[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
 THE 2000 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 
                                  2001

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 28, 2000

                               __________

                             Serial 106-49

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
66-463 CC                    WASHINGTON : 2000





                      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        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
WES WATKINS, Oklahoma                JIM McDERMOTT, Washington
JERRY WELLER, Illinois               JOHN LEWIS, Georgia
KENNY HULSHOF, Missouri              RICHARD E. NEAL, Massachusetts
J.D. HAYWORTH, Arizona
SCOTT McINNIS, Colorado


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

                               __________

                                                                   Page

Advisory of March 20, 2000, announcing the hearing...............     2

                               WITNESSES

U.S. Department of the Treasury, Hon. Charles O. Rossotti, 
  Commissioner, Internal Revenue Service.........................     6
U.S. General Accounting Office, James R. White, Director, Tax 
  Policy and Administration Issues, General Government Division; 
  accompanied by Randy Hite, Associate Director, Governmentwide 
  and Defense Information Systems, Accounting and Information 
  Management Division and Dave Attianese, Assistant Director, Tax 
  Policy, and Administration Issues, General Government Division.    34

                                 ______

American Institute of Certified Public Accountants, Deborah 
  Pflieger.......................................................    52
National Association of Enrolled Agents, Gregory H. Steinbis.....    62
National Society of Accountants, Bryan E. Gates..................    56


 THE 2000 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 
                                  2001

                              ----------                              


                        TUESDAY, MARCH 28, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 2:03 p.m. in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) Presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                Contact: (202) 225-7601
FOR IMMEDIATE RELEASE

March 20, 2000

No. OV-17

Houghton Announces Hearing on the 2000 Tax Return Filing Season and the 
                    IRS Budget for Fiscal Year 2001

      
    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the 2000 tax return filing season 
and the Administration's budget request for the Internal Revenue 
Service (IRS) for fiscal year 2001. The hearing will take place on 
Tuesday, March 28, 2000, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include IRS Commissioner Charles O. Rossotti, 
representatives from the U.S. General Accounting Office, and 
professional tax practitioner groups. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.
      

BACKGROUND:

      
    The 2000 tax return filing season refers to the period of time 
between January 1st and April 15th when Americans will file over 215 
million primary tax returns. During this period, the IRS is expected to 
issue over 95 million tax refunds and answer 118 million telephone 
calls from taxpayers asking for assistance.
      
    The Administration's budget requests $8.9 billion to fund the IRS 
for fiscal year 2001. This level of funding will support 100,133 
employees who will collect about $1.9 trillion in taxes, according to 
Administration estimates. (Note: These figures include the $145 million 
and 2,082 employees, technically outside the spending caps for the IRS, 
devoted to administering the earned income tax credit.) The fiscal year 
2001 budget request represents an increase of $769 million (or 9 
percent) over the fiscal year 2000 operating level, as well as an 
increase of 2,528 employees (technically referred to as full-time 
equivalents or FTEs) over fiscal year 2000 staffing levels.
      
    Beyond supporting the traditional activities of the filing season, 
the fiscal year 2001 budget request also addresses several additional 
activities. First, the budget seeks to reverse the decline in the IRS 
workforce by proposing to increase IRS staffing levels by 2,835 FTEs 
over two fiscal years, 2000 and 2001. Described by the acronym STABLE 
(Staffing Tax Administration for Balance and Equity), the proposal 
would assign about half of the new employees to work in the customer 
service area, while the other half would be assigned to examination and 
collection activities. Second, the budget requests $42 million to 
continue the Organizational Modernization program which would 
reorganize the IRS into four operating divisions correlated to the 
needs of taxpayers. The new operating divisions will be:
      
    (1) wage and investment income, (2) small business and self 
employed, (3) large and mid-size businesses, and (4) tax-exempt 
organizations and governmental entities. Third, the IRS budget request 
includes $119 million for its Investment Technology Account to support 
the project to upgrade the IRS' computer system.
      
    In announcing the hearing, Chairman Houghton stated: ``The IRS is 
seeking significantly higher funding and significantly more employees 
for next year. The Subcommittee should review this request carefully. 
We need to give the IRS the resources it needs to operate effectively, 
but why is it asking for such a large increase? It seems to go against 
the trend of government downsizing which the President and Congress 
began several years ago. What would the increases mean for the IRS, and 
more importantly, what would they mean for the taxpayers? ''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will review the 2000 tax filing season and explore 
how the IRS intends to allocate its fiscal year 2001 budget resources. 
It will examine the Administration's justification for the significant 
increase in both funding and staffing proposed for the IRS. It also 
will review the progress of the program to modernize the IRS' 
organizational structure, and the progress of its information systems 
program.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
April 11, 2000 , to A.L. Singleton, Chief of Staff, Committee on Ways 
and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Oversight office, room 1136 Longworth 
House Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov''.

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                


    Chairman Houghton. Good afternoon and welcome to our 
hearing.
    Today the Subcommittee will examine the current tax return 
filing season and the budget request for the Internal Revenue 
Service for fiscal year 2001.
    First of all, I am pleased to note that the current tax 
return filing season has been going smoothly and with no major 
problems. That is a relief for both the Commissioner and for us 
in Congress.
    Processing tax returns and sending out timely refunds are 
the primary activities by which the public judges the IRS. This 
year the IRS will send out 8 billion pages of tax forms and 
instructions. This paperwork avalanche will be augmented by 100 
million W-two forms from employers and about 1 billion 1099 
forms from financial institutions. The net result is that about 
300,000 trees will be sacrificed in order to carry out the 
current filing system. That ought to be a cause of alarm for 
the environmentalists.
    Fortunately, more people than expected are filing their tax 
returns electronically. The figures for electronic filing are 
up about 12 percent so far this year. This means less paperwork 
for taxpayers to fill out, fewer paper forms for the IRS to 
struggle with and less harm to our forests.
    For several years, the IRS has had a fairly flat budget and 
a declining work force. This was part of a larger pattern of 
government downsizing which the President and Congress both 
supported. It supported the theme advanced by the Vice 
President's campaign on ``Reinventing government.''
    For fiscal year 2001, the administration has proposed an 
IRS budget increase of $769 million which is about 9 percent 
higher than its operating level for the current fiscal year. 
The increased budget funding would be used in part to hire over 
2,500 new IRS employees. Why are so many new employees needed? 
What will they be doing? Does the fiscal year 2001 budget 
request mean that the era of IRS downsizing has ended?
    The IRS currently is in the midst of a major internal 
reorganization. It is transforming itself into four operating 
divisions. The IRS has fostered the expectation that its new 
operation divisions would result in better taxpayer service, 
but a new organizational structure is not enough to improve 
that taxpayer service.
    As the IRS' own budget material states, it requires a 
combination of improved management, business practices, and 
technology. So while the IRS reorganization may take 12 to 18 
months to complete, what is the timetable for implementing new 
business practices and for providing the operating divisions 
with the new technology tools they will need in order to make 
better taxpayer service a reality.
    If we have the new operating divisions functioning with the 
old business practices and the old computer systems, then 
clearly it is difficult to see how the IRS will be able to meet 
the expectations of improved taxpayer service.
    It is not the role of the Oversight Subcommittee to explore 
all the narrow, technical details of the IRS budget request. A 
budget is more than just numbers. A budget is a policy 
statement. We want to know what the trends are and what this 
budget signifies for the IRS. What are the long term goals 
which this budget is trying to achieve; are the proportions of 
this budget request the best ones for achieving the overall, 
long term goal?
    The IRS has a difficult job to do, and I believe that 
Congress should give the IRS the resources it needs to do that 
job, but we also should require that the IRS provide a strong 
justification for any increases which it requests and hold it 
accountable for producing the results which it promises.
    I look forward to working with and hearing the Commissioner 
and our other witnesses.
    I would like to now recognize the Ranking Democrat, Mr. 
Coyne, for his opening statement.
    Mr. Coyne. Thank you, Mr. Chairman.
    I would like to join Chairman Houghton in welcoming today's 
witnesses. I look forward to discussing with the IRS 
Commissioner the progress of the current tax filing season and 
the IRS' fiscal year 2001 budget request.
    The President's proposed budget for the IRS contains a 
small increase in IRS funding and staffing levels. This will 
help the IRS handle the many new requirements imposed by the 
Reform and Restructuring Act of 1998 and allow the IRS to 
address the increasing number and complexity of tax returns to 
be filed this year.
    The Congress must support full funding for IRS' fiscal year 
2001 budget as requested by the President. The IRS needs the 
resources to provide improved customer service and to make sure 
each American pays their fair share. Proper funding is a 
critical step to a successful restructuring and reform of the 
IRS. Support for the fiscal year 2001 budget request would 
signal our support for the hard working men and women who 
enforce the Nation's tax laws.
    I would like to commend Commissioner Rossotti on what has 
been an extremely successful 2000 filing season thus far.
    I look forward to working with my colleagues on both sides 
of the aisle to continue supporting the IRS' efforts to 
restructure and reform our tax collection agency. Our annual 
hearing on the IRS is an important oversight responsibility of 
this Subcommittee and I commend the Chairman, Mr. Houghton, for 
his commitment to a better IRS.
    Thank you, Mr. Chairman.
    Chairman Houghton. Thank you, Mr. Coyne.
    Mr. Portman, have you got a statement?
    Mr. Portman. No, sir. Just eager to hear.
    Chairman Houghton. Ms. Dunn?
    Ms. Dunn. No.
    Chairman Houghton. Mr. Watkins?
    Mr. Watkins. No.
    Chairman Houghton. Mr. Hayworth?
    Mr. Hayworth. No.
    Chairman Houghton. Commissioner, you are on.

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

    Commissioner Rossotti. Thank you, Mr. Chairman and 
distinguished Members of the Committee.
    The IRS is delivering a very successful filing season while 
we are also working to fulfill the many mandates that we were 
given under the Restructuring Act. Under the direction of the 
Act, we are making some of the most significant changes in 50 
years to the IRS organization, technology and most importantly, 
the way we serve taxpayers.
    In the current filing season, we expect to receive a total 
of 127 million individual returns. Electronic filing is up 16 
percent, so we expect to receive between 34 and 35 million 
returns electronically this season.
    In terms of our telephone service, we are delivering about 
a 65 percent level of service, meaning about 65 percent of the 
calls get through which obviously is still way too low, but it 
is up substantially compared to the 50 percent of last year.
    Our current success was possible in large part, due to the 
completion of the enormous program of $1.3 billion to fix all 
of our Y2K problems. I am pleased to say that has been 
accomplished almost flawlessly.
    For the whole year, we expect to collect $1.67 trillion and 
turn over that amount to the Treasury.
    While the IRS is showing important signs of progress, I 
cannot say today the IRS meets the legitimate expectations of 
our compliant taxpayers. Futhermore, the number of exam and 
collection cases is declining substantially.
    As you know, many of the basic accounting and other systems 
we use to manage the $1.8 trillion in tax revenue are 
inherently deficient. These problems are severe and if they are 
not addressed, over time they will certainly undermine the 
fairness, viability and integrity of the whole tax system.
    However, these problems are not newly identified and I do 
not believe they are impossible for us to solve. In fact, I 
think we now have in place at the top level at least all the 
plans we need that will allow us to address them.
    The President's budget for the IRS for 2001 requests the 
resources I think we need to implement these plans. So far, we 
have implemented many RRA, Restructuring and Reform Act, 
taxpayer rights provisions; we have completed the first phase 
of our new system of balanced performance measures; our 
reorganization to increase customer focus and management 
accountability is progressing rapidly and all of our top 
management teams are now in place.
    We are beginning the long term program of re-engineering 
our business practices and technology which is ultimately what 
will really allow us to deliver on our mandates for improved 
service and taxpayer compliance. As streamlined management and 
new technology becomes effective, we will also improve our 
efficiency and be able to maintain a stable work force even 
while the economy grows.
    To do all this, we must have adequate budget resources in 
2001 to address our critical operational needs for the short 
term and to invest in new technology for the longer term.
    This chart illustrates how the rapidly expanding economy 
increases our workload every year, not only because of the 
number of returns increasing but the complexity. For example, 
the number of individual returns with over $100,000 reported 
income, which tend to be the more complex returns, have 
increased by 63 percent in the last 5 years. In the meantime, 
during that period of time, our staff has dropped by 17,000.
    In addition to these general trends which have been long 
standing, some of the specific provisions of the RRA 1998 have 
added significantly to our workload in the short term. As you 
can see on the chart, some specific provisions have required 
about 4,500 additional staff just to administer these 
provisions.
    Our compliance personnel, those that do the case work, are 
the largest component of the budget. In addition to compliance, 
they are the staff required to administer the provisions of RRA 
1998. Therefore, when you look at the net effect on the number 
of frontline workers actually in the compliance functions, it 
has declined quite significantly.
    In addition to the staffing factors, the red line which is 
the net effect on our frontline compliance staff, we have also 
had a great deal and very pervasive change in the way the work 
force is required to work because of all the changes in RRA. 
This undoubtedly has caused a certain amount of confusion and 
relearning for many of our employees. These changes have had an 
effect on the number of compliance activities we have been able 
to address.
    To address these operational requirements, we are 
requesting a staffing increase in the 2001 budget which we call 
STABLE. With this staffing level, we expect that in 2001, the 
IRS will be able to stabilize the level of collection and exam 
activity while also implementing those provisions that were 
noted in RRA 1998, and also continue to gradually improve our 
service levels.
    Additional staff will enable us to meet our pressing 
operational requirements while we implement our longer term 
solution which is our technology. As this Committee knows, our 
IRS systems are fundamentally deficient and really need to be 
replaced.
    This is a big program and it has risk, but I think the 
success we had in the Y2K program, which was also a huge 
program, is a good harbinger of the future. We have in place 
many activities to manage these programs and manage this risk 
which I would be glad to go through in more detail if the 
Committee would like.
    I think we are making real progress toward our goals and 
mandates of RRA. If Congress can continue to provide us the 
support we need for modernization, including our fiscal year 
2001 budget request, we will be able to produce the visible and 
tangible improvements in service, compliance and efficiency 
which I think are the three things that America's taxpayers 
expect from the IRS.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Charles O. Rossotti, Commissioner, Internal Revenue 
Service

    Mr. Chairman and Distinguished Members of the Subcommittee, 
I am pleased to discuss the IRS' 2000 tax filing season, our FY 
2001 budget request and some of the initiatives we are 
undertaking on behalf of America's taxpayers.

                              Introduction

    The IRS is delivering on a very successful filing season as 
it also works to fulfill the mandates that Congress set forth 
in the landmark IRS Restructuring and Reform Act of 1998 (RRA 
98). During this time, the IRS also completed an enormous, yet 
almost flawless, Y2K conversion program to ensure that IRS 
computer systems continued to operate after the century date 
change.
    Following RRA 98's clear directions, the IRS is planning 
and implementing the most significant changes to its 
organization, technology and the way it serves taxpayers in 
almost a half-century. However, in spite of some recent 
tangible improvements in service, many years of hard work lie 
ahead to make this modernization of the agency a reality, and 
FY 2000 and FY 2001 represent critical junctures in our 
efforts.
    Mr. Chairman, neither Congress nor the IRS could have 
anticipated all the implications, including resources, needed 
to implement the full scope of RRA 98 which covers 71 new 
taxpayer rights and organizational and technological 
modernization. However, in the 20 months since this bill was 
enacted we have learned a great deal, and at this point I am 
convinced we can succeed through the combination of a limited 
increase in staff resources and investments in technology and 
organization.
    By continually managing this change and risk in an orderly 
and integrated fashion, I am pleased to report to the 
subcommittee that the 2000 tax filing season has been smooth 
and almost error free. Of equal importance, the 2000 filing 
season demonstrates some very important and positive trends in 
service to taxpayers on which we can build in the coming years, 
especially as our major technology and organizational 
initiatives take effect.
    Projected net collections for FY 2000 are $1.767 trillion. 
During FY 2000, we also project to receive 213.1 million 
returns, including over 127.3 million individual returns, and 
expect to issue over 93 million individual refunds. As of March 
10, 2000 refunds are up over 10 percent over last year, and the 
average refund is $1,731. On-line filing is running 96 percent 
ahead of last year's pace and has already exceeded last year's 
total volume of 2.5 million.

