telling me about the number of computers that have to 
be replaced to meet the Year 2000 challenge. Now, are those 
going to be useful?
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. In the new blueprint?
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. Or are we going to have to 
replace them? That's the kind----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. That's really----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. What I'm asking.
    Mr. Rossotti. For the most part, they will be useful and 
that's designed--we call that in the buzzwords of technology 
the phase zero of the blueprint. In other words, it's sort of 
the piece that precedes the major piece. But, if you look at 
these----
    Chairwoman Johnson. But the technology investments that 
you're making now are harmonious with your long-term blueprint.
    Mr. Rossotti. Yes.
    Chairwoman Johnson. Isn't a stop-gap measure that will then 
have to be repurchased--different equipment purchased----
    Mr. Rossotti. Yes.
    Chairwoman Johnson. In two or three years?
    Mr. Rossotti. Yes, that's right----
    Chairwoman Johnson. I don't----
    Mr. Rossotti [continuing]. Although I do have to make one 
comment and that is when you buy things like personal 
computers, the average life of these computers in most places 
is at most maybe four or five years. So, you have a normal 
cycle of replenishment of these things. The hardware portion of 
this tends to have a certain defined life and you have to 
provide for those replacements in the normal course.
    Chairwoman Johnson. Right. I did use that example of 
personal computers but in developing your centers and in 
beginning the process of reducing the number of centers----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. You're going to be making 
some----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. Very big investments----
    Mr. Rossotti. Yes.
    Chairwoman Johnson [continuing]. In technology.
    Mr. Rossotti. Yes.
    Chairwoman Johnson. Will those mainframe investments will 
be compatible?
    Mr. Rossotti. Absolutely.
    Chairwoman Johnson. Okay.
    Mr. Rossotti. The mainframe--in fact, that's one of the 
places that, in the Year 2000, we do get some long-term 
benefit. That's actually one of the bigger pieces of the 
investment that we are making and that will absolutely be in 
the direction that we want to go because we'll be boiling the 
computing centers down to the two main computing centers which 
is where we want to be in the long-term blueprint.
    Chairwoman Johnson. Now, one of the really big problems 
that came to light in recent years and resulted in various 
provisions in the Taxpayers Bill of Rights and various 
requirements that this committee has placed on the IRS for 
reports of one kind of another was the evidence of uneven 
behavior among IRS agents and some agents using a very 
authoritarian and abusive technique.
    You have put a good deal of money in this new budget for 
training. What do you hope to accomplish? Who is going to get 
trained? What kind of training are they going to get? Is this 
only sort of top-level management to make your new management 
program work?
    Mr. Rossotti. Oh, no, actually, that's the least of it. I 
mean, the basic focus of the training that we're proposing in 
1999 in this budget--is for the front-line people that are 
dealing with taxpayers. I've spent many, many hours talking to 
front-line employees, both on video conferences and around the 
country, and we recently had a session where we actually had a 
process to survey front-line workers who are dealing with 
taxpayers, saying what are the things that you think you need 
most in order to do a better job.
    And the number one thing--actually, there were two that 
were tied--technology was one which we already noted. The other 
one was better training and, in particular, simply better 
training in some of the basics, like the tax law changes. I 
mean, if there's going to be 800 tax law changes, they say we 
feel very uncomfortable when taxpayers are pressing us for an 
answer and we don't get enough training in what has happened in 
the tax law, we don't get necessarily up-to-date materials. So, 
when we're talking about this training in Fiscal Year 1999, 
we're talking about very practical training for front-line 
employees who are going to be working with taxpayers, either 
over the phone or in person.
    Chairwoman Johnson. Yes. Now, this year you've separated 
out the cost of administering the Earned Income Tax Credit and 
it's going to cost you, at least you're requesting $143 million 
for EITC administration next year. What is that cost per 
return?
    Mr. Rossotti. Cost per return? That's a number that I don't 
have--I'll have to get back to you on that.
    [The following was subsequently received:]

    Question. What is the cost per return for administering the 
EITC initiative?
    Answer. The IRS is currently developing an Activity Based 
Costing that will provide the cost per return specifically for 
administering the operational portion of the EITC Initiative. 
This costing will cover the cost of processing the return, 
issuing notices and/or refunds, and any compliance actions. The 
EITC Initiative Plan includes direct work (processing of 
return, issuing notices, and compliance actions) as well as 
items such as taxpayer education and outreach efforts, research 
project funding, postage and printing, and EITC systems 
development that are not traditionally captured in cost per 
return calculations.

    Chairwoman Johnson. I hope you will get back to us----
    Mr. Rossotti. I will.
    Chairwoman Johnson [continuing]. I think it's very useful 
to have that----
    Mr. Rossotti. I will.
    Chairwoman Johnson. I also will be very interested to know 
what the fraud level is in this round of returns, since we've 
made a number of changes----
    Mr. Rossotti. Right.
    Chairwoman Johnson [continuing]. So, I won't go into that 
now but I do want to know the cost per return and I think the 
committee wants to know promptly what your experience is as the 
season closes in the area of fraud.
    [The following was subsequently received:]

    Question. What is the fraud level this year on EITC 
returns?
    Answer. The IRS undertook a study of EITC which involved a 
statistically valid random sample of EITC returns filed 
throughout the 1995 filing season. The study results showed 
that EITC claims filed during the 1995 filing season contained 
errors that required adjustments both upward and downward. The 
final study results provided a baseline from which to analyze 
further studies of the effectiveness of our EITC administrative 
efforts. There are several programs which work with a portion 
of the EITC returns to determine the correctness of those 
returns. The largest programs being the math error program 
which looks for systemic problems, missing or invalid SSNs, and 
the examination program where questionable returns may be 
audited to determine the correctness of the EITC claims. A 
study on EITC for the 1998 filing season is currently in 
process. A fully developed and reviewed report including an 
EITC level of compliance measurement is expected to be 
available in 1999.

    Chairwoman Johnson. Let me turn to Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman. Commissioner, over 
the past few years your budget has not been as high as--the 
amount of money allocated in the President's budget for the 
coming year and I was just wondering if, as a result of that, 
there any activities that you were unable to complete or to be 
involved in as a result of a reduced budget?
    Mr. Rossotti. Well, Mr. Coyne, actually one of the most 
important was that, in the last two fiscal years--meaning 
Fiscal Year 1998 and Fiscal Year 1997--almost all of the money 
that would have gone to any investment in technology was 
deferred, was eliminated. I mean, it was all spent. It was 
used--it's being used for the Year 2000 conversion but, of 
course, that's pretty much just something you have to do in 
order to stay even. So, I think in terms of technology we had a 
deficit to begin with and it got deeper as a result of this.
    The training was another major area--you know, we used all 
available resources to put people on phones and continue to do 
the compliance programs but, as reflected in the comments of 
the employees, the training was cut.
    I think those are probably two of the more significant 
areas. The other thing that has happened is in some of the 
compliance areas--and I'm trying to do more studies of this--
while the compliance programs have been maintained, there's a 
certain unevenness that's developed, especially geographically 
and across different segments of the population, because of the 
fact that where people came off the payroll, they came off 
where, you know, attrition took place or where they would 
accept buyouts which generally was in the higher-growth 
economies geographically speaking. Whereas in some of the 
economies that were--segments of the country that didn't have 
as tight a labor market, people didn't take the buyouts, didn't 
``attrit.'' So, we ended up with a sort of uneven balance of 
compliance resources.
    So, these are some of the things that have happened over 
the last three years as a result of the constraint of the 
budget. Now, I will say this was before I got here that there 
were some very difficult and painful reorganizations that took 
place that did cut some administrative overhead which I think 
was an appropriate thing to do and which I think could be 
justly characterized as an ``efficiency gain'' rather than a 
loss of anything that was necessary. So, there were some hard 
decisions made by my predecessor and others to do that. But, 
that was not all of it; there were certainly losses--certainly, 
the technology, the training, and some of the balance of where 
the people are.
    Mr. Coyne. Did that transfer into a not-so-ideal situation 
relative to taxpayer services?
    Mr. Rossotti. Well, it would have except that, of course, 
one of the things we've done in the last two years is to 
dramatically increase the emphasis on taxpayer service. So, I 
think, you know, the balance was struck to be able to try to 
improve taxpayer service, even in the face of these other 
constraints.
    Mr. Coyne. Could you give us some sense of what the audit 
rate might be under the proposed budget that you brought before 
us today?
    Mr. Rossotti. I don't have that number with me but we can 
get that for you.
    [The following was subsequently received:]

    What is the audit rate under the proposed FY 1999 budget?
    The audit coverage figure is 1.17%.