                             Y2K Conversion

    Mr. Chairman, the IRS experienced a smooth Y2K ``roll-over 
weekend'' between December 29 and January 3 with fewer glitches 
than we experience in a normal year. There were also no 
problems associated with the leap year on February 29, 2000. We 
have now enjoyed almost three full months of successful 
operations following the century date change. Although we do 
not anticipate any future problems, we will remain vigilant 
during the remaining few weeks of high-volume tax-filing 
season.
    Our success to date was hard won and can be directly 
attributed to our comprehensive planning and preparations over 
the past three and a half years. Mr. Chairman, we are also most 
grateful for the guidance, assistance and support that you and 
the Ranking Minority Member provided throughout this effort.
    I would like to briefly recap our Y2K efforts. The scope of 
the Y2K problem at the IRS was enormous. The IRS employs more 
than 100,000 individuals in over 700 locations across the 
United States. Making the IRS' Y2K problem even more 
challenging is the sheer number of affected information 
technology systems.
    There were over 800,000 information technology (IT) items 
in our inventory that were assessed for compliance; renovated, 
replaced or retired; tested; and placed back into production. 
The technology ranged from custom applications programs to 
mainframe computers to commercial software products as well as 
thousands of non-IT items found in elevators and office 
equipment.
    Without the significant investment in resources to plan and 
prepare for Y2K, there was a tremendous potential for 
significant disruptions to ongoing IRS operations. Simply put, 
the tax system would have ground to a halt causing a massive 
disruption affecting almost every taxpayer. Fortunately, that 
investment was made.
    The IRS also gained some valuable residual benefits from 
the Y2K conversion project that will be of great value as we 
now proceed to our even more challenging business systems 
modernization program.
    First is replacement of obsolete hardware and systems 
software products. As a result of the Y2K program, most of this 
hardware has been replaced and software releases have been 
brought up to date. This is a prerequisite for supporting our 
technology modernization program and it is imperative that we 
have adequate annual replacements of hardware and regular 
routine upgrades of software releases.
    Second is improved program management practices. The Y2K 
program has been successful, largely because effective program 
management practices were implemented and improved over the 
last three years. This experience will be extremely valuable as 
we now move forward with our major technology modernization 
program. However, the modernization program imposes greater 
challenges because it involves major business changes as well 
as new technology.
    Third is standardization of products. The IRS installed 
base of hardware and software was not only obsolete, it was 
heterogeneous in the extreme. The Y2K program has allowed us to 
set up and largely implement standard products. Because of our 
reorganization under the leadership of our CIO Paul Cosgrave we 
now have the management structure and delegated authority in 
place to make design and procurement decisions to maintain 
standardization of technology.
    Fourth is improved inventory management. GAO criticized the 
IRS for the poor condition of its IT inventory, but because of 
Y2K, we were forced to examine our inventory as never before. 
The condition of our inventory is now greatly improved although 
much work remains to be done.
    Mr. Chairman, I must stress that these benefits will only 
be realized if we actively continue the practices established 
during Y2K, including regular replacement and upgrades of 
hardware and software.

                     Electronic Tax Administration

Meeting the Challenge

    The IRS Restructuring and Reform Act of 1998 set forth the 
mandate that at least 80 percent of returns be filed 
electronically by 2007. We know that the stakes are high in 
Electronic Tax Administration (ETA), but so are the potential 
benefits to taxpayers, practitioners and our tax administration 
system. There are, of course, the obvious rewards. Increased 
electronic filing of returns can improve tax administration by 
speeding refunds to taxpayers, provide positive acknowledgment 
that a return has been received and reduce the need to correct 
errors.
    However, on a broader scale, improved electronic exchange 
of information with taxpayers and practitioners advances all 
three of the IRS' strategic goals: service to each taxpayer, 
service to all taxpayers and productivity through a quality 
work environment.
    A robust ETA program will reduce time spent by taxpayers 
dealing with the IRS. We will reduce the number of phone calls 
we have to answer and because of these two factors we will free 
up our compliance employees to focus on real compliance issues, 
rather than just retrieving or correcting information.
    The IRS has made considerable progress in expanding 
electronic filing. During 1999, approximately one out of every 
four taxpayers, over 29 million individuals, filed 
electronically using one of three convenient e-file options: 
filing through an IRS-authorized Electronic Return Originator, 
filing on-line via home computer through a third party 
transmitter, and filing over the telephone via TeleFile. The 
IRS expects to receive more than 34 million electronically 
filed individual income tax returns in 2000.
    Businesses also enjoy the benefits of electronic filing and 
payment. During Fiscal Year 1999, taxpayers made over $1.3 
trillion in tax deposits through the Electronic Federal Tax 
Payment System (EFTPS). This system allows taxpayers to make 
their federal tax deposits over the telephone or using the 
computer, eliminating the need for paper deposit coupons, 
checks, or trips to the bank. In addition, well over two 
million employment tax returns were filed electronically or 
over the telephone during Fiscal Year 1999.

The 2000 Filing Season

    2000 filing season is turning out to be another growth year 
for ETA as more taxpayers than ever before are enjoying the 
benefits of filing taxes electronically. Through March 10, 
2000, over 25 million individual taxpayers filed using one of 
the three e-file options; a 16 percent increase over the same 
period last year.
     Nearly 18.4 million taxpayers e-filed their tax 
returns electronically through an IRS-authorized Electronic 
Return Originator (ERO); a 16.1 percent increase over the same 
period last year.
     Approximately 2.8 million taxpayers file their tax 
returns on-line via their home computer through a third party 
transmitter. On-line filing is running 95.7 percent ahead of 
last year's pace and as of March 10 has already exceeded last 
year's total volume of 2.5 million.
     Almost 3.9 million taxpayers filed their returns 
over the telephone using the award winning TeleFile system. For 
the first time, taxpayers in Indiana and Kentucky were able to 
file both their federal and state returns in a single telephone 
call during the pilot of the first Federal/State TeleFile 
option.
     Overall, 8.5 million taxpayers have chosen to file 
both their federal and state tax returns simultaneously in a 
single electronic transmission. This year, 35 states and the 
District of Columbia are participating in the program.
    In addition, many of the volunteer sites under the IRS-
sponsored Volunteer Income Tax Assistance (VITA) or Tax 
Counseling for the Elderly (TCE) programs offer free e-filing 
to those seeking help. Taxpayers can locate the nearest 
volunteer site by calling the IRS at 1-800-829-1040. As 
described in the following section, the IRS is undertaking 
several initiatives to further expand the program this year. 
Individuals, businesses and practitioners are also seeing many 
improvements in 2000 and will see even more in future filing 
seasons.

New in 2000 for Individual Taxpayers:

    Expansion of Signature Pilots: More individual taxpayers 
are able to file totally paperless returns in 2000 because the 
IRS expanded its Practitioner PIN Pilot to include about 18,000 
tax preparers. The IRS also continued the On-Line ECN Pilot by 
mailing 11 million postcards containing e-file customer service 
numbers (ECNs) to taxpayers who used a computer to file their 
own return last year. In 1999, over 650,000 taxpayers 
participated in the On-Line PIN Pilot, while nearly 500,000 
participated in the Practitioner PIN Pilot.
    Expansion of Electronic Payments: More electronic payment 
options (credit card and ACH debit payment) have been made 
available to taxpayers this year, such as accepting debit 
payments through TeleFile and accepting credit cards for Forms 
1040ES, estimated tax payments, and Forms 4868, extensions of 
time to file. Last year, over 53,000 tax payments were made by 
credit card and approximately 75,000 payments were made by ACH 
Debit.
    Additional Forms and Schedules Accepted: More forms and 
schedules including Schedule J, Farm Income Averaging, and 
Forms 8271, Investor Reporting of Tax Shelter Registration 
Number, 8582-CR, Passive Activity Credit Limitations, 6781, 
Gains and Losses from Section 1256 Contracts and Straddles, and 
8586, Low Income Housing Credit, are being accepted through IRS 
e-file, making the program available to more taxpayers. In 
addition, the IRS is finalizing its plans for accepting all 
forms and schedules via IRS e-file; half of the remaining forms 
and schedules should be added for 2001, with the balance by 
2002.
    Web-based e-file Options: Millions of taxpayers have 
discovered that the IRS home page on the World Wide Web is an 
excellent and convenient source for tax forms and tax 
information. They are also discovering that the IRS e-file 
Partnerships page on the IRS Web site provides links to various 
private industry companies that provide affordable, convenient, 
user-friendly e-file options. In the spirit of RRA 98, the IRS 
is partnering with the private sector to provide IRS e-file and 
electronic payment options for individuals and businesses.
    2000 Marketing Campaign: To help move us toward the goal 
Congress set for us, ETA launched a brand new marketing 
campaign this year, ``30 Million Americans Use IRS e-file.'' It 
is a fully integrated campaign with new TV, radio and print 
advertising.

New in 2000 for Business Taxpayers:

    Form 941 On-Line Filing: This April, employers will have 
the added option of filing their quarterly Forms 941 from their 
office computer, in addition to e-filing and TeleFile.
    Electronically Filed Information Returns: Effective for 
2000, payors who electronically transmit information returns to 
the IRS will have an extra month--from February 28 to March 
31--to file over IRS' new system, Filing Information Returns 
Electronically (FIRE).

New in 2000 for Practitioners:

    Account Management Pilot: The IRS is piloting an Accounts 
Management Program in the Kansas-Missouri and Southern 
California Districts to serve the needs of Electronic Return 
Originators (EROs), financial institutions, large and small 
employers, and payroll service providers who distribute ETA 
products and services to taxpayers.
    Debt Indicator Pilot: Through the Request for Agreement 
(RFA) process, selected tax professionals are participating in 
the debt indicator pilot.

Presidential Budget Initiatives


    The President's FY 2001 budget request contains two 
provisions that are intended to make electronic filing of 
income tax returns more attractive to taxpayers. These 
provisions would provide taxpayers with:
     A temporary, refundable tax credit for the 
electronic filing of individual income tax returns. The credit 
would be for tax years 2002 through 2006--$10 for each 
electronically filed return other than TeleFile returns for 
which the credit would be $5; and
     One or more no-cost options for preparing and 
filing individual income tax returns over the Internet 
beginning no later than tax year 2002.
    If enacted, the IRS intends to work closely with the 
private sector to implement the free Internet filing provision. 
It states that no later than tax year 2002, the IRS would be 
required to offer one or more options to the public for 
preparing and filing individual income tax returns over the 
Internet at no cost to the taxpayer. If the IRS offered such 
options through contract arrangements with Authorized IRS e-
file Providers, it would be with the assurance that the 
taxpayer's tax return information would not be used by the 
Provider without the taxpayer's permission for any purpose 
other than submission to the IRS.
    This proposal does not mean that the IRS will be entering 
the tax software business. Currently, there are several dozen 
commercial providers of tax preparation software for individual 
returns who provide software and customer support. The IRS does 
not currently provide tax preparation software and is not 
equipped to enter this business, nor does it plan to do so. 
However, the proposal would require the IRS to build on the 
trends that already exist in the industry, which are to offer 
very low cost, or even no cost tax services over the Web. The 
IRS could implement this option by issuing a Request for 
Proposal (RFP) to the industry.

             Providing Information and Service to Taxpayers

    From web-based technology to 24 hours-a-day/7-days-a-week 
phone service to sitting down face-to-face with a taxpayer with 
a problem, the IRS continues to work to provide the easiest and 
most efficient ways for taxpayers to get the information and 
assistance they need not only during filing season, but 
throughout the year.

Web Site

    An increasing number of taxpayers are discovering that the 
IRS site on the World Wide Web (the ``Digital Daily'') is an 
excellent and convenient source for tax forms and tax 
information. In preparation for the 2000 filing season, the IRS 
also has a shorter and easier to remember Web site address--
www.irs.gov. Since coming on line in January 1996, taxpayers 
have downloaded over 201 million forms, publications and 
products. Through February 2000, there have been over 51.5 
million downloads as compared to 24.3 million for the same 
period in 1999--an increase of almost 112 percent.
    Anyone with Internet access can receive: tax forms, 
instructions, and publications; the latest tax information and 
tax law changes; tax tables and rate schedules; and hypertext 
versions of all taxpayer information publications, including 
the very popular Publication 17, ``Your Federal Income'' all 
TeleTax topics; answers to the most frequently asked tax 
questions; a library of tax regulations; and the weekly 
Internal Revenue Bulletin, which contains all the latest 
revenue rulings, revenue procedures, notices, announcements, 
proposed regulations and final regulations.
    The IRS Web site also now has a W-4 Calculator in its ``Tax 
Info for You'' section. In addition, expanded use of online 
customer service technologies provides greater taxpayer access 
to IRS' help while on the Digital Daily.

Web Site and Innocent Spouse

    The IRS Web site has become an important tool in the IRS' 
efforts to educate and inform taxpayers of their rights under 
the new RRA 98 innocent spouse provisions and to help them to 
make correct and accurate claims. To this end, we developed an 
interactive application on our Web site that provides taxpayers 
a general explanation of eligibility for spousal relief. This 
application has also been distributed to 50,000 tax 
practitioners nationwide and assists taxpayers in understanding 
the information IRS needs in order to evaluate innocent spouse 
claims.
    The interactive application includes not only innocent 
spouse provisions, such as separation of liability and 
equitable relief, but it also takes taxpayers through injured 
spouse and community property issues as well. Moreover, the 
interactive application will give taxpayers direct access to 
forms and publications so they can apply for any of the 
applicable relief options. We have shared this interactive 
Internet application with 11 Internet sites associated with 
spousal issues, including the Oprah Winfrey Television Show Web 
site.

Web Site and Installment Agreements

    In August 1999 the IRS announced a new aid for those 
interested in paying their taxes on an installment plan. The 
IRS Web site now has an interactive calculator that helps a 
person figure the monthly payment amount, and then prints out 
an installment agreement form for the taxpayer to file.
    The calculator is for individuals who have filed their 
returns and are not already paying taxes under an installment 
agreement. It is available through the ``Interactive 
Installment Payment Process'' link on the ``Tax Info for You'' 
page of the IRS Web site.
    Those qualifying for a ``streamlined'' agreement--
generally, taxpayers with a tax debt of not more than $25,000 
that they will be able to pay off within five years--will find 
out how long their proposed monthly payments would last. 
Taxpayers who do not meet the criteria for a streamlined 
agreement can compare their monthly expenses to the amounts 
allowed under the IRS' Collection Financial Standards, to help 
determine an appropriate tax payment amount.
    Users may print out the Form 9465, Installment Agreement 
Request, from the Web site--with the allowable expense 
worksheet, if used--and mail it to the IRS for review and 
approval. The Web site does not store or transmit any personal 
data. Persons who are already paying back taxes under an 
installment plan must pay all subsequent taxes on time or they 
will default on their agreement.

Web Site Alerts

    This filing season, the IRS continues a Web site alert for 
taxpayers and practitioners about problems that could affect 
them. Similar to a product recall notice, the ``Index of 
Problem Alerts,'' found under the ``What's Hot'' section 
describes the problem, its scope (the number of people likely 
to be affected), where they are located, and most importantly, 
what the IRS is doing to fix the problem, and what, if anything 
the taxpayer needs to do about it. In most cases, taxpayers do 
not have to take any action. However, if they want more 
information, taxpayers can call our toll-free, 24 hour-a-day/7-
day-a-week phone number 1-800-829-1040. Thankfully, this filing 
season there were few problems to report.

Web Site Small Business Corner

    The Small Business Corner located on the IRS web site was 
inaugurated in January 1999 to benefit the over 23 million 
small business taxpayers and the 800,000 start-up businesses 
begun each year. It is intended to provide these taxpayers with 
easy-to-access and understand information. This type of 
convenient ``one-stop shopping'' for assistance could provide 
most, if not all of the immediate products and services that a 
small business needs. It also offers the potential for Web-
based Q&As which can help the IRS identify and address trends 
and systemic problems. Improved electronic access to 
information should also result in decreased demand for 
telephone and walk-in assistance.

Expanded Web Site Tax Professional Corner

    The Tax Professional Corner offers practitioners the 
opportunity to order electronically, tax products, including 
the Federal Tax Forms CD-ROM. Practitioners can also subscribe 
to electronic e-mail information services, such as the Digital 
Dispatch and Local News Net, giving them access to 
instantaneous news and information direct from national and 
local IRS offices. The Web site also provided highlights of the 
first conference on IRS Modernization, a joint effort between 
the IRS and private sector partners, including the American Tax 
Policy Institute, American Bar Association. American Institute 
of Certified Public Accountants, National Association of 
Enrolled Agents and Tax Executives Institute.

Web-based Customer Service

    This filing season, the IRS continues to provide 
interactive electronic tax law assistance to taxpayers via its 
Web site. Users click on the mailbox icon on the Digital Daily 
home page and then proceed to the Tax Law Question section. 
This is not intended for highly complex tax issues or questions 
regarding specific tax accounts. Specific tax account or refund 
questions must still be handled by telephone or in person. IRS 
customer service staff will provide answers to ``general'' tax 
law questions to assist taxpayers in preparing their returns. 
Taxpayers select one of a number of categories, provide an e-
mail address, and submit their questions. To answer taxpayers 
accurately, economically and quickly, the IRS will provide a 
``pre-prepared'' response, if available.

Notice Information on the Web

    This new application answers the most frequently asked 
questions about the IRS' highest volume notices. It shows 
taxpayers how to determine which notice they have, what they 
should do next and who to contact if they disagree. Information 
is provided on the following notices:

------------------------------------------------------------------------
                 CP Number                          Notice Title
------------------------------------------------------------------------
CP 12.....................................  Math Error--Overpayment of
                                             $1 or more
CP 14.....................................  Balance Due, No Math Error
CP 49.....................................  Overpaid Tax Applied to
                                             Other Taxes You Owe
CP 161....................................  No Math Error, Balance Due
CP 515....................................  First Notice--Return
                                             Delinquency
CP 518....................................  Final Notice of Overdue Tax
                                             Return
CP 523....................................  Notice of Default on
                                             Installment Agreement
CP2000....................................  Notice of Proposed
                                             Adjustment for Underpayment/
                                             Overpayment
------------------------------------------------------------------------


Expanded Web Site Orders

    In FY 1998, the IRS introduced ``Forms & Publications by 
U.S. Mail.'' This allowed taxpayers to request forms by 
conventional mail rather than downloading. In January 2000, 
approximately 82,000 orders were placed distributing 283,000 
products. In FY 1999, we added the ``Practitioner Order 
Program.'' For FY 2000, the Digital Daily expanded the 
electronic order capability to add a Tax Practitioner Order 
Program and added a Tax Package Request service and an Employer 
Order Program.
    The Tax Practitioner Order Program is used by tax 
professionals to order their copies of Package X. In an effort 
to save both paper and IRS costs, the IRS issued a ``postcard'' 
rather than a tax package to individuals who filed an 
electronic return in the previous year. Some portion of those 
individuals may still want to receive a tax package. The 
postcards the IRS issues provide the vehicle to request a tax 
package, but now taxpayers have yet another option. Those 
individuals can order their Tax Package via the Web using our 
new Online Tax Package Request.
    For FY 2000, tax professionals are able to correct their 
mailing addresses with IRS via the Internet. The IRS is 
expanding these ordering services to Post Offices, libraries, 
and other tax products distribution partners. In addition, we 
are looking to add VITA and TCE order capability on the net.
    This on-line ordering program will provide an online 
capability for employers to order quantities of Forms 1099 and 
a variety of other employer forms. In the past, employers had 
to request a copy of ``Package 1099'' in order to get a copy of 
the paper-based order form. More than 750,000 electronic orders 
were filled last year, before these many enhancements.

CD-ROMs

    The Federal Tax Forms CD-ROM contains more than 600 tax 
forms and instructions for the current tax year, and on archive 
of forms and instructions dating back to 1992, and some 3,000 
pages of topic-oriented tax information. Users can 
electronically search, view-on-screen, or print any of the 
items contained on the CD on their own printers. The two-issue 
subscription is conveniently available through the Digital 
Daily for $21. If ordered by fax, mail, or telephone, the cost 
is $28. As of March 20, 2000, over 40,500 subscriptions were 
sold.
    In conjunction with the Small Business Administration, the 
IRS also recently produced the joint small business CD-ROM, 
``Small Business Resource Guide: What You Need to Know About 
Taxes and Other Topics.'' Last year's prototype CD-ROM received 
highly favorable reviews from small businesses and external 
stakeholders. As a result, the Year 2000 version of the CD-ROM 
is being made available free of charge, one-per-customer, by 
calling our toll-free number at 1-800-TAX-FORM. It can also be 
ordered on the IRS Web site.
    The CD-ROM is an interactive multi-agency product utilizing 
the latest technology to provide the small business taxpayer 
with easy-to-access and understand information. The CD-ROM 
provides an array of helpful information for business 
operators, including actions to take before going into business 
and tax filing and reporting responsibilities when starting, 
expanding, closing and selling a business. In addition, it 
includes all of the business tax forms, publications and 
instructions for e-filing. The CD-ROM also allows users with 
Internet access to link to other helpful federal and state web 
sites.
    We are working with the SBA, the Association of Small 
Business Development Centers and the Service Corps of Retired 
Executives (SCORE) to help publicize and distribute the new CD-
ROM so that we can get it to the people it will help most. 
Combined, these organizations have over 1,500 locations and the 
IRS is sending each site 100 free copies of the CD-ROM to share 
with their small business clients. Each Member of Congress will 
soon receive two copies as well.

EITC CD-ROM

    IRS' Earned Income Tax Credit CD-ROM is now available. The 
first EITC CD-ROM was shipped to the three IRS distribution 
centers on February 17th. Thirty thousand disks were produced. 
The EITC CD-ROM is aimed primarily at tax practitioners and 
contains hundreds of forms, along with electronic documents and 
publications to help tax professionals meet their obligations 
related to EITC due diligence. It is the IRS' hope that the 
electronically searchable publications and electronically 
fillable forms will reduce practitioner burden and help in 
compliance.

New TAXi Module Debuts/TAXi CD-ROM Nears Completion

    The new Tax Interactive module, ``The Real Planet'' debuted 
this year. Tax Interactive is IRS' Web site for teens and is 
part of the ``Digital Daily.'' The original TAXi concept was 
created and produced through the joint efforts of the IRS and 
the American Bar Association's Section of Taxation.
    The new TAXi module is a Web talk show about ``teens in 
business for themselves'' and explains planning and operating a 
business, with an emphasis on business related taxes. The 
module helps teens learn in the same relaxed and fun style as 
the other TAXi modules. ``The Real Planet'' gives teens a 
practical introduction to owning a business and the related tax 
obligations.
    IRS is again working with the American Bar Association's 
Section of Taxation to develop a companion CD-ROM product for 
TAXi. When it is completed, teachers will be able to use the 
Tax Interactive materials on their local computers and 
networks, without an Internet connection. The CD-ROM will be 
completed next month.

Braintaxer Tax Game Show

    ``Braintaxer'' is a new fun and Web-based interactive game 
to test knowledge of a specific IRS or tax-related topic. A 
game show host introduces the taxpayer to the game and the 
contestants. The taxpayer selects the contestant of his or her 
choice and answers tax questions related to that contestant. 
Choosing a small business owner profile means the taxpayer 
receives small business tax questions. The taxpayer is then 
presented with three questions and multiple-choice answers. The 
``Results'' page shows which questions were answered correctly 
and provides links to a more complete explanation of the tax 
issues. Finally, the taxpayer can display and print a 
certificate.

IRS Local News Net

    IRS Local News Net is a list server that supplements the 
Web site's Digital Dispatch (there are over 70,000 Digital 
Dispatch subscribers) by providing localized, targeted and 
immediate information for tax professionals. It is a system 
capable of reliable and efficient delivery of information to 
the tax professional community across the nation.
    The system is structured to support the localized nature of 
information based upon the tax professional's specific local 
needs. Any District Office, Service Center or Computing Center 
that needs to communicate with the public or with tax 
professionals on a regular basis can request a list server. 
Local News Net Servers are being developed primarily to reduce 
the print and postage costs incurred with the Director 
newsletters.

                          Telephone Assistance

24/7 Phone Service and Access

    One of the hallmarks of the IRS' commitment to providing 
top quality service to taxpayers is 24 hours-a-day/7 days-a-
week toll-free telephone service (1-800-829-1040). So-called 
``24/7'' phone service became a permanent IRS service feature 
on January 4, 1999, and we offer it throughout the filing 
season. After April 17, we will continue to offer around-the-
clock service for refund and account callers, and service will 
be available for tax law assistance Monday through Saturday 
from 7:00 AM until 11 PM. As of March 11, 2000, more than 26 
million taxpayers have been served in FY 2000, compared to 
almost 29.9 million over the same period last year.
    As the Subcommittee is aware, the expansion to 24 /7 
service last year, combined with increased training demands to 
implement the new tax law requirements, caused the effective 
level of service to decline, especially during the beginning of 
the filing season. However, we believe we have turned a corner 
this filing season. The upward trends across the board in phone 
service are most encouraging and show that our investments in 
training, management and technology are beginning to pay 
dividends. For this filing season as a whole, our level of 
service is 65 percent so far compared to our target of 58 
percent. In the last four weeks, the level of service averaged 
70 percent.
    Some of our toll-free telephone strategies and initiatives 
for the 2000 filing season include: the Customer Service Field 
Realignment implemented October 1, 1999, that will help us to 
make the best use of staffing by routing calls to where we have 
trained people available; the increased ability to answer tax 
law inquiries by assigning additional compliance staff during 
regular hours and overtime and supplementing them with Appeals 
officers; improved accessibility to and service from the 
National Taxpayer Advocate; and expanded Spanish Language 
Assistance.
    One of the very important steps we are taking to improve 
telephone service is to change the way we measure service and 
quality to better reflect the ``real world'' way that taxpayers 
receive it. These are more stringent, but also more useful 
ways, of measuring.
    For access, we have begun to measure the percentage of 
calls in which the taxpayer receives actual service, in 
relation to the percentage of time the taxpayer simply gains 
access to our system.
    To promote consistency in call accounts quality, we 
established a Centralized Quality Review Site in October 1999 
to replace the field review process we had previously employed. 
The reported quality rate is lower in FY 2000 because the IRS 
is reviewing more stringently for adherence to Internal Revenue 
Manual requirements. If Customer Service representatives do not 
perform all action required by the IRS, the call is marked as 
incorrect.
    In order to deliver truly high quality communication to 
taxpayers, we need to improve the management, organization, 
technology and training that support these operations. This is 
a major long-term objective of our overall modernization 
program.

Referral Mail

    R-Mail (or Referral Mail) is a system that facilitates the 
referral of tax law questions on specific categories to 
Compliance employees.
    Up until the 2000 filing season, Customer Service employees 
transcribed these phone message recordings to paper and faxed 
or delivered them to Compliance employees. Compliance employees 
made two attempts to call taxpayers and if no contact was made 
on the second attempt, the message was discarded or filed. This 
system was time consuming and inefficient. Its deficiencies 
included poor workload controls and lack of management 
information.
    The R-mail system rolled out nationwide for the 2000 filing 
season addresses these problems. It provides a more effective 
method for moving this referral workload to Compliance staff 
than the previous cumbersome ``message offloads'' from 
recordings and unreliable distribution of paper.
    Calls on the topics identified for Compliance referral are 
routed to screeners through our routing scripts. CSRs type a 
brief message into a template on the R-mail system and add each 
question to the centralized database. Revenue Agents and Tax 
Auditors from all over the country who are assigned to do the 
callbacks are immediately able to access the questions from 
their computers using a Web browser and call taxpayers back 
with answers.
    Other than obvious workload distribution advantages, this 
system also provides not only better service to taxpayers, but 
easily quantifiable management information, improved controls, 
and the elimination of clerical time associated with logging 
and filing of paper referrals.

Forms By Fax

    Taxpayers can receive more than 150 frequently used tax 
forms 7 days a week, 24-hours-a-day from IRS TaxFax. Taxpayers 
can request up to three items per call. Taxpayers use the voice 
unit of their fax machine to dial the service at 703-368-9694. 
The only cost to the taxpayer is the cost of the call.

Recorded Tax Information

    TeleTax has 148 topics available 24 hours-a-day using a 
Touch-tone phone. Taxpayers can call (toll-free) 1-800-829-4477 
to hear recorded information on tax subjects such as earned 
income credit, child care/elderly credit, and dependents or 
other topics, such as electronic filing, which form to use, or 
what to do if you cannot pay your taxes. Nearly 11.5 million 
taxpayers used TeleTax last year for recorded tax information; 
as of March 11, 2000, over 3.3 million have taken advantage of 
the service so far this fiscal year.

Automated Refund Information

    In FY 1999, more than 34 million taxpayers used the 
Automated Refund Information system on TeleTax to check on the 
issuance of their refund checks. As of March 11, 2000, the 
number stands at over 14 million. Taxpayers may call 1-800-829-
4477 to check on their refund status Monday through Friday from 
7 a.m. to 11:00 p.m. if using a touch-tone phone, or 7:30 a.m 
to 5:30 p.m. for rotary or pulse service.

                      Taxpayer Assistance Centers

Saturday Service

    Delivering on our promise to supply even more reliable and 
helpful taxpayer assistance, the Internal Revenue Service is 
providing Saturday service for the entire 2000 filing season at 
275 locations nationwide, and for the first time, Sunday 
service on April 16th. As of February 29, 2000, we served 
62,496 taxpayers on weekends. So far this filing season, we 
have served over 2.8 million taxpayers at all Taxpayer 
Assistance Centers--a nine-percent decrease from last year.
    The Saturday Service sites were selected based on their 
weekend accessibility, year-round operational status, and high 
traffic volume and include non-traditional locations, such as 
shopping malls, community centers and post offices.
    On each of the Saturday Service Days, IRS employees 
provided taxpayers with the following services: (1) 
distribution of forms and publications; (2) answers to account 
and tax law inquiries; (3) verification of Individual Taxpayer 
Identification Number documentation; (4) processing of alien 
clearances; (5) acceptance of payments; and (6) return 
preparation.
    While some taxpayers prefer face-to-face meetings with IRS 
personnel to resolve their problems, we believe that in the 
long run, most taxpayers can be best served over the toll-free 
telephone services and the Internet. We also believe that by 
energizing the VITA return preparation program and co-locating 
these activities at the Taxpayer Assistance Centers, the IRS 
will be able to focus on simple account and collection issues.