    Mr. Coyne. All right. Thank you very much.
    Mr. Rossotti. Thank you.
    Chairwoman Johnson. Mr. Portman.
    Mr. Portman. Thank you, Madam Chair, and thank you for your 
testimony today, Commissioner. We have little time and I have a 
lot of questions so I'll try to be as brief as I can. I would 
appreciate your answers being to the point, too, as they always 
are.
    First of all, congratulations on what seems to be a 
relatively successful and smooth filing season. Following along 
with Mr. Coyne's question with regard to the audit rates and so 
on, I just have a general question for you which is, the degree 
to which the shift to customer service, which I generally 
support as you know, is enough to offset the kind of revenue 
that the government is likely to lose from the audit rate 
which--when you get back to Mr. Coyne--will probably be 
revealed to be a lower percentage.
    And, how do you deal with that? And how do you feel about 
that? Do you think that there's going to be a payoff from 
improved customer service that will counter that?
    Mr. Rossotti. Yes, well, let me say that that is a complex 
question and obviously, you know, we don't have quantitatively, 
verifiable data to say what is going to happen.
    I think that if you look at what was happening a few years 
ago, you know, when the access rates were low and the service 
was much lower than it is now, I mean you really had an 
untenable situation.
    As I saw it, you were sending out notices to people telling 
them they owed money or that they had to do certain things to 
comply and then if they had a question about it, they wouldn't 
be able to get through on the phone which, to me, is something 
that is really not a tolerable situation. One has to believe--
even though we can't prove it at this point quantitatively--
that that's going to hurt compliance.
    I think that there have been some things that the IRS has 
done to try to offset the impact of the way that resources have 
been allocated. For example, the math error capability that was 
added which allows certain kinds of checks to be made in the 
up-front processing of tax returns--to check social security 
numbers, for example--used to be done under the audit program. 
It's now built in as part of processing tax returns. I think 
there was something like a half a million returns that were 
done under the audit program a couple of years ago that have 
been built in to processing.
    As when I said my original testimony to this committee the 
last time, is I think if we can get the money for training and 
technology, we can do what a lot of private sector companies 
do--we can keep our workforce stable, we can improve the 
quality of the way it works and still be able to achieve our 
customer service goals and our compliance goals and, as the 
Chairwoman noted, increase the volume. I really think we can do 
that if we can get the investment money and if we can get the 
time to make those things happen. And I think already there's 
been some signs of that happening.
    Mr. Portman. Let me ask you a specific compliance question. 
This is one that's always troubled me and I think a lot of 
members of the committee and that is that the Office of Appeals 
generally rejects about two-thirds of the revenue agents' post-
audit request for additional taxes and I just wondered if you 
can comment on that briefly. Does this suggest that revenue 
agents are seeking unreasonable high amounts? Does this suggest 
they're trying to make themselves look good in front of their 
superiors? And why would there be a two-thirds rejection rate 
by the Office of Appeals?
    Mr. Rossotti. Well, that's a very good question and I've 
asked that question. I honestly don't know that we know exactly 
what the answer is but I will tell you one thing that we are 
doing that has been suggested by a number of people that may 
have some impact on this.
    As you know, we're in the process of changing the entire 
measurement system for----
    Mr. Portman. The measurements of performance that there may 
be some reason that----
    Mr. Rossotti. It might be. I mean, no one can prove that 
but--we're definitely changing--the measurement system so that 
we will not be measuring it in such a way that it would 
potentially give somebody encouragement to just build up 
assessments and I don't know that that has actually happened--
    Mr. Portman. I would just suggest, as we're talking about 
compliance and how to make compliance more efficient with 
limited resources, that may be one area where one could look 
closely and talk about more targeted use of the resources.
    Quickly, on Year 2000--you talked a lot about it today, I 
know you're very concerned about it, and I guess the question I 
would have and--not to be negative here--but what are your 
contingency plans? What if you don't become compliant by the 
Year 2000? Are you going to be able to revert back to some 
equipment that is not compliant in terms of the type of 
equipment or the type of application? Do you have a contingency 
plan, a back-up plan if we're not there?
    Mr. Rossotti. Reverting to old equipment doesn't do it 
because the old equipment isn't compliant. What we are doing is 
we are trying to very specifically identify our risks and 
figure out those places where we need to have--and where it's 
feasible to have--a contingency plan. That's where we're 
putting our emphasis on contingency planning and I'll give you 
an example.
    One of the major programs that Madam Chairman mentioned was 
the consolidation of the mainframe computers at the two sites. 
In that case, that's a very, very big program, that obviously 
has a lot of risk to it. The target is to get all of the 10 
service centers converted to 2 computing centers before the 
year 2000.
    However, we do have a contingency plan. We don't need to 
absolutely do that. The contingency plan would be to upgrade 
some of the computers in the sites that they're already in, and 
we're preparing that kind of a contingency plan. But----
    Mr. Portman. At what point in time do you make that 
determination?
    Mr. Rossotti. Pardon me?
    Mr. Portman. At what point in time do you decide that you 
need to revert to the contingency plan?
    Mr. Rossotti. We're deciding these--every month. I mean, I 
personally have a meeting every month with a high-level group 
and we go over these kinds of things on each risk-area every 
month. We made this decision, for example, just this last 
month, related to these mainframes.
    Mr. Portman. I have additional questions on EITC and maybe 
we'll have time at the end of the session. Thank you.
    Chairwoman Johnson. Mr. Tanner.
    Mr. Tanner. Thank you, Madam Chairman. I want to follow up 
on the Year 2000, if I could, Commissioner. And thank you for 
being here today.
    I am not as concerned, I guess, about the fact that you all 
will do, I think, what you need to do to get your computers 
compliant with whatever technology is available for the purpose 
intended.
    At the moment, what about all of the people who communicate 
with you and who may not be in the same position? That's, I 
think, one of jobs facing not only the Congress in terms of 
education and public awareness but also the service as well. 
And so, do your contingency plans--could you briefly describe 
where we are with that? Thank you.
    Mr. Rossotti. Yes, that is, in fact, a very good point. 
When we talk about Year 2000, it's not just converting our own 
application programs. There's a whole series of areas that we 
include under our management program. And one of them is the 
very area you're talking about--we call it ``external trading 
partners.'' These are people we exchange data with--like the 
States, the people that send us information returns. We have a 
whole office of people who are tracking those people, 
especially the major ones. I don't have the exact number here 
but I think there's about 67 or some number like that that's 
the top priority ones and then we've got the next priority 
ones. And we have a whole program to communicate with them and 
actually to test at the appropriate time the ability to 
interchange data with them.
    So, I mean, it is a focus area. I will say that based on 
the reports I've gotten right now for at least the top-priority 
ones, that is not one of the ones that is in the most cautious 
status. We seem to be doing pretty well at least for our major 
trading partners.
    Mr. Tanner. Thank you, Madam Chairman, I yield back.
    Chairwoman Johnson. Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman. First of all, I 
want to take a few moments just to say that in the short period 
of time that I've been on this committee, we've asked a lot of 
questions of the IRS in bringing forth information, letting us 
know how you do communicate with our constituents. Certainly 
what I think you've brought back to us today says that you have 
done a much better outreach program than I think I would have 
anticipated in the two years that I've been here and been 
listening to some of this. So, first of all, I want to 
compliment you on that fact. And I want to compliment you 
because it's an issue that I raised several months ago; and 
that is the outreach you've done with your front-line people. 
Those are the people that our offices are talking to, those are 
the people that we have to go to to get our questions answered, 
and certainly those are the people that I think are going to 
need to have the information to best provide for the taxpayers 
out there. So, I compliment you on recognizing that that front 
line is an extremely important part of this.
    In keeping with that and in the information that I've 
received over the last couple of years, the EITC and small 
business seem to be the two areas that we've had the hardest 
time in compliance, certainly from the electronic filing, 
possibility of the 16-hour telephone service, the kinds of 
things that you've done to outreach.
    What other kinds of things are you doing or do you 
anticipate doing to try to bring--I think the number that I 
heard for sole proprietors, small businesses, is about 40 
percent. If you bring in some cash businesses, it might go up 
as high as 60 percent. EITC, I think, was at one time 25 
percent. Is it now down to about 17 percent? Is that 
somewhere----
    Mr. Rossotti. Well, I don't think we're----
    Mrs. Thurman [continuing]. Around those numbers?
    Mr. Rossotti. We don't have up-to-date numbers. We're doing 
a study to find that out. But I think that, you know, it is 
interesting that you put both of those together.
    In these areas where there's noncompliance, I think that 
the strategy that we're following right now with EITC is 
generally the strategy we want to follow with all non-compliant 
areas, which is to have a strong emphasis on preventing the 
problem in the first place, by such things as what we did with 
EITC; mailing out notices to people that have previously 
claimed an EITC they weren't entitled to and tell them, look, 
you really shouldn't be claiming this or, if you are, you need 
to provide us with better information. Get the problem resolved 
upfront. Have education, outreach kinds of activities. Educate 
the practitioners.
    Then, at the back end, you also need to apply your 
resources to identify those people that, continue to non-comply 
even after that, and that's why we have these various detection 
programs, to try to detect and, where possible, prevent the 
refunds from going out.
    I think with all other areas, whether it be small business 
or elsewhere, that most people, given the right services and 
the right kinds of education, will comply if they know they're 
supposed to and if they understand that really is a mandatory 
requirement. I think better working with some of the small 
business groups; better support for people that are starting up 
small businesses--which is something I knew something about in 
my previous life--those kinds of things will, I think, help.
    That's one of the reasons in the long term that we need to 
organize the IRS into units that are dedicated to understanding 
those particular kinds of taxpayers. If we get to the point 
where we have a small business unit that basically services all 
the taxpayers, they can, then, get to be very, very 
knowledgeable about all the specific problems--the specific 
problems for each industry whether it be the construction 
industry, the software industry, and all the different 
industries and work with those associations; work with those 
people, and figure out what do we need to do to help these 
people understand their obligations; keep them in compliance, 
and limit our enforcement resources where they should be to 
those people who really just aren't willing to comply after 
we've done that. Now, that's, the long-term strategy that we 
want to go to, and we're pursuing that this year with EITC as 
much as we can.
    Mrs. Thurman. As you see and start to pull that information 
and, particularly, as you've kind of singled because you have a 
special account to work on EITC, do you potentially see 
something that people complain about the most--and that is the 
complexity of the forms, the kinds of things that we hear 
about--do you see that as maybe an offspring of this to the 
possibility that we'll see some of the paper reduction in these 
kinds of filings for these particular folks?
    Mr. Rossotti. Well, I hope that as we learn more----
    Mrs. Thurman. Beyond what we're doing up here to add 800 
pages in new tax laws.
    Mr. Rossotti. I think there's potential for that in the 
sense that if you have people that are working with a 
particular group of taxpayers and they see problems--and this 
is what we're trying to do with the Taxpayer Advocate Network--
they can come back and they can recommend not just specific 
cases but how we can systematically improve the system, and one 
way, of course, is to redesign the forms; to have better 
education. We are going to be doing that as part of our 
customer services initiative improving some of the 
publications. Of course, there are limits based on what the tax 
law says.
    Mrs. Thurman. I acknowledge that. [Laughter.]
    Mr. Rossotti. But I do think there's potential to improve 
that, yes.
    Mrs. Thurman. Thank you.
    Chairwoman Johnson. Mr. Rossotti, I'd like to proceed with 
a couple of more questions myself; I know Mr. Portman does and 
if my colleagues have other questions, we'll have a short 
additional round.
    There are two things that I want to approach. First of all, 
in your plans for customer service, you don't mention--you 
don't advance any interest in reorganizing your very front line 
personnel. We had a very, very interesting hearing at which the 
taxpayer advocates testified, and they were very high on the 
special tax days that the agency has been doing, the Saturday 
days, the problem-solving days, but they made a very important 
point: part of the success of those days was due to the fact 
that everyone on the team was there, and they could take the 
taxpayer's problems and all the people they would have to run 
it through and ask questions of were there, so they could solve 
it. Now, I thought--and we discussed this at some length--I 
thought that was a very important bit of testimony, because--
and that kind of reorganization needs to be thought through at 
the local level if you're really going to be a problem solving 
agency and not one that takes in the problem; runs through a 
million bureaucratic hoops, and hopes that at the end it comes 
out solved in a timely fashion. That kind of front line 
reorganization, I think, is extremely important and is what has 
made the difference in the private sector.
    Mr. Rossotti. I couldn't agree with you more, Madame 
Chairman. If you look at this organization chart of the whole 
IRS, by the time you get down to the front line employees, 
they're divided up into these, what we call, stovepipes, 
functional areas, that are then under quite of few layers of 
management.
    Chairwoman Johnson. Yes, I do think the idea of 
reorganizing according to the subject matter expertise is very 
good. This is way below that, and it's probably not something 
that you can do entirely from the top. It's something that 
they--each office is going to have to figure out how to do, but 
just Saturday problem-solving days isn't the only time you need 
the whole team at the table.
    Mr. Rossotti. No, I think that the concept that I've 
proposed organizing is not just strictly at the top. I think 
that when we get to the next level of detail which we're 
currently studying, I think we will find that--the whole point 
is to deliver what the customer needs, not what is organized 
according to the IRS.
    Chairwoman Johnson. Well, I thought that was the most 
significant comment that was made by the advocates about what 
they had learned from the problem-solving days, and I'll be 
interested to watch to see if that's----
    Mr. Rossotti. Well, I would agree with that very, very 
much, and if you diagram the way that the current IRS 
organization works, it makes it very difficult to do that 
except on an exceptional basis.
    Chairwoman Johnson. There is one area in which I have a 
significant question about how you're going to--about your 
budget decisions. First of all, it is truly remarkable, the 
increase in electronic filing, telefiling--electronic filing up 
28 percent; telefiling up 68 percent; some other statistics 
along those lines that are very impressive. From past hearings, 
while we couldn't exactly agree on how much is saved, there was 
general agreement that an electronically filed tax return is 
far cheaper for the agency to process than a paper filed tax 
return. So, clearly, this level of increase of activity does 
save the agency some money. Consequently, I find it really hard 
to understand why you're going to continue to function with 
only 1,682 cross checkers. Now, you used to have 3,322 
employees who cross checked interest and dividends reported on 
individual tax returns, and you used to collect $3.5 billion 
just from cross checking. Now, the agency now has 1,600 people, 
so it has about half the number of employees, but it's only 
collecting about one-third of the amount of revenue. It's 
collecting--your prediction next year is that you will collect 
$1.2 billion from this activity as opposed to $3.5 billion.
    Now, first of all, half of the employees ought to be able 
to collect at least half the money; that's a problem. Secondly, 
this is clearly an area in which personnel matter. I don't know 
how you cross check if you don't have the people to do it. It 
also is clearly an area of high yield. So, there are areas in 
which outside of the whole ``we need more money'' issue--and I 
agree you need more money, and I'll work with you to get more 
money--nonetheless, are you deploying your resources in the 
most powerful way when you're clearly reducing people power 
demands in some areas, and you're not pumping them up in an 
area where there is an obvious big bang payoff for the 
taxpayers?
    Mr. Rossotti. Well, I'd like to be able to get back to you, 
perhaps, in writing----
    Chairwoman Johnson. Yes, I'd appreciate that.
    [The following was subsequently received:]

    Question: The IRS cut about half of the employees from the 
document matching program but is only collecting about one 
third of the revenue. Why aren't employees being moved from 
areas where demand is reducing to the document matching 
programs where there is a big payoff?
    Answer: IRS is constantly trying to balance scarce 
resources while prioritizing its program objectives. In the 
area of our document matching program, we made a program 
decision to shift some of the resources originally directed 
towards document matching towards increasing the Service's 
ability to respond to the more taxpayer telephone inquiries 
during the past filing season. Although the document matching 
program's resources were reduced, we believe that our shift 
significantly enhanced our educational efforts through greater 
contact with taxpayers and, indirectly may have had a 
beneficial impact upon taxpayers to avoid future contacts 
within the document matching program.

    Mr. Rossotti. But let me just say that one of the issues 
here is that the total staffing in the IRS, if you look over 
the last 3 years, has gone down by 10,000 people. The number of 
returns processed has gone up by 8 percent in total which is 
more returns, by far, than--in terms of an increase--than we've 
saved in terms of how many have gone up through electronic 
filing, because even though our filing's gone up 25 percent, 
it's 25 percent of a small base. The whole economy has grown 
enough to add that many returns, so it's certainly more 
efficient relatively but in terms of absolute numbers of 
people, we've got to process more returns. In terms of the 
specific allocation of people to that specific function in 
terms of document matching, though, I don't have those numbers 
in my mind, so I could get back to you in writing?
    Chairwoman Johnson. Yes, I would like you to get back to 
me.
    Mr. Rossotti. I will.
    Chairwoman Johnson. In the same sort of context, I was very 
distressed by a report in the newspaper that we did verify and 
your people said was accurate--this is in February of this 
year; it's now March, so this is a recent report, and this Ms. 
Marvel didn't name any officers but said there's been 
historically a tendency on the part of some, not all, of the 
revenue officers who contact taxpayers to start that dialogue 
with an enormous chip on their institutional shoulder. This 
creates a level of acrimony and a level of perception of 
persecution that is really not what the system should convey or 
intends to convey.
    Now, you have mentioned that you are very interested in 
training, and I know from talking with you in other instances 
that you fully understand that this training has got to correct 
this kind of problem, but I think this also goes to the problem 
that Mr. Portman raised of the number of revenue agent 
recommendations that are actually rejected on appeal. I have no 
idea how many are paid that should not have been paid just 
because people can't tolerate the process of or front the money 
of an appeal. I think we really do have to be very aggressive 
about training, and I think when we do that we're going to save 
some money in some other places, and I would like you to get to 
me on the cross checkers, because I think that's one area that 
we need to look at as we move through this budget process.
    Mr. Rossotti. On the training, I think that the whole 
business that we're talking about is how do we convert the 
whole agency, to an agency that says, ``Look, our job here is 
to assume the taxpayers want to comply; we want to help them 
comply, and then if they don't, then, and only then, do we 
apply the more stringent kinds of enforcement tools.'' That is 
a big change, okay, and it involves more than one thing; I've 
laid out a number. One of them is, of course, the measurement 
issue; another one is the training, and it is somewhat 
technical training, but it's also some of the practices that 
you mentioned about how you go about doing an interview. In one 
of our programs that we're working on, we have one of the 
people working on specifically that issue with respect to 
collections about how do we retrain or restructure some of the 
interviewing process for revenue officers, and it's obvious 
that there are opportunities to improve in that area. It's just 
that when you have that many people, it takes a little while to 
get it done, but I am very encouraged by the response I've 
gotten from the front line employees. I really think that 
people are ready to change, and they want to make these kinds 
of changes. They're asking for help in the form of training and 
other kinds of tools.
    Chairwoman Johnson. I appreciate that, and for those who 
are listening--and there always are some that are interested 
enough in what we're doing to listen--I do affirm my 
congratulations to you and the people who work in the IRS and 
the tremendous effort you've made in the last year to respond 
to the concerns that have been raised publicly and the many, 
many, many changes that have been made to make the agency more 
efficient and more customer friendly and more responsive as a 
customer service bureau.
    There are problems and that's why I wanted to be sure that 
the record did contain a recent complaint, because it's only if 
people keep talking to all of us--to you as well as to us--that 
we can make sure that the statistics not only represent 
progress but that we are creating a different environment for 
our employees; a different way of serving the public, and a 
different style of collecting taxes, and I think it will take 
awhile to make sure that the statistics represent reform at the 
kind of human level that we all know is important and are 
committed to achieving.
    I'd like to yield to Mr. Portman.
    Mr. Portman. I thank the Chair for the second round, and 
I'd like to focus a little on the earned income tax credit, if 
I could. This is something that troubles, again, a lot of us on 
this committee because of the mispayments. I think this year 
we're estimating they'll be, what, about $5.4 billion worth of 
mispayments which is well over half of your budget request 
today, and we continue to see, as Ms. Thurman mentioned, real 
compliance problems there.
    I guess I would have a couple of comments: one, is having 
looked at the GAO statement today--I know we're going to hear 
from Lynda in a moment--but on page 41, it talks about the fact 
that, at least according to GAO, the IRS is not using the 1995 
study the IRS undertook which showed that there was about a 26 
percent error rate; about 26 percent of the dollars were being 
misclaimed, and I wonder if you could respond to that first to 
be sure that that's not the case; that, in fact, you are using 
that as part of your baseline?
    And then I want to talk a little about your compliance 
efforts. You've just asked for $143 million for the second year 
of a 5-year compliance effort. If you're not using that 1995 
study as a baseline, that would obviously concern me, and 
that's the implication from GAO's testimony today.
    And then I want to talk to you a little about what you are 
doing in your study.
    Mr. Rossotti. Well, first of all, I wanted to bring my 
colleague here, Mr. Dalrymple, who's more or less directly in 
charge of this. On the matter of the baseline--and John will 
elaborate on this--but I think that it's not that it's not 
being used, it's just that what we're trying to do is to come 
up with----a preliminary kind of an informal study that was 
done by the Criminal Investigation Division and not by the 
people that normally do compliance studies; research that is 
more statistically sound. So, it is a useful study, but what 
we're trying to do is, since we have this 5-year program, to 
create a more reliable and more statistically-based kind of 
baseline which we will then use every year.
    Let me just ask John to talk about that and also the other 
issue you talked about, about what we're doing in compliance 
this year.
    Mr. Portman. OK.
    Mr. Dalrymple. Actually, I'll reiterate part of what----
    Mr. Portman. My time is limited, John, as you know.
    Mr. Dalrymple. Yes, okay. I won't reiterate too much. The 
CID study that we did, which we shared with this committee last 
year, actually took place prior to all of the changes that 
Congress made and allowed us to implement such as math error 
changes for invalid and missing social security numbers, et 
cetera, which we expect would have a substantial impact on 
overclaim rates.
    Mr. Portman. Moving it from, what, about 26 percent to 21 
percent?
    Mr. Dalrymple. Well, we're really not sure, actually, I 
mean, that's really the problem. So, that study, the beauty of 
it was that it pointed up a significant problem that we had; 
allowed us to create some additional screens in our screening 
processes for overclaims and identify schemes, and we followed 
that up with another study the following year, but both those 
studies predate the changes in the law. So, what we're doing 
this year is a very precise research study which we believe 
will show exactly what the compliance rate is this year, and we 
will follow that up each year of the compliance initiative, or 
the EITC Initiative, with another compliance study, and we'll 
be able to tell from the baseline this year what impact steps 
we're taking this year have had.
    Mr. Portman. So, the funds which were appropriated last 
year are being used, in part, primarily for a benchmark study 
that would then be used going forward to see whether your 
compliance efforts are successful?
    Mr. Dalrymple. Right. It's not really a huge part of the 
$138 million, but it is a study that's being done this year. 
It's going to affect about 2,500 tax returns.
    Mr. Portman. And when is that study due?
    Mr. Dalrymple. That study is being conducted right now. We 
expect to have preliminary results in time for us to affect 
next filing season, and I'll have to get back to you with the 
exact date that we expect the study results.
    Mr. Portman. Another point GAO makes--which I know you're 
very well aware of--was your efforts this year with regard to 
increased information, public information, and so on, probably 
won't be affected because, yes, these folks tend to file 
earlier because they're getting a refund, and so when you say 
for next filing season, I guess that would mean sometime during 
this calendar year.
    Mr. Dalrymple. Yes, it would, and, actually, it's 
interesting because we did quite a bit of work early this year 
to try to ensure that folks knew about the credit. For example, 
we sent information letters to 100 of the top employers most 
likely to employ taxpayers who would be eligible. We sent 6 
million EITC recipients informing them of the advanced EITC 
credit. We sent a notice to approximately 2.5 million taxpayers 
who did not claim the credit but we thought were eligible, and 
took other measures. And our EITC filings are up dramatically 
this year, and the total rate of examinations is actually down, 
so we think we hit the right mark there. In addition to that, 
we've put in a substantial number of new screens, and we've 
done substantial work, also, in the compliance arena which I'd 
be more than happy to supply you with.
    Mr. Portman. Is one of your major problems social security 
numbers?
    Mr. Dalrymple. That is one of the major areas that we're 
looking at. And the math error legislation that you helped pass 
has been a significant help to us.
    Mr. Portman. What does it cost you to check social security 
numbers with paper returns?
    Mr. Dalrymple. I have to get back to you. I don't know that 
off the top of my head.
    Mr. Portman. Just one point I would make--and I appreciate 
the indulgence of the subcommittee--is that I've heard numbers 
as high as $60, $70 to check the social security numbers. If 
that's true, then there certainly would be an advantage to move 
to electronic filing rather than the paper returns and I wonder 
whether there are efforts being undertaken on the electronic 
side to encourage electronic filing?
    Mr. Dalrymple. Yes, there are, to answer that question. We 
are highly encouraging that, and, of course, there's huge 
advantages to us there because we check them up front and then 
reject them out of the system before they ever come in, so we 
encourage that highly, and, in fact----
    Mr. Portman. They need to be screened.
    Mr. Dalrymple [continuing]. Our trading partners----
    Mr. Portman. But at no cost. Well, I guess, if you could 
get back to me on the social security issue, specifically, and 
any detail you could give us as to what you plan to undertake 
with this money, you started to outline it in general terms--I 
think we're out of time now--and then the more general question 
I have is whether you're going to give us a benchmark that we 
can then use for policy purposes here within the year? It would 
be very helpful for us.
    Mr. Dalrymple. I'll get you those dates.
    [The following was subsequently received:]