Problem Solving Days

    Problem Solving Days continue to be a great success story 
on the problem resolution front. Last year, nearly 32,000 
people took advantage of this program. According to the 
National Taxpayer Advocate's 1999 Annual Report to Congress, 
the IRS handled 57,450 cases during the program's first two 
years. More than half the cases revolved around seven issues 
raised by taxpayers: audit reconsiderations (6,667 cases), 
Offer in Compromise issues (6,330), requests for technical/
procedural explanations (4,124), Installment Agreements 
(4,083), account and notice inquiries (3,393), various penalty 
issues (3,247) and inability to pay issues (2,561). Since the 
report was issued, an additional 5,700 taxpayers have been 
served during Problem Solving Days.
    There were a number of lessons learned from handling these 
cases: (1) Most taxpayers prefer a telephone solution to their 
problem, although some still want the option of a face-to-face 
meeting; (2) taxpayers want their issue resolved with one 
contact; (3) an increasing percentage of cases at Problem 
Solving Days involve routine issues, and systemic long-standing 
problems cases are becoming the exception; (4) most of these 
routine cases could have been resolved either by phone or in 
person at our current Taxpayer Assistance Centers; and (5) 
cross-functional coordination is an essential ingredient to 
effective problem solving.
    In July 1999, the IRS transferred responsibility for 
Problem Solving Days from the Office of the National Taxpayer 
Advocate to the IRS Chief Operations Officer. The Chief 
Operations Officer created a task force to study ways to 
institutionalize Problem Solving Days into every day operations 
and presented its recommendations earlier this year.
    A project office is now operational in Customer Service. 
One of the key recommendations is to move key features and best 
practices that have evolved from Problem Solving Days and 
incorporate them into a plan for implementing the Taxpayer 
Assistance Centers. However, during this transition, we 
continue to hold the annual National Problem Solving Day and 
local Problem Solving Days. A total of 74 Problem Solving Day 
events were scheduled across the country from January through 
March 2000. Taxpayers can get schedules for these special days 
from the IRS Web site or by calling their local IRS office.

Volunteer Programs

    Through February of the 2000 filing season, over 112,000 
taxpayers were assisted by IRS Volunteer Income Tax Assistance 
(VITA) and Tax Counseling for the Elderly (TCE) volunteers at 
more than 4,400 sites. During all of FY 1999, over 3.4 million 
taxpayers were assisted by more than 71 thousand VITA and TCE 
volunteers.
    We also opened up VITA and TCE offices that were in 
locations close to our assistance centers and offices observing 
EITC Awareness Days. Our volunteer programs are set up in 
shopping centers, libraries, churches and community centers, 
providing an additional avenue of support to taxpayers visiting 
an IRS office for EITC assistance.
    In addition to this type of volunteer assistance, our 
outreach program targeted expanding EITC education and 
assistance. We identified EITC coordinators in our offices who 
are responsible for the full complement of EITC outreach 
activities. While no data is available yet for FY 2000, during 
FY 1999, this program reached 174,067 EITC taxpayers through 
social workers, community organizations, homeless shelters and 
faith based organizations.
    Our challenge for the 2000 filing season was to provide 
volunteers with the necessary tools to assist taxpayers and 
reduce the burden on internal resources. To this end we loaned 
5,300 computers and 3,400 printers and provided software 
(TAXWISE) to volunteer sites. We are also identifying 
communities that would benefit from EITC programs and 
recruiting volunteers through the Internet.

The IRS Corporate Partnership Program

    The IRS Corporate Partnership Program has expanded 
dramatically. While our initial goal was to partner with 500 
companies that had 600,000 employees, there are now more than 
2,366 companies with more than 15.5 million potential employees 
in the program. Employees of these firms can get forms through 
the corporations' Intranet site or local LAN."font-family: 
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Tax Package Innovations

    In recent years, the IRS has worked with private 
contractors to improve forms, instructions, and publications by 
making it as simple as possible for taxpayers to understand and 
fulfill their tax obligations. The contractors have brought a 
wide range of expertise, including behavioral science and 
learning theory, to bear on the challenge. Application of these 
principles has enabled us to simplify language and use graphic 
and other cues to aid taxpayers.
    Specific areas targeted included the Earned Income Tax 
Credit (EITC) and Child Tax Credit (CTC) forms, worksheets, and 
instructions. The joint team effort used behavioral science 
principles to evaluate the effectiveness of the existing EITC 
and CTC materials, and to make improvements. While we do not 
yet have data from this filing season, the reworked forms and 
instructions received favorable reviews in focus group 
sessions, showing a dramatic decrease in the error rate. The 
redesigned EITC instructions refer taxpayers with very complex 
situations to Publication 596, Earned Income Credit. Removing 
consideration of these special situations from the instructions 
simplified filing for 90 percent of taxpayers claiming the 
EITC. Five publications have also been rewritten working with 
contractors using these same principles.
    For the 2000 filing season, most taxpayers whose only 
capital gains are from mutual fund distributions will not need 
to file Schedule D (Form 1040), Capital Gains and Losses. 
Rather than having to complete the 54-line schedule, these 
taxpayers can use a 15-line worksheet. This represents a 
dramatic burden reduction for approximately six million 
taxpayers. For the 2001 filing season, a line will be added to 
Form 1040A for reporting capital gain distributions from mutual 
funds, thus allowing the Service to send the simpler Form 1040A 
package to the approximately 2.5 million taxpayers who in the 
past had to file Form 1040 to report those distributions.

Simplification Initiatives

    The IRS released a new version of Form 8857, Request for 
Innocent Spouse Relief, that makes it easier for taxpayers to 
use the form. Using the revised form, filers are guided through 
the various types of relief available (innocent spouse, 
separation of liability, and equitable relief) through the use 
of simple-to-answer questions with Yes/No checkboxes. The 
instructions were revised to clarify key points and definitions 
such as the difference between understatement of tax and 
underpayment of tax. The revisions reflect feedback from 
various sources, including focus groups held at the IRS' Austin 
Development Center.
    In an effort to streamline the amount of information with 
which small businesses must contend to meet their requirement 
to file information returns, the IRS also developed the 
following new products for 2000, while continuing to provide a 
booklet for payers who need all of the Form 1099 information. 
The new products should help the majority of small businesses 
that are required to file only one or two of the various 
information returns:
     A separate new booklet containing only general 
instructions (16 pages) for use by all filers who need only 
certain form instructions; and
     Fourteen new separate form instructions for payers 
who need only the information pertaining to the forms they file 
(some form instructions have been combined based on forms used 
by certain filers).
    The Form 5500 series for 1999 used for reporting employee 
plan information was also substantially revised and improved. 
The prior Forms 5500 and 5500-C/R were replaced with one Form 
5500. The revised form will streamline reporting, filing, and 
processing.
    In addition, we removed two lines from Schedule AI, Part II 
of Form 2210. Part II of Schedule AI is completed by self-
employed taxpayers to figure their self-employment tax when 
computing any estimated tax penalty. Each line had four entry 
spaces, one for each payment period. Thus, these taxpayers now 
have two fewer lines to complete and eight fewer calculations 
to make.
    For the longer-term, the IRS' Tax Forms and Publications 
Division entered into a multi-year contract with The Gallup 
Organization to help determine the degree of customer 
satisfaction with tax forms and publications. The contractor 
will work with the division in gathering data through surveys, 
focus groups, and other methods to measure customer 
satisfaction, reduce both processing and taxpayer errors, and 
identify other possible improvements to division products.
    In addition, the Tax Forms and Publications Division is 
working with the Indiana District Office Research and Analysis 
(DORA) in the Simplifying Filing Research Strategy. This 
initiative will identify opportunities to migrate taxpayers to 
simpler returns, improve tax forms and instructions through 
detailed analyses of where errors are being made on current 
forms, and minimize the number of taxpayers affected by 
proposed changes to tax forms and instructions. This strategy 
initially focused on individual taxpayers, but has been 
expanded to include forms used by small business taxpayers.
    Finally, the IRS established several vehicles for 
conducting focus group interviews with Service employees to 
test new and redesigned products. These include use of the 
Development Centers in the Austin and Ogden Service Centers, 
and establishment of a cadre of IRS employee volunteers. Use of 
these resources enables us to conduct focus group interviews on 
short notice and at minimal cost. Also, we have found that in 
addition to doing an excellent job of providing input from a 
taxpayer's perspective, these employees also provide us with 
valuable insight into how the revised products will impact the 
IRS.

Tax Packages

    For most taxpayers, the 2000 filing season tax packages 
contain forms that look very much like last year's. There are 
different dollar amounts associated with some tax benefits, 
such as the higher $500 per child limit for the child tax 
credit, but the structure of the forms is very similar. There 
were very few tax law changes for 1999, and these are reflected 
in the forms and instructions.
    When the IRS finalized the content of the tax packages in 
October, it included a cautionary note about pending 
legislation. After Congress extended various expiring 
provisions, the IRS was able to replace the caution--or add an 
insert to ignore it--in all but about eight million of the 26 
million forms packages. Taxpayers receiving these packages also 
received a postcard telling them that the forms and 
instructions were all right to use.
    The one thing entirely new to the tax packages is not tax-
related. Photos of missing children appear on otherwise blank 
pages of the tax instructions and other publications. The IRS 
is working with the National Center for Missing and Exploited 
Children to expand the distribution of photos of lost, abducted 
or runaway children.

Newspaper Supplement Program

    The Newspaper Supplement Program promotes distribution of 
IRS forms in selected areas that do not currently have 
sufficient outlets for tax products. There are currently six 
newspapers enrolled in the program with a circulation of 
1.1million readers. Each newspaper distributes six pre-selected 
tax items (Forms 1040, 1040EZ, 4868, Schedules EITC, A&B, and 
Publication 2053, Quick and Easy Access to IRS Tax Help and 
Forms) in one of their upcoming Sunday editions. The IRS will 
supply the newspapers with enough forms to satisfy one Sunday 
circulation. All participating newspapers distribute in one or 
more of the counties identified as needing additional tax form 
outlets.

                     Taxpayer Rights Implementation

    RRA 98 required the IRS to implement 71 new or modified 
taxpayer rights provisions, many of which were effective either 
on date of enactment, or within six months of it. At the same 
time, the IRS received recommendations from many sources about 
other pressing changes that were required to improve service or 
fix problems. These included such basic matters as availability 
and quality of telephone service, rewriting of notices and 
letters sent to taxpayers, control over inventory of assets and 
hundreds of other matters.
    For example, over the last year, the IRS received 58 audit 
reports from the Treasury Inspector General for Tax 
Administration (TIGTA) containing 314 specific recommendations 
for changes or improvements and 74 reports from GAO containing 
42 specific recommendations. In addition, there are 127 TIGTA 
and 36 GAO audits underway. The National Taxpayer Advocate 
identified the top twenty problems affecting taxpayers and made 
recommendations as to what should be done about them. 
Addressing and managing these changes requires significant 
management attention, and many require additional resources, 
including information systems resources, to implement.
    In this context, the first priority was implementation of 
the taxpayer rights provisions of RRA 98 in accord with the 
law. Given the short time frames, and many competing demands, 
our capacity to provide guidance to the public and to employees 
and to conduct training for the 100,000 employees affected was 
stretched to the limit. The initial focus was on ensuring legal 
compliance. In many cases, we did not know the amount of time 
and resources that would be needed to carry out these 
provisions. In FY 1999, for example, we had briefings and 
training on 55 RRA 98 provisions and provided a total of two 
million hours of training. We estimate that nearly 4,560 full 
time equivalent personnel were required for the specific 
administrative provisions of RRA 98.
    We are at the stage where we have implemented the RRA legal 
provisions. However, we have several years of work ahead to 
make them work more efficiently and with higher quality. Our 
immediate challenges are primarily training and management. We 
are continuing a high level of training in FY 2000.
    I want to stress that we are wholly committed to 
implementing each and every taxpayer rights provision and 
making them work as intended, while still fulfilling our 
mandate to collect taxes that are due. We will get the job done 
and we will get it right. However, we will also make mistakes 
along the way and we are not yet at an acceptable level of 
quality, efficiency and effectiveness in the way that we are 
implementing some of these provisions.

New Taxpayer Advocate Organization

    The Taxpayer Advocate Service (TAS) is in the process of 
implementing a modernized structure as called for in RRA 98. 
The new organization officially ``stood up'' on March 12, 2000. 
TAS is competitively hiring over 2,300 individuals to work full 
time in the Taxpayer Advocate Service. All Taxpayer Advocates 
will report to the National Taxpayer Advocate rather than to an 
IRS District or Center director. Every state now has at least 
one Taxpayer Advocate. Separate addresses, telephone and fax 
numbers for Taxpayer Advocates are being published as the 
telephone directories are updated. They are also included on 
notices of deficiency. Because of the restructuring, TAS will 
be better positioned, better trained and more focused to 
address the more difficult problems facing taxpayers.
    The expanded hardship criteria as called for in RRA 98 also 
changed the way TAS classified cases. This change allows more 
taxpayers to qualify to be considered for Taxpayer Assistance 
Orders (TAOs). Compared to FY 1998, nearly three times as many 
taxpayers qualified for consideration for a Taxpayer Assistance 
Order. The expansion of the hardship criteria was so dramatic 
that TAS no longer found it necessary to maintain the separate 
problem resolution criteria. By adopting a single unified 
criteria governing TA cases, the TAS was able to make it easier 
for taxpayers and the IRS staff to understand the types of 
cases that qualify to come to the Taxpayer Advocate for 
assistance.
    Between FY 1998 and FY 1999 the number of regular cases 
worked in the Taxpayer Advocate Service decreased by 29 
percent, or by 81,704 cases. At the same time, the number of 
cases that met the rules for Application for Taxpayer 
Assistance Order increased by 281 percent, or by 59,869 cases. 
Once again, this shift in casework is explained by the expanded 
rules for Application for Taxpayer Assistance Order criteria 
defined in RRA 98. Overall, the number of cases worked in the 
Taxpayer Advocate Service decreased by 7 percent, or by 21,835 
cases.

Citizen Advocacy Panels

    The Citizen Advocacy Panels achieved several major 
successes during the first year of operation. In addition to 
the South Florida panel, three additional Citizen Advocacy 
Panels were established in Brooklyn, Pacific-Northwest and 
Midwest Districts. Although independent, the panels came 
together in late June for a national conference. The meeting 
provided members with an opportunity to discuss their roles, 
share ideas and experiences. As a result, coordination and 
teamwork among panel members has increased.
    Included in the accomplishments of the past year, the 
Pacific-Northwest panel worked with their local districts' 
small business lab unit to develop software that analyzes 
questions posed to the IRS through the Services' Web site, the 
``Digital Daily.'' The result should be improved categories of 
responses--more closely meeting the needs of taxpayers.
    The South Florida panel also forwarded two recommendations 
to the Department of the Treasury: (1) the inclusion of a 
limited power of attorney on federal tax returns; and (2) 
changes to the Earned Income Tax Credit (EITC) to redefine 
qualifying child, household, and age requirements. The Brooklyn 
Panel is working with IRS to clarify wording and make 
recommendations for improvement to Publication 596, Earned 
Income Credit and the 1040 Schedule for EITC. In addition, the 
Midwest Citizen Advocacy Panel continues to work with the 
Taxpayer Education office to solicit input not only from 
individual taxpayers, but also from members of the Bar 
Associations and various tax practitioner groups.