    Question: What does it cost to check social security 
numbers with paper returns for EITC compliance?
    Answer. Using 1996 data, the average cost to check social 
security number per paper return claiming EITC is twenty-two 
cents. This takes into account all processing and validation 
costs up to the point it becomes necessary to issue a math 
error notice.
    Question: What does the IRS plant to do with the additional 
funding requested for the EITC compliance initiative?
    Answer. The IRS plans to expand on the FY 1998 EITC 
inititive in FY 1999. The 1998 initiative includes plans to 
expand customer service efforts with dedicated toll-free 
telephone assistance, increase community based tax preparation 
assistance sites, and develop a marketing and educational 
campaign. The IRS will also expand compliance research efforts. 
Enhanced computer capabilities will allow the IRS to identify 
and select questionable EITC claims prior to refund issuance. 
Funds also are included to reimburse State vital statistics 
offices, through the Social Security Administration, for 
expanded data associated with social security numbers. Finally, 
expanded examination and criminal investigation staff in the 
district office and service centers will assist our efforts to 
address questionable or potential EITC fraud.
    Question: Is the IRS going to provide a benchmark for EITC 
compliance that Congress can use for policy purposes within the 
year?
    Answer. A study on EITC for the 1998 filing season is 
currently in process. The goal of the study is to establish a 
baseline for measuring EITC compliance. A fully developed and 
reviewed report including an EITC level of compliance 
measurement is expected to be available in 1999.

    Mr. Portman. Thank you. Thank you, Madame Chair.
    Chairwoman Johnson. In addition to that, you'll get the 
figure that I asked the commissioner for earlier, the cost per 
filing.
    Mr. Dalrymple. Right. I have that also.
    [The following information was received:]

    Question: What is the cost per return for administering the 
EITC initiative?
    Answer. The IRS is currently developing an Activity Based 
Costing that will provide the cost per return specifically for 
administering the operational portion of the EITC Initiative. 
This costing will cover the cost of processing the return, 
issuing notices and/or refunds, and any compliance actions. The 
EITC Initiative Plan includes direct work (processing of 
return, issuing notices, and compliance actions) as well as 
items such as taxpayer education and outreach efforts, research 
project funding, postage and printing, and EITC systems 
development that are not traditionally captured in cost per 
return calculations.

    Chairwoman Johnson. We'd like to have that report as soon 
as you conclude it, that you're doing now, your oversight 
report.
    Mr. Dalrymple. Okay.
    [The following information was received:]

    Question: What is the date the study on current year EITC 
returns will be available?
    Answer. The Compliance Research study on EITC for the 1998 
filing season is currently in process. The goal is to establish 
a baseline with the data. The steps of the study include the 
selection of returns, examinations of the returns, and analysis 
of the information. A fully developed and reviewed report, 
including an ``EITC level of compliance'' measurement, is 
expected to be available in 1999.

    Chairwoman Johnson. Mr. Coyne.
    Mr. Coyne. Thank you, Madame Chairwoman. Commissioner, are 
there any results in yet from the EITC awareness day that was 
conducted this past Saturday in 150 sites across the country?
    Mr. Rossotti. We are going to collect the comments from the 
taxpayers, but we don't have them in yet; it was just this 
Saturday.
    Mr. Coyne. Nothing you could share with the committee at 
this point?
    Mr. Rossotti. Sure.
    Mr. Coyne. The current study that's being done, the EITC 
study, are you going ask that it distinguish between errors and 
fraud?
    Mr. Dalrymple. Well, we're actually looking at what we 
consider to be overclaim rates. It is extremely difficult in 
these scenarios--I mean, if we see some really abusive things 
here, we will make referrals out of this process, but it is a 
research study, and what we're looking for is, in general, 
overclaim rates. And it's very difficult to determine 
willfulness in those kind of situations. Now, it's not to say 
we may not find some really abusive situations which we would 
then refer to our criminal investigation units, and if we do 
that, we consider that there was, potentially, some fraud 
involved.
    Mr. Coyne. Well, don't you think that it would be important 
to go the extra mile for people who do make innocent errors 
like we all do on our tax returns; to distinguish that between 
fraud and innocent errors?
    Mr. Dalrymple. Well, that's how we do distinguish them, 
Congressman, I'm sorry. If we see badges of fraud in this 
study, we will know how many--it's a statistically valid 
study--and we will send those on to our criminal investigation 
unit, so, to the extent that we see that, we will be pursuing 
it.
    Mr. Coyne. So, the answer to the question, will we be able 
to distinguish between innocent errors and fraud, is yes?
    Mr. Dalrymple. A qualified yes. Innocent errors--I mean, 
there are all kinds of errors, and whether it reaches the 
threshold for fraud and the definition for fraud is another 
issue. Does that make sense?
    Mr. Coyne. Yes. Thank you.
    Chairwoman Johnson. If there are no further questions? 
Thank you, Commissioner Rossotti. We appreciate your testimony, 
and we look forward to working with you on the budget issues.
    Mr. Rossotti. Thank you very much, Madame Chairwoman.
    Chairwoman Johnson. I'd like to call next, Lynda Willis, 
the Director of the Tax Policy and Administration Issues at 
USGAO, General Accounting Office. Ms. Willis, welcome to you 
and your staff.

STATEMENT OF LYNDA WILLIS, DIRECTOR, TAX POLICY ADMINISTRATION 
         ISSUES, UNITED STATE GENERAL ACCOUNTING OFFICE

    Ms. Willis. Thank you, Madame Chairman. I'm very pleased to 
be here today and with your permission, I'll ask that my 
written statement be put in the record in its entirety, and 
I'll just very quickly hit the highlights of what we have to 
say today.
    Chairwoman Johnson. Thank you. So, ordered.
    Ms. Willis. I have with me, today, my associate, Jim White, 
and also the Assistant Director responsible for our technology 
modernization work, Randy Hite.
    The most critical issue IRS faces this year and next is the 
need to make its computer systems year 2000 compliant. The goal 
is to implement all year 2000 efforts by January of 1999 to 
allow time for testing, and with the IRS, as you are all aware, 
it is very important to have enough time to test the new 
systems during a filing season before we go into the year 2000. 
IRS' latest cost estimates indicate that additional funds will 
be needed for Fiscal Year 1998 beyond the amount already 
available. IRS is also refining its budget estimates for Fiscal 
Year 1999 in light of more current information.
    For Fiscal Year 1999, the administration is also requesting 
an additional $323 million for IRS' information technology 
investments account. Combined with the $325 million 
appropriated for 1998, that request would increase the 
account's total to $648 million. Because we believe that $246.5 
million of the request has not been justified on the basis of 
analytical data or derived using a verifiable estimating 
method, we believe that Congress should consider reducing the 
administration's request by that amount.
    The administration's request also includes $103 million to 
enhance customer service. IRS plans, among other things, to 
provide better telephone service; improve customer service 
training, as you discussed; and strengthen the Taxpayer 
Advocates Office. We believe all of these areas are critical to 
good customer service and need improvement.
    Each year IRS submits detailed budget estimates to support 
the administration's budget request. In our opinion, several 
factors limit the utility of the budget estimates for oversight 
purposes. For example, the estimates do not provide the kind of 
information needed to determine how much of the 
administration's request is for taxpayer assistance as opposed 
to enforcement. One aspect of IRS' budget estimates that has 
improved over the years involves the use of performance 
measures, however there is still much work to be done in that 
area and many challenges to overcome. Both of these things are 
very critical to IRS' successful implementation of the 
Government Performance and Results Act.
    Interim data on the 1998 filing season indicate that IRS is 
continuing to make progress in two very important areas: 
electronic filing and the ability of taxpayers to reach IRS by 
telephone. In addition, although it is too soon to assess the 
results of the IRS initiative to reduce earned income credit 
non-compliance, we do have observations on two aspects of the 
initiative. First, some of the expanded assistance will 
probably be too late to help many claimants, and, second--as 
Congressman Portman noted--the baseline 1995 study, according 
to IRS, cannot be used as a baseline. This raises questions as 
to whether decisions to develop and fund the initiative were 
founded on reliable data. We also question, based on the 
information we have from IRS, whether the results of the new 
baseline study will be available soon enough to be of any value 
to the Congress.
    Madame Chairman, those are the highlights of our testimony 
today. I'd be happy to answer any questions you may have.
    [The prepared statement follows:]
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    Chairwoman Johnson. Thank you. I'd like to enlarge on this 
issue of the $243 million, was it, that you don't feel is 
adequately documented.
    Ms. Willis. Let me allow Mr. Hite to answer that question.
    Mr. Hite. Madame Chair, the OMB has put forth guidance 
directing the agencies as to what they need to do to justify 
investments in capital assets. This guidance requires that 
these capital assets be justified on the basis of verifiable 
data; that the amounts being requested be determined using 
formal estimating methods.
    Now, in the case of IRS' request this year for its 
investment account of $323 million, if you combine that with 
the appropriation IRS received last year in the investment 
account which was $325 million. That provides $648 million in 
the account. Now, the justification that IRS has put forth in 
terms of a business case for the first release of the first 
phase of the modernization, totals $401.5 million. The 
difference has not been justified on the basis of any 
verifiable analysis. Therefore, in the absence of that, IRS has 
not met the requirements of OMB, and that leads us to our 
recommendation that about $247 million not be funded.
    Chairwoman Johnson. So, $247 million of the dollars that 
they already have for capital investment cannot be justified?
    Mr. Hite. Two hundred and forty-six point five million of 
what they are asking for this year, out of that $323 million 
cannot be justified.
    Chairwoman Johnson. That's a very high percentage. What are 
the kinds of problems you're seeing? I mean, that seems like a 
remarkable statement. What are the failures? What I hear you 
saying is that $247 million of $323 million can't be justified 
using the guidelines OMB has issued for capital investment.
    Mr. Hite. Correct. And the rationale behind the $323 
million that's being requested this year is to show a steady 
state of funding from prior years. Last year, $325 million was 
appropriated, and what we were told by OMB was we'll keep the 
request for funding at a steady rate, therefore, it will be 
somewhere around $325 million.
    Chairwoman Johnson. So, your point is that they just keep 
asking for the same amount of money knowing that they're going 
to have technology needs, but, actually, they're not spending 
it well, because they can't justify it?
    Mr. Hite. That's correct. The fact that they're not 
spending it well, I wouldn't necessarily agree with, but 
they're asking for that steady rate of funding without the 
associated justification for that amount of money.
    Ms. Willis. Madame Chairman, this is not dissimilar to the 
situation we had with this investment account last year when 
IRS came in asking for $500 million, and we found that they did 
not have good plans justifying what they were going to buy with 
that money and what they were going to get in return for it. 
Congress cut the $500 million request down to just over $300 
million, and that's basically the same amount that they've 
asked for this year, but, again, in our opinion, without having 
an adequate basis for saying this is how much we need to fund 
investments in the account even in the future, recognizing that 
they will not be spending this money in the near term if there 
are certain requirements on it. In order to know how much 
you're even going to need, you need to have a better 
justification for the total.
    Chairwoman Johnson. Do you mean that while they know they 
need to replace a lot of front line computers, they can't tell 
you exactly how many nor what kind?
    Ms. Willis. Well, now, the front line computers that 
they're replacing are being funded under the operations part of 
the budget not the investment account. That's all part of the 
year 2000 investment, and so none of that money is coming out 
of the investment account.
    Chairwoman Johnson. Are the mainframes and the centers 
coming out of this investment?
    Ms. Willis. No, no, that, again, is coming out----
    Chairwoman Johnson. Is this all just blueprint stuff?
    Ms. Willis. This is all money designed to pay for the 
investment that will be driven by the blueprint for 
modernization in the future.
    Chairwoman Johnson. Is this money actually being spent? 
It's just being allocated so that they can build it up, and we 
don't have to do it over one budget here?
    Ms. Willis. Yes, it's just being placed in a multi-year 
type of investment account so that when IRS is in a position--
we hope in a position--and has the disciplined processes in 
place to spend the money properly, that this is where they will 
go to get the money for the new modernized systems. But how 
much money will be needed and when will it be justified are the 
open questions.
    Mr. Hite. If I could add to that? For Fiscal Year 1999, 
from that investment account, IRS is planning to obligate, 
roughly, $81 million.
    Chairwoman Johnson. Well, since some of this money is 
clearly being set aside to meet the future costs of the 
blueprint, of implementing the blueprint, and since they're 
just now going out for contracting the blueprint, would you 
assume that they would be able to be justified--that they would 
be able to justify this, all of this money precisely at this 
time? It's kind of a question of the overall blueprint plus the 
detail of the equipment that's going to achieve those goals. 
Can you really expect at this point that they would know all of 
that and, therefore, be able to attach specific justification 
for equipment to these dollars at this time?
    Ms. Willis. Madame Chairman, I think the issue here is that 
under OMB guidelines before investment accounts are set up or 
money is placed in investment accounts, you need to be far 
enough along the process to have a justification for what 
you're going to spend that money on. So, no, IRS is not in a 
position right now to say how much they're going to need 
overall to modernize and when, but before we start 
appropriating or allocating money in specific amounts for that, 
they do need to be farther down the road in understanding what 
they're going to use it for. Right now, it's just kind of going 
into a bank account that can be drawn on in the future, and we 
don't know what they're going to buy with it.
    Chairwoman Johnson. Interesting. Certainly, one of the 
problems that we saw in the $4 billion that we've already put 
into technology modernization.
    Mr. Coyne. Congresswoman Thurman.
    Mrs. Thurman. Thank you. Just so I understand it, in that 
account that we're talking about, are there any guidelines; are 
there any stipulations; is there anything that would prevent 
them from spending those dollars or is this just to kind of 
gather some money recognizing modernization later on? I mean, 
is there anything that covers that?
    Ms. Willis. Well, there are certain requirements or fences 
that have been placed around the money in terms of IRS having a 
systems life cycle, processes in place, and the blueprint 
finished, et cetera, but once that basic framework is in place 
and the money is released, as I understand it, at this point, 
there are no controls around what and how that money will be 
spent.
    Mr. Hite. One thing I could possibly add to clarify this, 
is that the modernization blueprint lays out multiple phases; 
and within each phase, it specifies multiple releases of 
technology. There are 16 releases in all. What IRS has 
justified so far is the first of the 16 releases. Now, these 
releases are going to be brought on incrementally; presumably, 
they're going to be justified incrementally. Thus far, only 
release one has been justified.
    Mrs. Thurman. And justified and accepted with the 
justification. I'm not sure that I understand all of this.
    Mr. Hite. Justified in terms of OMB's requirements for 
business case justification--a case where the estimates, or the 
monies that you're going to spend for the technology that you 
want, are arrived at using formal cost estimating techniques; 
where there is a validated cost benefit analysis justifying 
those amounts, and the payback--the return on investment from 
those amounts are worth making that investment. These are the 
type of things that OMB is requiring.
    Mrs. Thurman. Okay, so they put some kind of limitation on 
what can happen. And you said that's 1 out of 16? Have there 
been other ones offered and they just haven't been justified at 
this point or----?
    Mr. Hite. No.
    Mrs. Thurman. No----
    Mr. Hite. I'm sorry. There have been no justifications put 
forward in terms of a business case for any of the releases 
beyond release one.
    Mrs. Thurman. Do they have a time period in which they can 
do that with that pot of money?
    Mr. Hite. We asked that question and right now they have no 
time frames for preparing the business cases for the subsequent 
releases.
    Mrs. Thurman. What did they say back to you when you asked 
about that? I mean, not having the opportunity to ask them that 
question because they're no longer a witness. What is their 
justification to you? I mean, when you talk about this issue. 
Do they give you any?
    Mr. Hite. Justification in terms of why they haven't 
completed?
    Mrs. Thurman. Why they have that money? Why they need that 
money? I mean, what have they been telling you?
    Mr. Hite. We asked IRS how that amount of money was 
derived, and they couldn't explain the derivation over and 
above the $401.5 million that's justified in that business 
case. We asked OMB and OMB's reply was the steady rate of 
funding from year to year in the investment account. So, the 
presumption is we'll ask for a constant amount of money over a 
number of years, so you do not see a lot of peaks and valleys 
in the amount of money that's being asked for in the investment 
account.
    Mrs. Thurman. So, does this kind of go to the issue that we 
hear sometimes from Government where if you don't get the money 
but when you need it to do modernization or you need to do some 
other updating and that kind of stuff, because you haven't 
spent that money the year before, so they don't want to give 
you any more money, but there's no account for them to use 
later on where something might be more expensive? I don't know 
if that made a lot of sense.
    Ms. Willis. As we have looked at IRS' technology programs 
and modernization over the past 10 years, we have not found a 
lack of money to be a problem at all. Now, there is the issue 
of having money to invest as the projects come up in the 
future, but there's also the issue based on history of making 
sure that when the money is invested it is invested wisely and 
consistent with the blueprint, with the architecture, and done 
in a way that will bring the benefits that you expect to get; 
and that has not historically happened.
    Mrs. Thurman. Are we--and I don't know that you can answer 
this--but are we seeing that same problem--I mean as I look at 
this year 2000 issue that seems to be getting very close to 
us--are we experiencing this in other parts of budgets in other 
areas, the same kind of situation?
    Ms. Willis. Around the year 2000 budget? Yes, I think 
across the board in Government what you're seeing are increases 
in the estimates for what it's going to cost to become year 
2000 compliant as agencies become more familiar with the 
inventory of their systems; what they're going to have to do; 
which systems are going to have be replaced; what that's going 
to cost. There's also some hypotheses out there that as we get 
closer to the time and resources get tighter, that the cost of 
contractors will go up. So, the expectation is that the cost 
will continue to climb.
    Mrs. Thurman. Okay, thank you.
    Ms. Willis. And that's not unique to the Federal sector.
    Mrs. Thurman. Thank you.
    Mr. Coyne [presiding]. Well, I'd like to thank the 
panelists, director, for your testimony and call up the next 
panel.
    The next panel is Joseph Lane, EA, Chair, Government 
Relations Committee from the National Association of Enrolled 
Agents, and Roger Harris, Federal Taxation Committee, National 
Society of Accountants.
    Mr. Lane.