                    1999 Revenue Protection Strategy

    During the 2000 filing season, validation of Social Security 
Numbers (SSNs) and other tax identification numbers will continue to be 
a very visible portion of our overclaim prevention efforts for the 
Earned Income Tax Credit (EITC).
    We have expanded the validation of SSNs/TINs to virtually all forms 
and schedules requiring identification numbers. We will identify 
dependent SSNs claimed on more than one return along with the improper 
claiming of children for the dependency exemption and/or EITC. 
Taxpayers with incomplete returns, invalid or duplicate SSNs, or 
returns demonstrating patterns consistent with profiles of invalid EITC 
claims can expect to have their refunds delayed or disallowed through 
``math error'' procedures or examinations.
    Beginning this filing season, we will test the Dependent Database 
that includes records from the Social Security Administration and the 
Office of Child Support Enforcement at Health and Human Services. These 
records contain data linking the names and SSNs of dependent children 
with the names of their parents and their parents' SSNs, along with 
information on custody and child support obligations. IRS is testing 
this data to identify the appropriate tax return for examination and 
eliminating unnecessary contacts with taxpayers who appear to be 
eligible for EITC, the Child Tax Credit and the dependency exemption.
    We have expanded the EITC Communications Strategy in FY 2000 by 
initiating an integrated compliance strategy with the paid return 
preparer community. It consisted in part of
     Outreach/Education: Over 9,000 return preparers who 
prepared over 100 EITC returns were contacted and offered an 
opportunity to meet one-on-one with an IRS Revenue Agent and receive 
guidance on EITC and their due diligence responsibilities. Acceptance 
of the visits was voluntary and nearly 8,000 return preparers 
participated and were provided with materials and an overview of EITC 
specifically developed for tax return preparers. Additionally, we 
worked closely with the major tax return preparation services to 
provide information and training material as well as providing 
presentations at their tax year planning conferences.
     A telephone survey to determine the level of customer 
satisfaction achieved by these outreach visits was conducted by the 
Gallup Organization for the IRS and the results of that survey 
indicated that 83 percent of the contacted preparers were very 
satisfied with the education/outreach visits. Similarly, high scores 
were given for the clarity and completeness of the information provided 
to the preparers.
     Due Diligence: Approximately 1,100 preparers of EITC 
returns were examined to determine if they were complying with the due 
diligence requirements including the requirement that practitioners 
exercise due diligence in determining whether a taxpayer meets the 
eligibility requirements of the EITC. Penalties were asserted against 
149 preparers.
    For the fiscal year ending September 30, 1999, IRS examination 
resulted in approximately 605,000 cases closed with protected or 
collected revenue of $740 million and math error corrections/
adjustments of $383 million total of $1.123 billion.

                         FY 2001 Budget Request

    To deliver on the RRA 98 mandates for improved service and taxpayer 
treatment while also increasing compliance effectiveness, IRS requires 
increased funding in FY 2001. With improved management and technology 
enabling the delivery of improved service and increased compliance 
effectiveness, the IRS will be positioned to succeed with limited 
resources in future years. As the streamlined management and new 
technology become effective, the IRS can also improve efficiency and 
maintain a stable workforce in relation to the economy. However, we 
face a major budget challenge in FY 2000 and FY 2001, which, unless 
addressed, will threaten not only the IRS reform and restructuring 
program, but the entire tax system.
    The FY 2001 request is $8.841 billion (without the Earned Income 
Tax Credit Account), $769 million more than the final FY 2000 enacted 
level of $8.072 billion. This is $729 million over the FY 2000 proposed 
funding level of $8.112 billion, which includes a $40 million 
supplemental to stabilize the IRS workforce. Of this increase, $119 
million is for resuming funding of the Information Technology 
Investment Account (ITIA) for which there was no funding in FY 2000. 
The IRS requires this increase in FY 2001 to deliver on the RRA 98 
mandates, manage organizational modernization, and invest in critically 
needed information technology.

    Our budget request has two broad management categories: (1) 
Maintaining Current Operations, and (2) Modernization. Increases to 
maintain current operations include more FTE to assist in stabilizing 
enforcement activity levels and modestly increasing service levels, and 
to provide adequate non-labor resources for increasing electronic tax 
filing capability and contractual support for critical operational 
activities of the agency. Increases for modernization include funds for 
completing organizational modernization, business line investments, and 
replenishing of ITIA. The requested resources provide for full 
implementation of RRA 98 along with plans to modernize and realign the 
IRS organization, and fund the workforce.

                     Maintaining Current Operations

    To implement RRA 98, the IRS must modernize its organizational 
structure and technological base. However, during this time, we must 
also maintain operational activity at acceptable levels.
    As I discussed earlier in my testimony, RRA 98 established 71 
taxpayer rights provisions, each of which imposed additional procedures 
or new requirements for tax administration. This increased the time 
required to handle existing cases and required the IRS to divert 
compliance personnel to handle new procedures such as Innocent Spouse 
and Third Party Notice provisions. In addition, other compliance 
personnel were re-assigned to provide extended hours of telephone and 
walk-in service. This came on the heels of declining staffing from FY 
1996 through FY 1999.
    In part because of these changes and increased workload demands, 
the number of examination and collection cases handled declined by half 
since 1997. This illustrates the need to balance the continued 
improvements in customer service with funding adequate to maintain 
enforcement activity to collect unpaid taxes and address areas of 
potential under-reporting of income.

Current Services Level

    The IRS is requesting a net increase of $336 million to maintain 
the current services level. The IRS is a labor-intensive organization 
and we must have a stable workforce. To maintain current operations, 
carry out a successful filing season, oversee tax administration 
programs, and implement organizational modernization, the IRS must have 
the resources to pay for the inflationary costs associated with 
statutory pay and other mandatory increases.
    Since 1992, the IRS workforce has decreased more than 16 percent 
while handling significant increases in workload due to tax law changes 
and customer demand. The downward trend in FTE is the result of: (1) 
reduced funding in general; (2) inadequate funding for pay components, 
such as costs of within-grades (WIGs) and promotions; and (3) 
insufficient funding of non-labor inflationary costs for required 
agency-wide shared services support costs. During the last few years, 
costs for Support Services have been cut to a bare minimum. In 
addition, the IRS has proactively reduced rent costs. From FY 1996 
through FY 1998, the IRS released 2.5 million square feet of space for 
savings of $40.8 million. There is little room for further cost 
reductions. Any further cuts in agency-wide shared services support 
will result in further FTE reductions.
    It is vital to note that the long-term decline in the IRS workforce 
due to funding constraints has led to a situation where virtually no 
hiring has been done since 1995 in critical front-line skilled 
positions. For example, in a revenue agent workforce that was over 
15,000 in 1995 and hovers at 12,000 today, the IRS has only hired 75 
revenue agents since 1995. Funding of our current services request, 
together with the STABLE initiative discussed next, will allow us to 
begin the process of meeting the need for critical skilled positions.

Stabilizing the Workforce (STABLE)

    The IRS is requesting $144 million and 1,633 FTE to stabilize and 
strengthen tax compliance and customer service programs in FY 2001 and 
$39.8 million and 301 FTE for a FY 2000 proposed supplemental. This 
request is collectively known as the STABLE (Staffing Tax 
Administration for BaLance and Equity) Initiative.
    Efforts have been made to improve toll-free service, improve access 
to new web-based products and information, and expand electronic 
filing/payment options. However, staffing resources devoted to critical 
compliance and enforcement programs have declined by more than 20 
percent over the last five years.
    Beyond the reduction in staffing levels, annual growth in return 
filings and additional workload from RRA 98 contributed to a steady 
erosion of enforcement presence, audit coverage, and case closures in 
front-line compliance programs. Current estimates of additional work 
directly related to RRA 98 total nearly 4,560 FTE for Compliance and 
Customer Service activities. Although the IRS is fully committed to 
delivering on every mandate and objective of RRA 98, it is essential 
that we restore and maintain adequate staffing levels in our key 
program areas.
    To ensure that the benefits of this initiative are realized as 
quickly as possible, the IRS has proposed a supplemental FY 2000 
appropriation, which, if approved by Congress, would allow the hiring 
of 301 FTE in FY 2000. This would ensure that most training of new 
hires would be undertaken in FY 2000, allowing the impact of these new 
hires to be fully maximized in FY 2001.


    With this staffing level, we expect that in 2001, the IRS will be 
able to slightly increase levels of service and stabilize the level of 
exam and collection activity while complying with the taxpayer rights 
provisions of RRA 98.

Electronic Tax Administration (ETA)

    The IRS is requesting $3 million for ETA to continue progress 
toward achieving the congressional goal that 80 percent of all tax and 
information returns be filed electronically by 2007. In RRA 98, 
Congress established the interim goal that all returns prepared 
electronically, but filed on paper (approximately 80 million) be filed 
electronically by 2003. Increasing taxpayers' awareness and 
understanding of IRS e-file products, services and benefits will help 
close the gap between the projected range of 44.1 -49.4 million returns 
being filed electronically in 2003 and the aggressive goals established 
by Congress. This funding will be used to expand marketing efforts that 
communicate the benefits of IRS e-file to both taxpayers and 
practitioners. The IRS plans to advertise in the television, radio, and 
print media; continue the launch of a business marketing campaign; and 
conduct the necessary marketing research to ensure that ETA products 
and services meet our customers' needs.

Contract Management

    In FY 2001, we are requesting an increase of $44 million to fund 
necessary contracts that support general operations, mandatory 
contractual arrangements and necessary outside expertise. In prior year 
budgets, we funded these contracts--which were absolutely necessary to 
conduct business--by reducing funding available for staffing. This is 
in contrast to our FY 2001 request that simply requests the necessary 
funding. Mr. Chairman, I would like to stress that contractual support 
is critical to maintaining operations and implementing RRA 98 and the 
Modernization program. Our contractual support is in three categories: 
mandatory, operational and expertise contracts. I would like to 
describe for you the type of contracts and provide examples:
     Mandatory contracts make up 44 percent of the total budget 
and are required by law, or agreement with other Federal agencies. 
These include National Archives storage of tax records; Treasury's 
Financial Management Service activities for tax refunds and lockbox 
collections; and Low Income Taxpayer Clinic grants.
     Operational Contracts make up 32 percent of total budget 
and support IRS operations. Examples include funding for Currency 
Transaction Report processing, FedWorld management of the IRS Web Site, 
and Multilingual Interpretation services for Walk-in offices.
     Expertise Contracts make up the remaining 24 percent and 
are required to obtain expertise outside the IRS for activities 
including outside services for customer satisfaction surveys and 
rewriting of IRS Forms and Publications in plain English.

                             Modernization

    The IRS budget is only a small part of the cost to the 
public of administering our tax system. Most of the costs, both 
tangible and intangible, are related to what the public 
encounters when it must deal with the IRS. The tangible cost is 
each taxpayer's time and money. The intangible cost is the 
frustration of being treated poorly when making an honest 
effort to comply with a complex tax code. Moreover, this 
frustration has occurred at a time when the level of service 
that many people are receiving from other service providers has 
been increasing. In order to provide better service to 
taxpayers across the board, we need to reengineer the entire 
way the agency does business.
    In addition, the tax system depends on each taxpayer who is 
voluntarily paying the tax owed having confidence that his or 
her neighbor or competitor is also paying. Modernization will 
enable the IRS compliance activities to identify more 
effectively areas of non-compliance and to address them 
promptly, accurately and fairly.

Organizational Modernization

    In FY 2001, an additional $42 million is being requested to 
cover IRS reorganization expenses. These costs will peak in FY 
2001, decline in FY 2002, and end in FY 2003. The IRS 
organizational modernization involves the first complete 
reorganization of the IRS since 1952. Essentially all 
management positions above the first line are being redefined; 
district and regional offices are being eliminated; and some 
new front-line positions are being created. This massive change 
is being done with the objective of minimizing physical 
relocation and associated costs. However, some relocation of 
personnel and a great deal of reassigning and retraining are 
required. In addition, some managerial and administrative 
positions are being eliminated and it is necessary to assist 
the incumbents in these positions either to find new positions 
in the IRS or to retire.
    Together with the $140 million included in the FY 2000 base 
for this effort, this request will be used to cover all the 
expenses of the reorganization. These costs include buyouts, 
recruitment, relocations, employee training, equipment, 
services and supplies, telecommunications moves and 
installations, and modifications of information systems to the 
new organizational structure. Resources are also requested for 
design work, space alterations, and contract movers to 
physically align employees with their operating divisions for 
the Area and Industry Offices, Chief Counsel Headquarters, 
Information Systems, and the National Office. These resources 
cover all aspects of organizational change that will complement 
the IRS' systems modernization efforts and implement the RRA 98 
reorganization mandate.

Business Reengineering and Technology Investments

    The IRS depends entirely on its computer systems to 
administer the tax system and to collect and properly account 
for $1.9 trillion of tax revenue. Nearly every IRS employee 
depends on computer systems to perform his or her daily 
activities, such as processing returns, answering taxpayer 
questions, adjusting taxpayer accounts, sending out notices and 
letters, conducting examinations and collecting overdue 
accounts.
    However, the IRS base of existing systems, which evolved 
over a 40-year period, is totally inadequate to support these 
activities at an acceptable level of service to the public, 
internal efficiency, or acceptable risk. GAO and TIGTA 
repeatedly identify serious problems and risks in IRS 
operations and financial management, many of which cannot 
realistically be rectified except by a near total replacement 
of IRS' systems.
    In addition, nearly all the numerous changes required to 
improve service to taxpayers under RRA 98, and to increase the 
effectiveness of compliance activities depend on improvements 
to IRS' information systems. As indicated earlier in the 
testimony, it would be extremely expensive and require very 
large increases in staff to meet the service and compliance 
demands of an increasing economy and the RRA 98 mandates by 
simply adding staff. Instead, the IRS must reengineer and 
replace its archaic processes and systems.
    Since reengineering the IRS' business practices and systems 
is a massive job that will take many years, it is necessary to 
set priorities and adopt time-phased plans since the needs and 
opportunities for systems improvements are far greater than can 
be accommodated in any one year, or even a few years.

Business Line Investments

    Most of the largest scale and most complex systems' 
improvements will be accomplished through the agency-wide Core 
Business Systems program that is funded by the ITIA and is 
discussed below. However, there are dozens of smaller and more 
focused high-priority needs to support and improve operations. 
They are either too specific to be included in the Core 
Business Systems program, or, if they were included, would not 
be delivered for many years. The IRS has gone through a 
prioritization process for these business line investments and 
requests funding for $40 million in FY 2001 for only the 
highest priority of such projects.
    We are requesting the $40 million to develop, redesign or 
acquire new systems to improve:
    (1) The Taxpayer Advocate's ability to identify problems 
and recommend changes to the business process by redesigning 
and consolidating multiple, stand-alone systems into one 
management and control system;
    (2) The management and reporting of taxpayer and employee 
complaints by designing a new system;
    (3) The new Tax Exempt/Government Entities organization's 
ability to process determination requests, contacts with 
requestors and track the deposits of fees;
    (4) The notices sent to taxpayers, including clarity and 
reduction of the need for multiple contacts with taxpayers;
    (5) The Chief Counsel Case Management activities, including 
modernizing many business rules and updating the system to save 
costly manual work and improve Counsel's ability to timely deal 
with the Courts, taxpayers and IRS' needs; and
    (6) The walk-in sites' efficiency and service to taxpayers 
by providing automated management tools of tax information to 
about 125 walk-in sites.

ITIA Funded Core Business Systems

    The Core Business Systems program is an agency-wide program 
designed to reengineer all of the basic IRS' business processes 
and the computer systems that support them. After the award of 
the PRIME contract in December of 1998, the IRS spent CY 1999 
and the early part of CY 2000 building the management and 
governance process necessary to manage this huge program; 
developing plans for the near-term and medium-term projects; 
and beginning to update architectural and technology 
infrastructure plans. This program is being very carefully 
managed at the highest levels within the agency and adjustments 
to plans are made frequently based on experience to date and on 
risks anticipated.
    The first, relatively small projects to be delivered will 
provide for improved telephone service during FY 2001 and 
provide improved tax computation capabilities to examiners. 
Further enhancements to taxpayer service over the Internet and 
increased electronic tax administration services will follow. 
Two critically important projects will be planned in detail in 
FY 2000 and are expected to proceed to development stages in FY 
2001. They will replace incrementally and over time the archaic 
tape-based system that maintains all taxpayer records and 
improve our financial management systems. Other critical 
projects to improve service and compliance programs, including 
correspondence, collection and exam are in the early states of 
design and further plans will depend on results of the design 
efforts.
    In support of these business projects, work will proceed in 
FY 2000 to complete institutionalization of the ITIA governance 
process and the Enterprise Life Cycle methodology. This will 
provide for the first complete update of the technology 
blueprint since 1997 and complete major infrastructure and 
architectural work necessary to support the other projects. 
Security issues are being given special attention in this work. 
In FY 2001, continued update of the blueprint and other 
architectural and technology standards will be done and 
additional work on infrastructure will continue as necessary to 
support the business projects.
    The Congress through the specified ITIA wisely planned the 
funding for this core business systems program. This account 
represents a practical means of funding a long-term program 
such as the IRS technology modernization program. Under ITIA, 
Congress appropriates the funds for the program as a whole and 
the IRS is allowed to plan for continuity of the program 
subject to stringent reviews and safeguards. No funds are 
released from the ITIA until the IRS prepares a plan for 
specific increments of funding and is reviewed and approved by 
the Treasury, OMB, GAO and the two Appropriations 
Subcommittees. This approval, however, still only provides the 
IRS authority to proceed up to a certain funding level. No 
funds are actually obligated except through a rigorous internal 
process within the IRS, which is managed by the IRS Executive 
Steering Committee chaired by the Commissioner.
    In FY 2001, we are requesting $119 million to continue 
progress as anticipated on the ITIA funded Core Business 
Systems program. In FY 2000, we requested no funds for ITIA. 
Remaining balances from prior year appropriations plus the new 
$119 million request will support a spending level in FY 2001 
of $330 million. To ensure continued funding, we are requesting 
an advanced appropriation of $375 million for FY 2002.

                               Conclusion

    Mr. Chairman, I believe we are making real progress not only to 
provide better service during the filing season, but also on the goals 
and mandates set forth by the Restructuring Act to bring meaningful, 
positive changes to the IRS and America's taxpayers. It is true that no 
one fully understood everything that would be required to implement 
this far-reaching Act. However, if Congress can provide continued and 
assured support for IRS modernization, such as that contained in our FY 
2001 budget request, we will be able to produce the visible, tangible 
changes in service, compliance and productivity that America's 
taxpayers expect and deserve now and in the future. Thank you.
      

                                


    Chairman Houghton. Thank you, Commissioner.
    Mr. Coyne?
    Mr. Coyne. Commissioner, you stressed the importance of the 
fiscal year 2001 as a pivotal year in the agency's 
restructuring. What will be the consequences to the tax system 
if the IRS receives less than the administration's requested 
budget of $8.8 billion?
    Commissioner Rossotti. I think that we would be taking some 
real serious risks. In fact, we already have some serious risks 
but I think we would be increasing them more than we should if 
we are not able to get this funding. In the short term, the RRA 
1998 has created an expectation among taxpayers that they will 
be treated right and that they will get reasonable service. 
While we are doing our best with our resources, we are still 
not anywhere near the 100 percent level.
    In the meantime, it is a fundamental tenet of our tax 
system that the vast majority of people, the honest taxpayers, 
are complying voluntarily because they have a confidence that 
their neighbors or their competitors are also paying the bill. 
If we continue to have the kind of declines that we have 
currently in enforcement activities, I think we risk that 
fundamental tenet of the tax system.
    Finally, the only solution in the long term, unless we 
really want to reverse the entire trend of efficiency in 
government, is to invest in technology. It takes some time to 
realize those benefits but we have to operate today while we 
invest in technology for tomorrow and that is why we need our 
budget request fullfilled.
    I believe we already have a significant amount of risk 
because of the massive changes that we have been asked to 
comply with and the past resource reductions. I really do not 
think it is wise to risk our $1.8 trillion tax system any 
further than we already have.
    Mr. Coyne. I understand that you are working on an EITC 
compliance study currently under review. Is compliance better 
relative to EITC?
    Commissioner Rossotti. I really don't have that answer yet 
until we get the study completed. I can only say that with the 
funding the Congress gave us beginning in 1997, we have taken 
steps to deal with compliance issues, both by doing the 
traditional kind of compliance such as auditing many of the 
returns before the refunds are out and some after the refunds 
are out, but also through a very innovative program that we 
instituted last year.
    We did a study of the tax preparers. Many of the EITC 
returns are done by tax preparers. We found that many tax 
preparers do make errors in these returns. These can be 
legitimate errors because of complexity or they could be just 
because of lack of due diligence by the preparers.
    We did a study of where these errors were occurring and we 
had a program last fall for having 10,000 preparers visited by 
revenue agents to point out to them what some of the key due 
diligence requirements are for preparing EITC returns, the 
kinds of errors being made in the past. We are hopeful this 
will contribute to a reduced error rate in this filing season 
which we will not know until we get the study.
    We felt some preparers were not performing their due 
diligence adequately, so we did more serious visits with them, 
where we audited their previous activities and potentially took 
enforcement action if necessary.
    We have this program in place. We will get some additional 
data to see how effective it has been hopefully later this 
year.
    Mr. Coyne. Do you have any sense of when the study will be 
completed?
    Commissioner Rossotti. I can only say I hope we will have 
it later this year.
    Mr. Coyne. Later this year. Does the study or investigation 
give you any hint as to whether most of the errors that occur 
are problems of fraud or are they innocent mistakes?
    Commissioner Rossotti. It is really very hard to tell. 
There are purely innocent errors, there are careless errors and 
there are deliberate errors. It is extremely hard to separate 
those. I will tell you that we have some returns that are 
actually prepared by experienced IRS employees where we assist 
some people at our walk-in sites. We have looked at the error 
rate--those are some EITC returns--and even those returns 
sometimes have errors in them because of basic 
misunderstandings of what the taxpayer has said about their 
personal situation.
    So you have a spectrum of errors from purely mechanical or 
straightforward errors to carelessness all the way up. We are 
trying to address the whole spectrum of them.
    Mr. Coyne. Can the IRS identify, for instance, the number 
of people who are eligible for EITC say within the geographical 
area of the congressional district?
    Commissioner Rossotti. Can we identify the number that 
actually claimed it or would theoretically be eligible?
    Mr. Coyne. That would be eligible?
    Commissioner Rossotti. I don't think we have that 
information because it really requires knowing some fairly 
specific details about the family situation. You can't just 
tell it from income levels. You have to know all the things 
that go into what a qualifying child is. To my knowledge, we 
don't have that but I will get back to you and see if we have 
some information on that.
    Mr. Coyne. But you do have the knowledge and could provide 
how many take advantage of the ITC within a geographic 
district?
    Commissioner Rossotti. Yes, we do. We have that and we can 
give it to you but what we may not know is how many might not 
be claiming the credit that could. We just don't have any way 
of knowing that, that I am aware of.
    Mr. Coyne. Thank you.
    Chairman Houghton. Mr. Portman?
    Mr. Portman. Thank you, Mr. Chairman.
    On the ITC a couple of years ago, we had a hearing of this 
Subcommittee and the best consensus guess of Treasury, GAO and 
the IRS was there was about $6 billion a year in missed 
payments under EITC. I am eager to see that report as well. I 
think it would be an appropriate area for the Subcommittee to 
delve into.
    You know that I am very concerned about the complexity 
analysis that was mandated under the RRA. The Subcommittee was 
eager to see that report on March 1 when it was due. I know it 
continues to be in process. My concern is I have heard reports 
that this delay of getting the complexity analysis to us is not 
due to the IRS but due to the Treasury Department reviewing the 
IRS' work which was not the intent of this Congress.
    I would refer you to the Code section itself which asks for 
Congress to hear straight from the IRS as to the sources of 
complexity and administrative problems. This came from the 
Commission's work where the Commission said it would recommend 
Congress hear ``an uncensored view'' of the administrability of 
all tax legislative proposals and makes the point that the tax 
legislative process is driven by revenue neutrality and 
progressivity estimates but rarely takes into account the IRS' 
ability to administer the tax law and taxpayers' ability to 
comply with it.
    That is the background and I think you would be the first 
to agree with the need for more focus on that aspect of our job 
as legislators. I would hope you could give us an answer today 
as to when the complexity report is due and give us some 
assurance this will be an IRS report that is unfiltered and 
represents your best estimate as to what the sources of 
complexity are and not a tax policy document.
    Commissioner Rossotti. I am very sorry that I can't be here 
on time with this report. I take these deadlines very 
seriously. I have to say what we have been doing. We have been 
working very hard on this but we have been soliciting the input 
from technical experts in Treasury as well as counsel in other 
places in order to make sure this first report is as 
technically accurate as possible because that is important. 
That is taking some time. That is not an excuse but it is 
taking some time.
    We haven't tried to tackle the whole Tax Code but we have 
three areas we have focused which I think are important. Those 
are the filing status and dependent qualification issue, the 
alternative minimum tax and the quarterly payments issue.
    We are certainly intending and I believe we will come out 
with a report which will provide some useful analysis of what 
causes the complexity in these three important areas, what 
information we have and some possibilities as to what could be 
done to deal with the complexity aspect.
    As you noted, it will not be a tax policy document, it will 
not deal with all of the issues you would need to think about 
in order to determine the best way to fix the Tax Code because 
there are issues about revenue and distribution which we will 
not deal with in our report.
    Insofar as the report deals with what causes complexity and 
some of the things that might be done to deal with the 
complexity aspect, I am optimistic that we will get this out. I 
can't give you a specific date but I think we are getting close 
to the point where we can submit this to you.
    Mr. Portman. We need it as soon as possible because we are 
once again in the process of legislating on tax matters and we 
have a short year in front of us. I think it would be possible 
even this year to make some changes based on your 
recommendations.
    I would hope you could give this Subcommittee further 
assurance that these recommendations will be IRS 
recommendations and that they will reflect the best thinking of 
the IRS. Is that accurate?
    Mr. Portman. That is our intent.
    There are so many other questions I would love to get into 
but I guess my major one would be in the area of the budget, we 
see your need for increased personnel and increased funding for 
technology. I have a concern that post-Y2K now that there are 
some resources that have been freed up, perhaps the IRS has 
decided to slow down a bit the pace of modernization and that 
there may be some delay in some of your projects including 
electronic services until 2002.
    My question would be why would we want to slow down the 
modernization effort because it seems to me that although there 
may be a need for additional staff on the compliance side 
through this year's budget, the ultimate answer here is 
technology as you have said in other sessions, that technology 
will lead to not only better taxpayer service but more 
efficient delivery of service and fewer personnel over time.
    I wonder if you could comment on that. Are we delaying and 
if so, why is the IRS doing that?
    Commissioner Rossotti. First, let me say I doubt you could 
find a greater supporter of the idea of using technology to 
improve the productivity and effectiveness of the IRS than I 
am. That is the only real solution that I think exists.
    The limiting factor is really how fast we can manage this 
program successfully. We are going to move ahead at the fastest 
practical speed. The difficulty is that these are large, 
complex programs and there is a lot of risk attached to them. 
As you know, there were some not successful initiatives in the 
past at the IRS. The limiting factor we are dealing with is 
simply how fast we can manage these improvements, with 
reasonable and acceptable risk.
    With respect to the e-filing part of our technology 
modernization program, we did, in an earlier, preliminary plan, 
have some objectives we thought we could reach for the 2001 
filing season for Internet access for certain constituencies. 
We did have to make a decision to delay that past that season.
    It was simply because upon further examination, we simply 
could not be confident--in fact, we were confident we would not 
have acceptable security infrastructure in place to manage that 
in the 2001 filing season. We just were not far enough along in 
solving some very difficult problems there. We just did not 
have the solutions to be able to go forward on that kind of an 
accelerated schedule. We have not in any way backed off from 
the priority. We have only tried to be realistic about what is 
necessary to be successful.
    Mr. Portman. I appreciate the fact that you have not backed 
off.
    My time is up and I would just make one other statement. 
That is that under the RRA, we provided you with a public-
private oversight board that has now been through the first 
process which was after a year late, the President finally made 
his nominations. Now the Senate has gone through its practice 
of confirmation and we need to move that on the Senate floor. I 
understand there is one Senator holding those nominees. I 
assume you are pleased they will soon be on board to help you 
with your strategic plan?
    Commissioner Rossotti. I am waiting.
    Mr. Portman. Thank you, Mr. Commissioner.
    Chairman Houghton. Ms. Dunn?
    Ms. Dunn. I want to follow up, Commissioner, on the 
technology questions of Mr. Portman.
    You have a prime contractor now for the computer blueprint, 
the modernization blueprint. I am wondering what benchmarks you 
believe we should be using to make sure that is proceeding at 
an acceptable pace?
    Commissioner Rossotti. I think the best benchmark is to 
look at the plans we have submitted to the Congress and have 
actually published. Because the way this appropriation works, 
even though money has been appropriated in previous years, in 
order to get it released to us, we have to submit some very 
specific programs that show exactly what projects we are going 
to do. A couple of weeks ago, we submitted our request for the 
remainder of this fiscal year to the Appropriations Committees. 
The GAO and others have those. I would be glad to supply you 
with a copy of that.
    Our request lays out in some detail what the objectives are 
for various timeframes. There are a significant number of 
projects. To summarize them quickly, we have some shorter term 
projects which are aimed at delivering some improved service 
during the 2001 filing season, mainly for customer service for 
phone traffic and people that call in. That is an immediate 
project.
    We then have a series of other projects underway including 
the overall blueprint which would be aimed at the next year, 
adding some additional electronic services for an array of 
taxpayers and then also the financial management systems to 
support the financial management improvement.
    Finally, a very critical one and one in which we have made 
real breakthroughs is the most critical system of all, the one 
that keeps the basic taxpayer accounting records, the basic 
records of every taxpayer in America. This is the most 
fundamental problem that we have. We have a 35-year-old tape-
based sequential system that is updated once a week. As long as 
that is there, no matter what else we do, we are not going to 
be successful.
    We have now come up with what I think is the first 
practical way for gradually getting out from under this 
terrible burden. This is one of our critical projects. There 
are some others that are longer term. So there is a whole 
sequence of things that we hope are laid out step by step to 
deliver improved technology and improved business practices 
over the coming years.
    Mrs. Dunn. I would like to have a copy of that.
    Commissioner Rossotti. I will get that to you.
    Ms. Dunn. Let me ask a question about one of the areas that 
we spent some time on as we were reviewing and reforming the 
IRS, the innocent spouse provisions.
    Right now I understand there is a backlog of about 45,000 
of these cases waiting to be considered. I am wondering if this 
is the result of changes, did we make it too complicated, are 
there more cases than you expected, are we behind because we 
don't have enough FTEs looking at them? What is the problem 
here and what are we doing to try to get a hold on this?
    Commissioner Rossotti. That is a matter I have been very 
focused on. As a matter of fact, I ran into Mr. Portman in 
Cincinnati airport last night because I was returning from 
being all day in Cincinnati which is where we have our center 
of innocent spouse processing. I was out there for that exact 
reason.
    Your question had a number of premises and I think the 
answer is all of them are part of it. It is a rather complex 
law. There are actually three new provisions plus a fourth 
provision and to judge each claim, as it turns out, you really 
have to look at each one of those. For example, if the 
requesting spouse doesn't qualify under one of the provisions, 
you then have to look at the equitable relief to see if they 
might get relief under that.
    Learning how to comply with the provisions and getting the 
appropriate guidance out and the appropriate explanations to 
our own employees about how to adjudicate these claims 
correctly has been our number one problem and our number one 
effort.
    I am pleased to say I believe we have really come up the 
learning curve quite significantly. It did take us longer than 
I wish it had but my conclusion was that it was most important 
to get these right. Remember, there are always two spouses 
involved in most of these claims, we couldn't just process them 
like a bunch of numbers, we had to be very careful. Until we 
learned how to get some experience with this, we were not able 
to process them very quickly.
    Now, I think we have come up with that learning curve. We 
have gotten some guidance and training and are very well 
organized in the Cincinnati customer service site. We have 
already seen that the rate of conclusion of determinations, as 
they are called, to these claims has picked up. I believe over 
the remainder of this calendar year, we will see a substantial 
improvement in the rate of progress. I have stressed to our 
employees that the first and most important thing is to do them 
correctly because we really don't want to go wrong on this.
    In reference to your question regarding the complexity of 
the law, I don't believe it is too complicated. I might not 
have said that 6 months ago because there was a time when some 
of us just couldn't figure it out, but we have now learned a 
lot about how to complement this provision. I think we have, 
through that experience, come up with some practical ways to 
make these decisions. I don't think the law is wrong, I believe 
that Congress was appropriately careful to say how this should 
be done. We are trying to be just as careful in our 
implementation.
    I can honestly say that if I come back here next year for 
this hearing that we will be in a lot better shape on these 
claims than we are now.
    Chairman Houghton. I just have two questions. The first 
ought to be rather fast.
    1,769 on the basis of 8 billion is roughly 8 or 9 percent, 
something like that, but what would that average out to over 
the past 5 years in terms of increase?
    Commissioner Rossotti. I think we would be talking about 
somewhere in the 2 or 3 percent range. I didn't bring the other 
chart with me but I do have a chart which I can supply to you 
which goes back over the last three or 4 years.
    Chairman Houghton. Anyway, in that range?
    Commissioner Rossotti. Yes, and you would see that it 
hasn't kept up even with the inflation rate.
    Chairman Houghton. I would like that information.
    Commissioner Rossotti. I will get it for you, Mr. Chairman.
    Chairman Houghton. The last question has to do with 
security. In the GAO report, there was a quote here about 
deficiency in computer security controls that ``may allow 
unauthorized individuals to access or alter the propriety IRS 
information.'' This has been with us for several years.
    Commissioner Rossotti. Yes.
    Chairman Houghton. I am not only interested in what you 
feel the security problems are and the resolution of those but 
also how this affects the Internet age which we are moving 
into?
    Commissioner Rossotti. It just happens I do have the chart 
with me and I am distributing the chart you asked for. For once 
I am well prepared and have the data.
    On the security issue, the IRS was way behind frankly, as 
acknowledged by itself as well as GAO, in a whole variety of 
areas, ranging from very simple things like physical security 
like fences around the building to more intangible things such 
as detecting unauthorized accesses.
    Before I ever got there, I have to say there was an 
important initiative underway to try to deal with these over a 
long term plan. I think as GAO acknowledged in its report, 
there has been very significant progress made in that area over 
the last 3 years. Yet, there is still a significant amount to 
be done.
    We are taking two paths to accomplish this goal. First, is 
we are attempting to deal with the problems that we can with 
our current security system. There is no reason we can't deal 
with physical security; there is no reason we can't do 
background checks even on our temporary employees. Those kinds 
of things can be done and we are doing them. I think in the 
short term, the next year or two, we will have that part of the 
problem licked.
    We are also doing what we can within the confines of our 
old computer systems. On the computer system side, as I 
answered Mr. Portman's question, the real critical thing is to 
build the appropriate security mechanisms into the new systems 
that we build. In our new architecture, we are including our 
security standards as one of the paramount principles that we 
have to build into all these new systems.
    In terms of going to the Internet, this slows us down. It 
needs to slow us down because if we were to go to the Internet 
without appropriate security, you would have a terrible 
backlash from the public and everyone if there was a potential 
security problem.
    I would say in terms of using the Internet, this whole 
security issue is the paramount problem; it is the limiting 
factor in terms of our ability to move forward. It is a problem 
even in the private sector. Many of the problems aren't so much 
having the technology as the question of how to administer and 
implement technology.
    Chairman Houghton. Any other questions?
    Mr. Portman. I just want to follow up on your Internet 
point and Mr. Houghton's question about how we prepare for the 
Internet age.
    A month or so ago you issued a statement regarding the IRS' 
interest in providing free access, electronic filing through 
the Internet. Reading your testimony today, I noticed you say 
again the IRS does not intend to get into the tax software 
business. I see this as a potential conflict for us going 
forward.
    There are companies now selling software for $9.95 so 
people can file their taxes through the Internet. There are 
also companies providing web-based tax preparation for free. 
This is becoming more widespread and it is something that is 
providing a great benefit to the IRS because it is part of our 
16-percent increase in electronic filing this year.
    I just wonder how you, given your background in the private 
sector and your familiarity with this technology and its 
potential benefits are going to deal with the concern that you 
have the IRS making what I view to be an appropriate general 
statement that we want to bring down the barriers to access for 
Internet filing and we don't want to get into the tax software 
business and yet the IRS going to be moving toward what the 
private sector is currently providing and really intervening in 
the marketplace to a certain extent. I don't think even the 
most efficient IRS can keep up with what is going on in the 
outside world in terms of the latest software technology.
    How are you going to deal with this issue and what are your 
personal thoughts on it?
    Commissioner Rossotti. That is an important question and 
there is a note in the President's budget in that regard. I 
appreciate the opportunity to clarify it.
    Let me first make it clear what I don't think we should do. 
There is no possibility I can think of where the IRS could 
effectively compete in offering tax preparation software which 
is a consumer product, pretty complex, needs to be user 
friendly and up to date with what the private sector offers. 
There are quite a few excellent providers and there are more 
coming out all the time. As you note, they are going onto the 
Web and I believe this whole thing is going in this direction 
very soon.
    There is also a section in the Restructure and Reform Act 
that deals with the electronic filing which actually addresses 
this issue and encourages the IRS to something like ``stimulate 
robust competition in the private sector in order to drive down 
the cost'' and that is really the strategy that I think we are 
going to try to follow.
    We want to try to use whatever techniques we can and we 
will work with ETAC and our industry groups on how to stimulate 
competition and provide incentives of whatever kind we can for 
the private sector to provide ultimately what we hope will be 
no cost to the taxpayer electronic preparation and filing over 
the Web. It would not be our intention that we would provide 
this in any form ourselves.
    We would like to find some ways of stimulating and driving 
the trend. It is already happening, as you noted, where 
basically any individual taxpayer would be able to go onto a 
Web site, prepare their taxes, send them to the IRS without any 
direct, out-of-pocket costs to the taxpayer. That is our goal.
    Mr. Portman. Again, I think there is a potential issue here 
as the IRS begins to develop that technology. There will be I 
think private sector options that may be displaced and maybe 
some more innovative solutions that the IRS might not look to 
in the future. I hope you never leave the IRS but perhaps the 
next Commissioner won't be as interested or as knowledgeable 
about some of these products. That is my concern, that we don't 
want to displace that.
    Commissioner Rossotti. It is not our intention to offer any 
products ourselves. I want to make that clear. I don't think we 
need to do that and I don't think that would be a wise thing to 
do for the very reasons you are giving.
    I think we can build on the trend that is already happening 
to stimulate competition among the private sector providers. We 
may have to provide some incentives to them and this was also 
provided in the Restructure and Reform Act, but the idea is not 
that we would provide the software or have direct interchange 
with the taxpayer ourselves, but rather that we would stimulate 
various private sector providers to do this. That is the 
intent.
    I think it is fully consistent with the direction we were 
given in the RRA 1998 Act which actually explicitly said that 
was what we were supposed to do.
    Mr. Portman. The simpler filings including telefile, I 
think the IRS has a good story to tell as well. Your telefiles 
are up again this year?
    Commissioner Rossotti. Actually, telefile is down a little 
because the people are filing more from home on their 
computers. Computer filing has almost doubled, so it has 
displaced a little bit of the telefile. Nevertheless, it is a 
good product.
    As you noted, there are many who offer filing over the Web. 
Most of those are about $9.95 and some of them are for free. We 
want to drive them down even further.
    Mr. Portman. Thank you, Mr. Chairman.
    Chairman Houghton. Ms. Dunn?
    Ms. Dunn. No.
    Chairman Houghton. In giving us the information about the 
average cost increase, if you could give us your assumptions on 
inflation in that also, I would appreciate it.
    Commissioner Rossotti. Sure.
    Chairman Houghton. Thank you very much. We appreciate your 
testimony.
    Chairman Houghton. I would like to now call Mr. James R. 
White, Director of Tax Policy and Administration Issues, GAO. 
We are delighted to have you here. You may proceed.

     STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX POLICY AND 
   ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. 
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY RANDY HITE, ASSOCIATE 
   DIRECTOR, GOVERNMENTWIDE AND DEFENSE INFORMATION SYSTEMS, 
    ACCOUNTING AND INFORMATION MANAGEMENT DIVISION AND DAVE 
 ATTIANESE, ASSISTANT DIRECTOR, TAX POLICY AND ADMINISTRATION 
              ISSUES, GENERAL GOVERNMENT DIVISION

    Mr. White. Thank you, Mr. Chairman.
    I am accompanied by Randy Hite on my right and Dave 
Attianese on my left, also from GAO.
    Mr. Chairman and Members of the Subcommittee, I am pleased 
to be here today to discuss the current tax filing season and 
IRS' fiscal year 2001 budget request.
    With respect to the ongoing 2000 filing season, I want to 
make three points. First, despite the potential for 
complications due to Y2K and other systems changes, IRS' tax 
processing systems have operated without any significant 
disruptions of IRS' ability to process tax returns and issue 
refunds. In fact, data from various sources indicate that these 
systems are actually performing better than in 1999.
    Second, the use of electronic filing with its potential for 
faster refunds and fewer errors continues to grow. So far this 
year out of about 53 million returns filed, almost half have 
been electronic. The continued growth is due in part to IRS' 
initiatives to make electronic filing truly paperless through 
the use of personal identification numbers and electronic 
payments and IRS efforts to better promote the program.
    Third, compared to last year when IRS experienced a 
significant decline in the quality of its telephone service, 
service this year has improved. However, it is still not back 
to the level achieved in 1998. Telephone service is important 
because of the number of taxpayers that call IRS. From January 
1 to March 4 of this year, for example, there were 21 million 
calls attempted to IRS.
    IRS officials we talked to cited two factors that have 
played a part in keeping service below 1998 levels--a drop in 
productivity and fewer staff dedicated to answering calls.
    I want to switch gears and discuss IRS' budget request for 
almost $9 billion which includes a 9-percent increase over 
fiscal year 2000's proposed operating plan. IRS is also 
requesting a supplemental appropriation of $40 million for 
fiscal year 2000 and an advance appropriation of $375 million 
for fiscal year 2002 for its capital account. I want to make 
four points about that request.
    First, we have concerns related to parts of IRS' initiative 
to increase full-time equivalent staff in tax compliance and 
customer service programs (know as STABLE). Because many of the 
new staff associated with STABLE will work only part of fiscal 
year 2001, IRS may have to ask Congress for additional funding 
in 2002 when these staff will work a full year. Moreover, IRS 
has a history of being unable to fill enforcement positions 
that were funded by Congress.
    In addition, although we agree that IRS needs to improve 
its toll free telephone service, we do not believe that IRS has 
provided adequate justification for increasing the number of 
FTEs devoted to that service. The level of service during the 
current season, while still not at 1998 levels, has improved 
significantly even though IRS reduced staffing this year. Based 
on these results, IRS does not need additional staff to achieve 
the 2001 performance goal of a 60 percent level of service it 
set in its budget request.
    Accordingly, we believe Congress should consider 
withholding approval of this part of the STABLE request until 
IRS provides a revised estimate of the level of telephone 
service it can expect to provide in fiscal year 2001 with 
increased staffing.
    Second, the $119 million requwsted for IRS' capital account 
funding for 2001 and the $375 million requested for 2002 are 
not justified. We believe Congress should consider denying 
these requests and directing IRS to develop a credible request 
based on defined modernization requirements and formal 
estimating methods. Such congressional action should not affect 
the continuity of IRS' systems modernization efforts because 
IRS' own plans leave $211 million in the capital account to 
cover funding needs in 2001.
    Third, IRS' reorganization costs will peek at $182 million 
in fiscal year 2001 and end in fiscal year 2003. However, other 
costs associated with IRS' ongoing modernization such as 
training and systems investments will continue well past 2003.
    Fourth, and last, as I alluded in my discussion of 
telephone service, IRS' budget request does not provide clear 
links between the resources being requested and expected 
results. We recognize that establishing such links is difficult 
and other Federal agencies are struggling with this issue. We 
believe nevertheless that as IRS proceeds with reorganization 
and development of new performance measures, it has an 
opportunity make future budget requests more useful to 
Congress.
    Mr. Chairman, that concludes my statement. I would be happy 
to answer any questions.
    [The prepared statement follows:]

Statement of James R. White, Director, Tax Policy and Administration 
Issues, General Government Division, U.S. General Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    We are pleased to participate in the Subcommittee's inquiry 
into the status of the 2000 tax filing season and the fiscal 
year 2001 budget request for the Internal Revenue Service 
(IRS).
    Our statement is based on (1) the preliminary results of 
our review of the 2000 tax filing season; (2) our review of 
IRS' fiscal year 2001 budget request and supporting 
documentation; and (3) past and ongoing reviews of various IRS 
activities, including those related to information systems and 
IRS' reorganization. Much of our analysis is based on data 
provided by IRS that we did not verify. However, those data 
generally came from management information systems that we have 
used in the past to assess IRS operations.
    With respect to the 2000 filing season, our statement makes 
the following points:
     IRS made several important changes to its tax 
processing systems before the 2000 filing season, and those 
systems have operated without significant problems. Various 
data sources indicate that the systems are actually performing 
better than in 1999.
     The use of electronic filing continues to grow, 
which is partly attributable to various IRS initiatives to make 
electronic filing paperless and to better promote the program.
     Compared to last year, when IRS experienced 
serious problems, telephone service has improved, but it has 
yet to reach the level of service achieved in 1998. IRS 
officials cited two factors that have likely played a part in 
keeping the level of service below the 1998 level--a drop in 
productivity compared to 1998 and fewer staff dedicated to 
answer telephone calls.
    IRS is requesting about $8.986 billion for fiscal year 
2001, an increase of about $729.8 million, or 9 percent, over 
IRS' proposed operating level for fiscal year 2000. IRS is also 
requesting (1) a supplemental appropriation of $39.8 million 
for fiscal year 2000, which is included in the proposed 
operating level for that year, and (2) an advance appropriation 
for fiscal year 2002 for its multiyear capital account. With 
respect to those requests, our statement makes the following 
points:
    The supplemental appropriation and a significant part of 
the increase for fiscal year 2001 is for an initiative that 
would increase staffing levels in several of IRS' program areas 
and which has budget implications for future years. While many 
aspects of the initiative seem appropriate, we are most 
concerned about (1) IRS' ability to implement the initiative 
given its past history of being unable to fill enforcement 
positions funded by Congress and (2) that part of the 
initiative that would increase staffing for IRS' toll-free 
telephone assistance program. Congress should consider 
withholding approval of the requested increase for telephone 
service until IRS provides a more realistic estimate of the 
level of service it can expect to provide in fiscal year 2001.
    IRS' request includes $1.58 billion for its Information 
Systems appropriation and $494 million for its multiyear 
capital account, $375 million of which would be an advance 
appropriation for fiscal year 2002. Because the $494 million 
request is not adequately justified, Congress should consider 
denying the request and directing IRS to develop a credible and 
verifiable fiscal year 2001 budget request for the capital 
account that it can use in seeking, if necessary, a 
supplemental appropriation.
     IRS' includes $182 million to cover expenses 
associated with its reorganization. Over the past year, IRS has 
developed detailed designs, selected management officials, and 
put in place management structures for several of its new 
operating units. IRS plans indicate that reorganization costs 
will peak in fiscal year 2001 and end in fiscal year 2003. 
Other costs associated with IRS' modernization, such as the 
costs of training and systems modernization, should continue 
well past 2003.
     IRS' budget request does not provide clear links 
between the resources being requested and expected results. We 
recognize that establishing such links is difficult and that 
agencies throughout the federal government are struggling with 
the same issue. As IRS proceeds with its reorganization and its 
efforts to develop new performance measures, it has an 
opportunity to make future budget requests more useful to 
Congress.