  STATEMENT OF JOSEPH LANE, NATIONAL ASSOCIATION OF ENROLLED 
                             AGENTS

    Mr. Lane. Thank you, Mr. Coyne. We appreciate the 
opportunity to visit with the committee again today. If it's 
all right, I'll submit our written comments for the record and 
I'll just summarize and then be happy to take your questions 
afterwards.
    We're pleased to be before the committee again this 
afternoon, and continue to appreciate the opportunity to come 
in annually to review the preparation for the filing season and 
the service's performance. We're surveyed our online members in 
the last two weeks in preparation for this testimony. We 
received scores of comments from our members who, despite the 
fact they work 100 hours a week, wanted to comment and have 
some input on this hearing today.
    The overall impression is that the filing season is running 
very smoothly. More taxpayers than ever are using paid 
preparers to get their tax returns done this year because of 
the confusion caused by the tax bill was passed last year. And 
while we appreciate the work, we probably would recommend that 
Congress revisit the whole area of tax simplification next 
year, because we don't really think the intent of last year's 
bill was to increase our workload. There's a lot of confusion 
about the Schedule D, the various IRAs that take effect this 
year, and the childtax credit.
    We also want to extend some congratulations to the Service 
for the way they've taken the criticisms of last year, both at 
the congressional hearings and from taxpayers. We think they 
have made a legitimate and concerted effort to try improve 
responsiveness to taxpayer complaints and problems and to 
emphasize to their employees the absolute necessity for 
courtesy in all their dealings. Our members report to us a 
general improvement across the board in that area.
    We also think the institution of the local problem-solving 
days at the district level was a masterstroke. And the decision 
to continue these events into the filing season has proved very 
effective and we support the Service on that.
    What we would like to suggest the committee do, however, is 
to schedule a hearing in the near future to have the Service 
come in and present to the committee what systemic problems and 
case-processing problems have been identified across the 
country in these problem-solving days, and what steps they've 
taken to ensure that those problems don't continue to recur. We 
think we could all learn something out of this, and the Service 
would benefit from having the committee's input and the input 
of the practioner organizations on those issues.
    Another example of improved service is the extended office 
hours into nights and weekends. We think this is a trend in the 
right direction, and IRS should be granted with additional 
budget support. We caution the committee not to expect an 
immediate payoff. Sometimes it takes a while and a number of 
years of pump-priming to get people to realize IRS is not open 
during the usual business hours, but has extended hours and is 
available on weekends.
    Several years ago IRS had a program where they used to take 
fully-outfitted campers out to shopping centers. They had tax 
forms and actual assisters on board to help taxpayers. A guy 
would come to the shopping center not knowing IRS was going to 
be there, see it there, and come back the next weekend with his 
stuff. And of course they would have moved to another mall by 
then. So they had some bad publicity and there was a 
disconnect. It takes a while and a concerted effort to make 
sure this publicity gets out. But we praise IRS for their 
ability to take this these programs out to the public where the 
public is, as opposed to expecting them to go downtown on a 
weekday to a Federal building.
    Schedule D reporting of capital gains has been a major 
headache for taxpayers and practitioners and apparently for 
mutual funds and brokerage houses. We are seeing a tremendous 
increase in the number of corrections that are coming out late 
in the year on 1099's because brokerage houses were not able to 
properly account for and report the capital gains. Some of the 
mutual funds gave out reports that did not break out what was 
subject to the 28 percent rate versus the 20 percent rate, so 
we had problems along those lines. We had many practitioners 
exercised about that.
    Another exasperated practitoner basically said that anybody 
in Congress who voted for this bill ought to be taken out and 
hung or shot or whatever, but we'll say we don't blame you 
folks for designing the form.
    One thing that is important, I think, is that any time you 
have a late-year tax law change, it really is disruptive, not 
only to the IRS, but to the publishing industry, the software 
industry, practioners and everybody else. So we would like to 
see the committee agree that for current year tax law changes, 
legislation must be ready for a vote by July 1, and any vote on 
a tax law change that comes after July 1 would have to take 
effect the following year. It just makes sense to do it on a 
more rational basis.
    One of the other issues we looked at is the electronic 
filing program. The comments we received from our members were 
universally supportive of the quality and design of the e-
filing program material that the IRS made available this year. 
They are very happy with that. We would note that was done by 
an outside agency under IRS contract.
    What our members have not noticed are any of the Public 
Service Announcements on public television. It's been very, 
very spotty, and so it prompted a lot of our members to be 
concerned. And so like other government agencies that have 
legitimate advertising program needs--for example, the 
volunteer Army, which we understand is somewhere funded in the 
neighborhoood of $100 million for advertising--that the IRS 
ought to get some kind of reasonable budget that allows them to 
go out and actually market this e-filing program appropriately 
with professional management.
    Of course, the caveat is that would have to be handled by 
an outside advertising agency. We would not recommend that we 
have IRS engage in running their own advertising campaign. The 
experience we've had with them in the past has not been 
entirely positive in that regard, but they certainly deserve a 
much-enhanced budget to allow them to go out and actually 
purchase advertising.
    We are still receiving complaints from practitioners who 
would be willing to convert to electronic filing, but can't 
because not all the tax forms can be accepted electronically. 
And one of the concerns we have is that we hope the Senate 
delays in passing the IRS reform bill will not cause a 
situation where IRS is granted a delay beyond December 31 of 
this calendar year to have a procedure in place which allows 
IRS to accept all forms electronically. And that is a major 
concern of ours because, quite frankly, we think it's not 
getting the proper amount of emphasis in this budget request.
    If you look at that illustration in the Commissioner's 
testimony you got today, of the additional $103 million that's 
going for enhanced customer education and customer service, 
only $3 million is earmarked to go to electronic filing. Now we 
heard testimony all last year where we had an $800 million cost 
to process tax returns through the pipeline, and if 50 percent 
of those tax returns are from practitioners that are in digital 
format already and get transferred back to paper to send to 
IRS, it seems to me that there is a substantial budgetary 
savings that could be derived by just increasing the number of 
practioners who file electronic returns.
    So it's critical, and we believe it ought to be addressed 
in a specific line budget item, to make sure that that work is 
done and it is done timely, even if it means going outside and 
hiring an outside contractor to identify what reprogramming 
needs to be done to make sure IRS could accept the all existing 
tax forms. We understand the Service has lots of priorities, 
and the Year 2000 problem is a major one, but this cannot be 
allowed to drop through the cracks.
    We've also had some complaints about the refund telephone 
solicitors giving bad advice to taxpayers. All of these 
examples we're putting up are mentioned to us by our members 
for purposes of illustrating that the Service has still got 
some improvements to make in the training area.
    One of the real concerns we have is the so-called e-filing 
educational monitoring visits that are part of the revenue 
protection strategy. These visits are ostensibly done to assure 
the practioner is complying with the record-keeping 
requirements of the e-filing program and maintaining the 
documentation required of return transmitters. Based on our 
review of our members' depictions of these events, we can only 
conclude the Service has re-defined the word ``visit''--
something akin to the Viking visits of Northern Ireland 
centuries ago.
    We have had incredible complaints from members about 
revenue agents barging into their offices full of people, 
insisting on seeing the preparer immediately, asking to see 
taxpayer records immediately, not calling for appointments, not 
explaining the purpose of the visit. We understand the need for 
revenue protection strategies, to make sure you don't have 
earned income fraud and refund fraud, but the IRS's own study 
two years ago indicated that Enrolled Agents and CPA's who are 
covered by Circular 230 were a miniscule percentage of the 
problem e-filers. I think that these educational visits, if 
they're allowed to be conducted the way they're being conducted 
now, are just going to cause more ill-will.
    And it's important, we think, for the Service to 
communicate the criteria they use--when they identify these 
problem taxpayers--that they're going to be using, that they 
should share that information with responsible practitioner 
organizations and the banking industry, in particular, and the 
software companies, because they have the most to lose from 
earned income credit fraud.
    So we need to address those issues dramatically and 
quickly, because one of the problems we had this year is the 
earned income credit criteria that they publicized they didn't 
put out until mid-March, and the peak refunding cycles had 
occurred in late January and February. So all of those bad 
loans had already been made before the criteria that the 
Service was going to use was disclosed to the people that would 
have been making the loans.
    And part of the problem, as we understand it from the banks 
that we've talked to and our own members who have lost a fair 
amount of money so far on this, these people came in, made a 
commitment to the Service to file electronically. They filed 
the returns electronically. The Service has selected these tax 
returns for additional review for purposes of looking at the 
earned income credit.
    And in the cases where the Service subsequently decides 
that that is an accurately claimed return refund and an 
accurately claimed earned income credit, even though they have 
been designated or instructed on the original return that was 
filed to do a direct deposit of the refund back out--and 
generally in those cases, that means to a bank that's already 
advanced the loan to the taxpayer against that refund, they are 
issuing a paper refund, which means that the very people who 
are supporting them in the electronic filing arena, trying to 
get additional tax returns filed electronically, the banks and 
the preparers that are involved in that program now, are 
losing. The preparer loses his fee because it doesn't get 
deducted, and the bank loses the repayment of a loan which they 
had assumed was a guaranteed repayment because the Service was 
going to do a direct deposit.
    Now, they should be able to get that back into a direct 
deposit cycle. IRS should not have to issue a paper refund on 
that. In 1995 when they did that, the bankers we talked to told 
us that it cost them over $200 million. This year the bankers 
have told us that they had programmed a 2 percent unfunded 
refund loss rate, and they're currently running 4 percent. So 
they're looking at the same type or dimensional losses this 
filing season. That's outrageous. That's four years that 
they've been talking about changing that. They should get that 
back into an automatic deposit cycle. It just creates ill-will 
among everybody that they're looking to help them improve their 
processing systems.
    And we'd like to suggest that the committee hold hearings 
on this issue alone this year and invite in the banks. There 
are only three or four banks that are involved in this, and 
software people, and some practitioner organizations--to 
comment specifically on the cost to them to do business with 
IRS just because of the way they handle these refunds.
    As to budget priorities, we reviewed the budget. We think 
the budget priorities in terms of the design and direction are 
all getting proper emphasis. It's taxpayer service; it's 
enhancing the ability of the technology to process the work 
effectively. The one area we would like to spell out in detail, 
and we believe you have to stay on top of it, is to make sure 
that those tax forms are translatable and file able 
electronically by the end of this year.
    The IRS has supported this and said they had supported it 
for years. The problem is, if you look at that budget request, 
with $3 million allocated to enhancing electronic filing, I 
don't think you're going to buy much in terms of moving the 
rest of the tax forms over. We would be happy to come back and 
comment at either one of those hearings, should you decide to 
put those on your schedule.
    In summary, we would like to comment that Commissioner 
Rossotti has made a substantial effort in turning around the 
morale of that organization and we commend him on that. And we 
would also like to commend Deputy Commissioner Mike Dolan, who 
was acting for quite a while before Mr. Rossotti was confirmed, 
and the IRS employees, who really had to take some pretty 
substantial hits last year in terms of their own performance 
and but who took the valid stuff to heart. They have made a 
legitimate change, and, I think, basically, are going to 
continue to make positive changes in the way they deal with 
taxpayers.
    So, in general, we're happy to report a much better 
functioning IRS this year than we have had in the last year or 
so. So, I'd be happy to take any questions if you have any.
    [The prepared statement follows:] 
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    Chairwoman Johnson [presiding]. Thank you very much, Mr. 
Lane.
    Mr. Harris.

  STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL TAXATION 
           COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS

    Mr. Harris. Thank you, Madam Chairman. My name is Roger 
Harris. I am president of Padgett Business Services and 
currently the vice chairman of the National Society of 
Accountants Federal Taxation Committee. We're very pleased to 
have the opportunity to be here today to comment on the current 
filing season, as well as the 1999 IRS budget.
    I think, as you know, our organizations have been big 
supporters of the restructuring legislation that the House has 
passed and the Senate is considering, and certainly we've been 
supportive of the goal of that legislation, which is to make 
the IRS a much more customer-responsive agency. I think to be 
consistent with that support, we must also be supportive of the 
fact that they need money to do that, and we stand in general 
support of their budget request.
    Specifically, on a few points, Commissioner Rossotti's 
reorganization plan, I think, is something we agree, certainly 
in principle, with. I think we know very well that the small 
business taxpayer is a different person than the individual 
taxpayer, and when the IRS reorganizes in a business unit 
format, I think it offers them the opportunity to train their 
people to understand their customer better, and that what they 
are dealing with is their customers. I think that this has a 
tremendous opportunity to improve the customer service of the 
agency.
    Clearly, I think training and equipping personnel is 
important at all levels of the IRS. I think we have a lot of 
hardworking people at the IRS that just need to have the 
training and equipment that they need to do the kind of job 
that I think they want to do when they come to work every day. 
And I think to the extent that we can fund that, it certainly 
is money well-spent.
    I don't think that we can--any of us--sit around and 
question the need for funding for the Year 2000. I think all of 
us shudder at the idea of what would happen if the system is 
not functioning as it needs to be in the Year 2000. Perhaps of 
all the budgetary processes, that maybe is the most important 
area that we have to address. I think that the system has to 
work and work indefinitely.
    Moving into the filing season, I can agree in large part 
with some of the things that Joe said, particularly as it 
relates to the Schedule D and the capital gains rule. I think 
we would all agree that this has been a relatively smooth 
filing season, but there is no question that the Schedule D and 
the capital gains law has added a complexity that many of us 
didn't anticipate and has been an unintended benefit to the tax 
practioners. And I know that that legislation was not intended 
to help us make money, but it has done that.
    But there's also been another interesting result of that--
that since most taxpayers have benefitted from these changes, 
it's amazing how complexity, when it saves you taxes, is not 
nearly as offensive as it is when your taxes go up. [Laughter.]
    So, I don't know what the message is there, but we thank 
you, and I think the taxpayers thank you at this point.
    There have been some positive things, obviously, done this 
year by the IRS, many of which have been mentioned here today 
with regard to the expanded hours of the phone, the walk-in 
Saturdays, and the problem-solving days. I don't think we can 
ignore that those have been well-received and have made a major 
impact on this smoother tax season. I think we should commend 
the Service and certainly encourage them to continue to work in 
those areas.
    With regard to electronic filing, we've heard numbers and 
we've heard comments today that electronic filing has 
increased, and I think, in fact, it has. But, unfortunately, I 
don't think it's increasing anywhere fast enough if we're going 
to try to meet the 80 percent goal of the legislation that has 
passed the House. There are problems in the current system that 
have to be addressed if we are going to realistically meet an 
80 percent goal.
    There are some encouraging things going on, though. One, I 
think, is Bob Barr joining the IRS--I know they are currently 
working right now to put together the Electronic Tax 
Administration Advisory Committee, and I think if we build that 
committee properly and give Mr. Barr the funds and the people 
to work with, I think we can devise the system that will help 
us reach the goal.
    I don't think today we know what that system looks like. 
I'm not sure that we should be restricted by what's happening 
today. I think we have to be, again, a little creative and give 
this group the empowerment to design a system that gives 
incentives both to taxpayers and practitioners so that the 80 
percent goal is met very easily and leads into perhaps even 
better than 80 percent, because it becomes the way everyone 
wants and chooses to file their tax return.
    I see the light is coming on, and in the interest of 
everybody's time, I will ask you--to include written testimony 
I have submitted that is in more detail. I certainly, again, 
welcome the opportunity to be here today. It's also a pleasure 
to come, and I certainly will look forward to any questions 
that any of you may have.
    [The prepared statement follows:] 
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    Chairwoman Johnson. Thank you very much.
    Mr. Lane, your comments about the need to complete work on 
making all the forms of the IRS compatible with the electronic 
filing system is a very important point. The Commissioner 
didn't speak to that, and certainly from last year's work we 
know how important it is to get more people into that system, 
both to save money, improve accuracy, service, and so on. Is 
anything going on to move forward on accommodating the forms to 
the electronic system?
    Mr. Lane. We had a meeting yesterday afternoon with 
Commissioner Rossotti to just chat with him, meet him, and talk 
about what his plans were, and I brought this up with him as 
well. We had given him an advance copy of our testimony. And he 
obviously shared with us the concerns he has in terms of the 
number of problems he's dealing with over there, and clearly 
the Y2K problem is a major preoccupation of the Service right 
now.
    Our concern is exactly as we outlined in the testimony, 
that the Service has always said that they support that 
process, but we don't see the support given in the budgetary 
requests. And I think if you look at the Commissioner's 
exhibit, it shows, I think, $3 million out of $103 million 
going for enhanced electronic filing. I can sympathize with 
their situation. They have a unique problem with the Y2K issue, 
given the age of their equipment. I mean, they're unlike almost 
any other corporate business, because most corporate businesses 
have much more current equipment to work with.
    So, we can sympathize with that and recommend to the 
committee that if the Service feels they cannot meet that goal 
this year, then they ought to let a contract out and have an 
outside group do that piece of it because that has nothing to 
do with Y2K. Let an outside group of programmers come in and 
get all those tax forms moved over.
    Right now they have the ability to enter the data from 
those forms digitally because when they keypunch the return, 
they put it in. So it's not like they have to reprogram 
everything. They just have to give us the ability to load that 
data electronically, basically, if they are in fact keying that 
information.
    Chairwoman Johnson. Do you have reason to believe that this 
will cost more than $3 million?
    Mr. Lane. You know, I would assume that it does. I don't 
have the data in my possession to determine what their cost 
factors are, but $3 million is a paltry sum when you consider 
that just the amount of money that would have to go into 
advertising promotion alone to expand electronic filing beyond 
20 percent to 25 percent of tax returns to get up to 80 
percent--that's an admirable goal.
    Chairwoman Johnson. Is is worth, though, putting the money 
into a big marketing effort when you can't yet let everyone who 
could file electronically, file electronically?
    Mr. Lane. I agree with you. There's no question the 
priority ought to be on getting as many of those forms moved 
over.
    Chairwoman Johnson. How big a job is that? How long do you 
think it would take? I mean, if you really committed yourself 
to getting all those forms in there, what are we talking about? 
Six months, a year, three years?
    Mr. Lane. You know, I don't have the expertise to respond 
to that. I'm sure the Service has looked at it and could do it, 
but--and I would like to see the answer to that because we've 
been raising that issue, and I noticed the National Commission 
on Restructuring focused on that issue intently and tried to 
get an answer of what that would cost.
    The key thing--and I think that the National Commission has 
understood it when we got finished, and I think your staff 
people here understand it from the discussions we've had with 
them in the committees--the key thing to getting practitioners 
to move into electronic filing is to allow them to file. They 
will not set up two separate processing pipelines in their 
office during tax season. They have to have one processing--and 
as long as 40 or 50 or 60 percent of the tax returns can't be 
filed electronically, they're going to keep 100 percent of the 
volume out, and that's critical.
    Chairwoman Johnson. Right, and I think that point has been 
very well made, and I appreciate your calling us back to 
something that is very fundamental to the whole cost structure 
of the IRS and its ability to use its resources in the future 
in the way that will be most effective for the taxpayers in the 
long run.
    Mr. Lane. Absolutely.
    Chairwoman Johnson. We will look into some of these 
questions about how long this project would take and what the 
resources are and what they're planning, as certainly this is a 
key component of customer service.
    Also, I just wanted to ask you briefly--you heard the 
discussion about the cross-checkers?
    Mr. Lane. Yes.
    Chairwoman Johnson. What is your opinion of that process 
and the need for more people in that function? Will that need 
decline as electronic filing increases?
    Mr. Lane. It's interesting. Part of the reason you've had a 
drop-off in yield from that program is because of the fact that 
they have gotten so much more corrective. Initially, the reason 
you got a lot of yield on that program is that people didn't 
know that there was a cross-check between the 1099 data that 
came in, so a lot of stuff didn't get put on tax returns or it 
got put on tax returns erroneously or taxpayers didn't know 
that they got it and should have put it on. So, I think what's 
happened is an education level as this IRP program has 
matured--taxpayers and practitioners are doing a better job of 
making sure the information is on the return.
    Chairwoman Johnson. Interesting. So would you interpret, 
then, the fact that the personnel has been cut in half but the 
collections have been cut by two-thirds, to indicate greater 
compliance out there in the community and therefore may not be 
a case for adding more people back and doing more of that 
function?
    Mr. Lane. I would say that you've had a significant 
increase in compliance with the tax return data matching the 
1099 data. There's no question about that compared to 5 or 10 
years ago, absolutely no question about that. Roger?
    Mr. Harris. Oh, I would agree completely. I think most 
people now are aware of the fact that the cross-checking does 
go on, and I think you're seeing a much higher compliance.
    Chairwoman Johnson. So actually increasing personnel in 
that function might not make any difference to the yield?
    Mr. Lane. No, because the vast majority of the 1099 data 
you get, what they call the IRP data--the information returns 
data--comes in electronically, so those people--those 
checkers--are only looking at the stuff that's dropping out of 
the other system because of a mismatch, and I think what we're 
saying is that a lot less stuff is mismatching.
    Now, it's going to be interesting to see, because as more 
requirements get ladeled-in to require 1099's--for example now, 
this year, every check written to a lawyer--whether he's a 
corporation or not--for $600 or more needs a 1099. So you're 
going to increase dramatically the number of small paper 1099's 
you get. So, I can see a need if you're going to generate a lot 
of that stuff in the future to have to increase those checkers 
back up again, because the paper documents don't get the degree 
of verification that the electronically filed documents do.
    Chairwoman Johnson. Thank you.
    Mr. Lane. Sure.
    Chairwoman Johnson. Mr. Coyne. Mr. Portman.
    Mr. Portman. I first want to thank both of these gentlemen. 
Roger and Joe, this is like deja-vu all over again. You've 
testified so many times before this subcommittee and the 
Commission.
    I sort of agree with you that to get to the 80 percent goal 
in electronic filing you almost have to have that quantum leap 
that Joe talked about. And I guess one question I would have 
for you is, as you look at the restructuring bill that is now 
over in the Senate, and with any luck will be back for a House-
Senate conference within a month, is there anything that you 
think should be changed with regard to electronic filing to 
create more incentives? As you know, we took that legislation--
this subcommittee took the legislation and the 
recommendations--changed them somewhat, dropped out a couple of 
things, added a couple of things. Do you have any comment on 
that? We have a window of opportunity here.
    Mr. Lane. Yes; I would like to see--we made a 
recommendation to the Restructuring Commission at some point in 
our testimony--quite frankly, I don't remember which one it 
was, but it's in there. I would like to see a provision that if 
a person files electronically and there is an accurate match on 
the IRP data with what's on the tax return--so, in other words, 
the 1099 dividend and information and the W-2 data was 
correct--that the statute for audit on that tax return be 24 
months instead of 36 months.
    Mr. Portman. Yes; I remember that recommendation.
    Mr. Lane. I think what that will give you is taxpayer 
motivation to file electronically, and practitioners will 
always respond to client demand before they're going to respond 
to anything else. And so if practitioners get a taxpayer 
ground-swell that says, ``I want this filed electronically 
because I want to limit my audit exposure,'' their malpractice 
insurers are going to be telling them the same thing: ``You 
better justify why you're not filing everything electronically 
because we don't want to have another year of exposure if we 
don't need it,'' I think you'll get that 80 percent number 
relatively quickly, if not within a year or two.
    Mr. Portman. Interesting. Roger, do you have some thoughts?
    Mr. Harris. You know, I think what we've got is a lot of 
things that move a small number of people. I don't think 
there's any one magical change we're going to make that's going 
to all of a sudden have the whole marketplace demand electronic 
filing, so I think anything--what Joe suggested, what's in the 
legislation, incentives we've talked about were taken out----
    Mr. Portman. What about the signature?
    Mr. Harris. Signature--I think all of those things are 
important. I think that's why the Commission that I know the 
bill had set up and now the IRS is setting up is so important 
that we not be bound by what we know today, that we're able to 
look, not only with what's out here today, but what can happen 
over the next three or four years--not get in a hurry to hit 80 
percent, but get there the right way.
    Mr. Portman. Yes; therefore the advisory committee could be 
very helpful. You know one thing--this is a far-fetched idea, 
but I thought I'd throw it out anyway--EIC is one area where I 
think you could see some increase in electronic filings, as I 
mentioned earlier, and that there are some advantages to that 
in terms of cost and compliance. Anybody who wants a refund, 
obviously there's an incentive there now. For people who owe 
taxes, there, in a sense, is a disincentive. We can knock down 
all the barriers in the world, and we can create, therefore, 
some more incentives, but there will be that disincentive for 
somebody who files on paper, and because it processes more 
slowly it is going to be a disadvantage. Can you address that?
    Mr. Lane. But the taxpayer who owes money typically has the 
more complex return and is the one who has the most audit 
exposure. So where you do get that guy, where you incentivize 
him is you say, ``Well, limit your own exposure.''
    Mr. Portman. Going back to your idea.
    Mr. Lane. And why it's important to make sure that the 
provision has to be, not only is it filed electronically, but 
all the IRP data matches, is because the delay time in IRS 
getting the confirmation back from Social Security on the wage 
data and getting all the IRP data processing could take 
anywhere from 12 to 14 months. So, if only in cases where 
that's a 100 percent match is the 24-month statute in there; if 
it's not a match, they should have the additional 12 months to 
pursue examination.
    Mr. Harris. Well, and we mention in our testimony that 
right now if you file electronically and owe this year, that it 
will be debited on your account on the 15th. If you mail your 
tax return, then you've got a certain float. Why not give the 
people who file electronically until May 1? You know, put an 
incentive in there to file electronically; your payment will be 
made later.
    Mr. Portman. Yes. I say it's far-fetched because it will 
cost something, and we're running into that problem with this 
bill already.
    Mr. Harris. That's why I think we've got to be creative and 
think of all of these, and see what the effect will be.
    Mr. Portman. Yes.
    Mr. Lane. You know, I'd like to suggest one other thing. It 
seems to me every year we're having problems on this earned 
income credit, and it really isn't a tax issue. I can see an 
argument to say, ``Hey, give this to Social Security; give it 
to Health and Human Services, but it doesn't belong on a tax 
form.''
    There are a lot of people who are entitled to that that 
aren't getting it because they're not even filing. You know, 
the guy working for minimum wage and he's making $4,000 to 
$5,000 a year, and he's got a couple of kids--he's going to be 
qualified, and he's not even filing a tax return. So, I think 
one of the issues you might want to address is whether IRS 
ought be handling this at all. And why create all of this 
tension and aggravation over this issue?
    Mr. Portman. I can't believe you said that, Joe.
    Chairwoman Johnson. We're working up to that one.
    Mr. Portman. That's exactly the question that needs to be 
proposed, and the answers need to come more from us.
    Thank you very much.
    Mr. Lane. Thank you.
    Chairwoman Johnson. Thank you. Congresswoman Thurman.
    Mrs. Thurman. Mr. Harris, just very quickly, because I know 
this is an issue that our chairperson and Mr. Portman and 
others of us--with the electronic filing, and we were certainly 
encouraged by some of the statistics, I think, that we heard 
today of the more compliance on this--and I can't remember for 
the life of me who said this to me, but somebody said, ``Well, 
we don't do electronic filing because we don't have enough 
clients to really do that.'' Help me with that statement. I 
mean, in the fact that you represent accountants--and I don't 
know how many accountants there are in the country--but what do 
you think the percentage of accountants that are actually in 
the situation or have the ability, or would, how many are doing 
it electronically?
    Mr. Harris. Currently, to the best estimates of our 
organization, about one-third are doing it today.
    Mrs. Thurman. And in that, can you tell us why they don't? 
Maybe it's because of what I just said, but there are other 
stumbling blocks that would prevent them from wanting to get 
into the electronic filing?
    Mr. Harris. We've talked about some of them today; I think 
the fact that you can't file all returns electronically. You 
know, there are the checks that you must go through during the 
filing season that contribute to some. But as a business 
person, I think it's that the demand in the marketplace is not 
that great yet--again, unless you're right now in the business 
of filing a lot of returns due refunds early and you can speed 
that process up. If your practice is geared towards business 
people who maybe don't have refunds, there's no demand, 
certainly not to pay extra to file a return electronically when 
you owe money. It's very hard to sell that idea to a business 
person.
    Mrs. Thurman. But this year would be different because 
they're getting money back, right? [Laughter.]
    Mr. Harris. Yes.
    Mr. Lane. I'd like to add something on that, if I could. I 
think, as Roger said, there are lots of issues that impact 
that, particularly from a member's behavior standpoint. Some of 
it's education, some of it's a perception of a lack of 
technical competence, technical competence in the terms of the 
technology as opposed to the technical tax stuff. And actually 
it's much simpler than they really believe it is, and once you 
show them how easy it is they go, ``Oh, my God; I could have 
been doing this.''
    Mrs. Thurman. ``Why haven't I been doing this?''
    Mr. Lane. Part of it is a perception that they have to go 
out and buy a whole bunch of expensive equipment to do it, and 
they're very happy with the DOS machine they have in their 
office and they don't want to upgrade; they don't realize you 
can use that machine to do it.
    So, part of it is the way the whole program has been 
packaged and sold. Quite frankly, some of it is also a kind of 
a hangover of the bad reputation electronic filing got early on 
when it was basically viewed as a way of gouging clients by 
charging them outrageous fees for doing refund anticipation 
loans. They don't realize that the whole market has really 
transformed, and there is a whole array of financial products 
that really help taxpayers--and they're not right for every 
taxpayer, but they're right for some taxpayers.
    And so we're going through this whole re-education effort 
in both of our memberships in terms of the benefits of that. 
Quite frankly, the IRS causes themselves a lot of problems by 
doing exactly what we talked about in our testimony today. They 
don't share the information; they change procedures in mid-
stream, and it catches the guy unaware.
    This whole paper refund issue--I mean, in 1995 they pulled 
7 million returns that had EIC credits on them out of the line 
that were supposed to go direct deposit and did nothing with 6 
million of them and put them back 12 months later, all on paper 
refunds, and cost people all of the fees on those returns and 
the banks all of the loan repayments. I mean, it's just 
appalling, and this is supposed to be the partner you're 
working with--to give him the information. And, we would hope 
they would have learned from that, but now we're back into the 
same problem this year. So you look at people and say, well, if 
they're going to lose that kind of money, what's the business 
reason for them to do it? There isn't any.
    Mrs. Thurman. But we can fix this, right? I don't know--
what kind of an answer was that? [Laughter.] Thank you.
    Mr. Lane. A qualified ``yes.''
    Chairwoman Johnson. Before we go to vote on this current 
problem of the IRS not doing direct deposits, is that elective 
or a matter of law?
    Mr. Lane. We tried to get an answer on that yesterday. The 
thing that's got our members so upset about this is this is a 
problem that IRS has said for four years that they would 
correct, and it hasn't yet been corrected. My personal view--we 
were told when we inquired about this that there is a technical 
problem in terms of being able to put the refunds that were now 
held up back into an electronic deposit stream as opposed to a 
paper check. I don't know if that's accurate or not.
    My belief is that probably when you get down to the bottom 
of it, that what the advice that is being given, because it's 
coming out of a criminal investigation, they're looking at the 
potential for fraud there. What I would be willing to hazard a 
guess as to what the advice is is make it a paper refund, 
because if we were right and it subsequently develops that 
there was fraud there, we have a better case if we have a 
taxpayer's signature on a cancelled check as opposed to a bank 
deposit that went in straightforward. And so my concern is if 
that is what they're looking for--to have a better paper trail 
in the event one of these things gets prosecuted--I mean it is 
at an extremely high cost to the people who are participating 
in this program.
    And what we tried to point out in our testimony is that 
everybody loses with refund fraud, not just the Government. The 
banks are the biggest losers, and the preparers and software 
companies lose because they don't get their fees paid. If the 
IRS was more forthcoming in their criteria for identifying 
refund fraud, the software companies and banks would be happy 
to act as the first couple of screens for that because they 
don't want to make that loan.
    Chairwoman Johnson. And are their new screens, even though 
they came out a little later--are they helpful?
    Mr. Lane. Yes, yes. But mid-March, when 95 percent of the 
business is done by February 15, mid-March doesn't help them.
    Chairwoman Johnson. No; I appreciate that. But as you 
reflect on this--what to try to do now versus next time we go 
through this, now with a better system in place. I would be 
interested in hearing any thoughts on that.
    Mr. Lane. What I would hope, and I think Roger could agree 
with me on this, is that this new ETAAC, or advisory board for 
electronics--I would hope that when that gets funded and put 
together this year that the whole revenue protection strategy 
is discussed at great detail with those folks and then shared 
with the practitioner organizations like NSA and NAEA and 
AICPA, so we can disseminate that information to our people----
    Chairwoman Johnson. That's a very good suggestion.
    Mr. Lane [continuing] And also to the banks and software 
companies.
    Chairwoman Johnson. We have three minutes left, so thank 
you for your input. I appreciate your testifying today.
    Mr. Lane. Thank you.
    Mr. Harris. Thank you.
    Chairwoman Johnson. The hearing is closed.
    [Whereupon, at 4:06 p.m., the hearing was adjourned subject 
to the call of the Chair.]
    [A submission for the record follows:]
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