               Preliminary Data on the 2000 Filing Season

    At the Subcommittee's request, we are reviewing IRS' 
performance during the 2000 tax filing season. Our testimony 
focuses on three specific issues--the performance of IRS' 
processing systems and IRS' efforts to increase electronic 
filing and improve telephone service. Our preliminary results 
show that (1) computer systems for processing returns and 
remittances appear to be working well; (2) the number of 
individual income tax returns filed electronically has 
continued to increase; and (3) taxpayers have been better able 
to reach IRS by telephone than they were last year, although 
service has not yet reached the level IRS attained in 1998.

Tax Processing Systems Have Operated Without Significant 
Problems

    Despite the potential for complications due to the 
replacement of critical equipment, consolidation of operations, 
and other Year 2000-related changes, IRS' tax processing 
systems have operated without any significant disruption of 
IRS' ability to process returns and issue refunds. In fact, 
various IRS performance measures and comments from IRS 
officials and a representative of the largest tax return 
preparation company indicate that IRS' tax processing systems 
have been performing better this year than in 1999. For 
example, as of March 10, 2000, the processing time for paper 
returns was at least 14 percent faster than at the same time 
last year. Also, according to IRS data as of that same date, 
IRS had experienced fewer system problems that caused work 
stoppages than in 1999 and was able to resolve these types of 
problems in less time than it took in 1999. According to the 
Commissioner of Internal Revenue, IRS' ``smooth transition to 
Year 2000 can be directly attributed to our thorough planning 
and preparation.''
    In the last few years, IRS has been involved in three major 
system-related efforts that affect the processing of returns 
and remittances: (1) replacing service center return and 
remittance processing equipment, (2) consolidating the tax 
processing computer operations of IRS' 10 service centers to 2 
computing centers, and (3) rewriting applications software to 
make systems Year 2000 compliant. The equipment replacement 
project was completed before the start of the 2000 filing 
season. The consolidation project is ongoing--five centers were 
consolidated before the start of the 2000 filing season, and 
the other five are scheduled for consolidation by the end of 
this year. IRS' efforts to make its computer systems Year 2000 
compliant were also substantially completed before the start of 
the 2000 filing season.
    For the past several years, IRS has been processing returns 
and remittances without any significant problems. However, 
considering the volume of tax returns and remittances that IRS 
has to process during a filing season and the need for IRS to 
annually reprogram its systems to accommodate tax law changes, 
some ``glitches'' are to be expected. In that regard, IRS has 
experienced some relatively minor problems this filing season. 
According to IRS, those problems affected a relatively small 
number of taxpayers, and prompt action was taken to address the 
problems once they were identified. For example:
     IRS reported that in the first week of January 
2000, it issued about 440 balance due notices with erroneous 
due dates. The notices were sent to taxpayers owing more than 
$100,000 and account for less than 1 percent of the balance due 
notices issued during that week. According to IRS, it contacted 
all affected taxpayers and provided the correct payment dates.
     IRS' electronic filing system improperly rejected 
about 40,000 individual returns that claimed a child care 
credit or reported dependent care benefits from an employer. 
According to IRS officials, the problem began in mid-January 
and was corrected by February 10, 2000. According to a 
representative of the largest national tax return preparation 
company, most taxpayers filing through his company opted to 
resubmit their electronic return after IRS corrected the 
problem rather than submit a paper return. According to the 
representative, the problem resulted in only minor delays in 
taxpayers receiving their refunds.
     IRS' systems could not identify taxpayer accounts 
that were affected by a power of attorney designation. As a 
result, a few hundred refunds that should have been mailed to 
the third party were mailed directly to the taxpayer, and at 
least 81,000 notices or letters were delayed in being sent to 
third party representatives. In the event the notices related 
to unpaid tax liabilities and those tax liabilities are not 
paid on time, IRS may need to abate certain penalties and 
interest because of the error. According to IRS, it has 
corrected the system-related errors to avoid further problems.

Use of Electronic Filing Continues an Upward Trend

    Pursuant to a provision in the IRS Restructuring and Reform 
Act of 1998 (RRA98), IRS has as its goal that 80 percent of all 
tax and information returns be filed electronically by 2007. 
Electronic filing has several advantages for taxpayers and IRS. 
For example, IRS acknowledges receipt of an electronic return, 
electronic filers receive their refunds faster, up-front checks 
in the electronic filing system help to ensure more accurate 
returns and thus reduce the number of taxpayer errors that IRS 
has to correct, and returns filed electronically bypass the 
error-prone manual procedures that IRS uses to process paper 
returns.
    For the past several years, we have been tracking IRS' 
progress in getting individual income tax returns filed 
electronically. As noted in our report on the 1999 filing 
season, the number of electronically-filed individual income 
tax returns increased substantially between 1997 and 1999.\1\ 
As shown in table 1, that upward trend is continuing.
---------------------------------------------------------------------------
    \1\ Tax Administration: IRS' 1999 Tax Filing Season (GAO/GGD-00-37, 
Dec. 15, 1999).

---------------------------------------------------------------------------
Efforts to Increase Electronic Filing

    To encourage taxpayers to file electronically this filing 
season, IRS has, among other things, (1) expanded tests aimed 
at making electronic filing paperless, (2) allocated $7 million 
to promote electronic filing, and (3) increased the types of 
forms that can be filed electronically.

                             Table 1: Individual Income Tax Returns Received by IRS
                                                 [In Thousands]
----------------------------------------------------------------------------------------------------------------
                                                                             Percent                   Percent
                                                  1/1/98 to    1/1/99 to     change:     1/1/00 to     change:
                  Filing type                      3/13/98      3/12/99      1998 to      3/10/00      1999 to
                                                                               1999                      2000
----------------------------------------------------------------------------------------------------------------
Paper                                                 31,936       30,168         -5.5       27,817         -7.8
Electronic
 Traditional a                                        13,649       15,853         16.1       18,404         16.1
 On-line b                                               550        1,431        160.2        2,800         95.7
 TeleFile c                                            4,598        4,353         -5.3        3,911        -10.2
 Subtotal                                             18,797       21,637         15.1       25,115         16.1
Total                                                 50,733       51,805          2.1       52,932          2.2
----------------------------------------------------------------------------------------------------------------
a Traditional electronic filing involves the transmission of returns over communication lines through a third
  party, such as a tax return preparer or electronic return transmitter, to an IRS service center.
b On-line returns are prepared and transmitted by the taxpayer through an on-line intermediary using a personal
  computer and commercial software.
c Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free
  number on touch-tone telephones. Officials in IRS' Office of Electronic Tax Administration suggested that
  TeleFile use is down over the last 2 years because taxpayers who could have used TeleFile might have switched
  to on-line filing.
Source: IRS' Management Information System for Top Level Executives.

    A major criticism of the electronic filing program has been 
that it is not paperless--electronic filers had to send IRS a 
paper signature document (Form 8453) and, if they owed money, a 
check and payment voucher. According to IRS, feedback from the 
tax practitioner community indicated that making electronic 
filing paperless would significantly increase taxpayers' and 
tax preparers' willingness to file electronically.
    IRS, in 1999, implemented two tests that provide 
alternatives to paper signature documents and two tests that 
provide electronic payment alternatives for taxpayers who owe 
money. For the 2000 filing season, IRS expanded each of those 
tests.
    The two alternative signature tests waive the need for 
participating taxpayers to submit paper signature documents and 
copies of their Wage and Tax Statements (Forms W-2). \2\ The 
first test allows certain tax practitioners' clients who choose 
to file electronically to use a self-selected personal 
identification number instead of completing a signature 
document. IRS data show that about 500,000 taxpayers used this 
option in 1999. IRS increased the number of practitioners 
allowed to participate in the test from 8,100 in 1999 to 18,000 
this year. IRS data show that about 3.95 million taxpayers had 
already used this option as of March 9, 2000--a significant 
increase over last year.
---------------------------------------------------------------------------
    \2\ These tests are consistent with a provision in RRA98, which 
required that IRS ``develop procedures for the acceptance of signatures 
in digital or other electronic form'' and that further authorized IRS 
to waive the requirement of a signature or provide for alternative 
methods of signing until such time as such procedures are in place. 
According to a cognizant IRS official, IRS can waive the submission of 
W-2s because there is no statutory requirement that these forms be 
attached to tax returns.
---------------------------------------------------------------------------
    The second alternative signature test involves taxpayers 
who used tax preparation software to prepare their previous 
year's tax return. Instead of sending those taxpayers a paper 
tax package, IRS sends them a postcard with a unique customer 
number that they can use in lieu of mailing in a signature 
document, if they decide to again file through their computer. 
About 660,000 taxpayers used this option in 1999. IRS increased 
the number of taxpayers who could participate in the test from 
about 12 million in 1999 to about 16 million this year. 
According to IRS, about 778,000 taxpayers had used this option 
as of March 9, 2000.
    IRS also expanded two tests involving alternative payment 
methods for taxpayers who owe money, both of which eliminate 
the need for taxpayers to send checks and payment vouchers. One 
test, involving the use of credit cards, was expanded to 
taxpayers who file Estimated Tax Payments (Form 1040ES) or an 
Extension of Time to File (Form 4868). IRS also did more to 
publicize this option's availability to paper filers. The other 
test, involving payments via direct debit, was expanded to 
include TeleFile users. As of March 10, 2000, according to IRS, 
28,200 taxpayers had used one of these two payment 
alternatives, compared to 7,286 at the same time last year. Of 
those 28,200 taxpayers, 20,697 were electronic filers who paid 
by direct debit (including 6,367 TeleFilers) and 7,503 were an 
unknown combination of electronic and paper filers who used 
credit cards.
    Another effort to increase electronic filing this year 
involved additional marketing of the electronic filing program. 
IRS allocated $7 million to market individual electronic filing 
for the 2000 filing season, compared to $5 million for 1999. 
This year's marketing effort includes expanded television and 
radio advertising, advertising in several magazines and 
newspapers, and the use of outdoor billboards. IRS officials 
from a regional office we visited told us that many more 
taxpayers have been coming into IRS walk-in sites to have their 
returns filed electronically, which the officials attributed, 
at least in part, to the increased marketing.
    IRS also added five forms to the list of forms that can be 
filed electronically this year. Practitioner feedback to IRS 
indicated that providing the ability to electronically file 
additional forms, such as those used for averaging farm income 
or reporting passive activity gains, would allow practitioners 
to file more electronic returns because they had clients who 
were required to file those forms with their returns. IRS 
estimated that about 250,000 of these types of forms would be 
filed electronically in the 2000 filing season. As of March 16, 
2000, about 9,800 had been filed.

Telephone Service Shows Some Improvement But Is Still Below 
1998 Performance Level

    An important indicator of how well the filing season is 
going is the ease with which taxpayers can reach IRS over the 
telephone to ask questions about the tax law or respond to a 
notice they received.\3\ In the few years before 1999, there 
had been a steady improvement in this indicator. That trend 
ended in 1999, when IRS experienced problems that significantly 
reduced taxpayers' ability to reach IRS by telephone. IRS 
addressed some of the problems that contributed to the service 
problems in 1999 and, as shown in table 2, service has improved 
this year. However, the level of service as of March 7, 2000, 
was still below the level achieved in 1998 partly because, 
according to IRS officials, the productivity of telephone 
assistors has declined compared to 1998 and fewer staff years 
have been dedicated to answering the telephone in 2000.
---------------------------------------------------------------------------
    \3\ An equally important indicator is the quality of the response 
taxpayers get to their questions once they reach IRS. We had not done 
enough work at the time this statement was prepared to comment on IRS' 
performance in that respect.

 Table 2: Toll-Free Telephone Level of Service for the First 2 Months of
                 the 2000, 1999, and 1998 Filing Seasons
                              [in Millions]
------------------------------------------------------------------------
                                1/1/00 to  3/ 1/1/99 to  3/ 1/1/98 to  3/
       Telephone service            4/00          6/99          7/98
------------------------------------------------------------------------
(a) Calls answered............         13.4          14.7          16.3
(b) Calls abandoned...........          3.9           4.6           3.8
(c) Subtotal--calls that got           17.4          19.3          20.2
 into IRS' system.............
(d) Busy signals..............          4.1          14.8           2.2
(e) Total call attempts.......         21.4          34.1          22.3
Level of service a............          63%           43%           73%
Percentage of calls that                19%           44%           10%
 received busy signals b......
Percentage of calls that got            23%           24%           19%
 into IRS' system but were
 abandoned c..................
------------------------------------------------------------------------
 Note 1: This table combines data on three of IRS' toll-free telephone
  lines--tax law assistance, account inquiry, and refund.
 Note 2: Totals may not add and percentages may not compute due to
  rounding.
a Level of service is the number of calls answered divided by the total
  call attempts--computed in this table by dividing row (a) by row (e).
b Computed in this table by dividing row (d) by row (e).
c Computed in this table by dividing row (b) by row (c).
 Source: GAO analysis of data in IRS' Weekly Customer Service Report.

    The 63-percent level of service IRS had achieved as of 
March 4, 2000, was a significant increase compared to the 43-
percent level of service achieved as of the same time last 
year. According to a cognizant IRS official, unlike last year 
when IRS faced many problems that affected access, there has 
been only one major problem this year that had a significant 
impact on the telephone system. In late January 2000, contract 
delays resulted in the bulk of over 1 million notices being 
mailed out over a 2-week period instead of being staggered over 
7 weeks as intended. As taxpayers received the notices, there 
was an unexpected increase in the number of telephone calls 
that IRS was unprepared to answer. According to the official, 
the level of service decreased over about a 3-week period as a 
result of this unexpected demand, but then increased back to 
levels achieved before the erroneous mailing. In that regard, 
according to IRS data, the level of service was 67 percent for 
the week ended January 22, dropped to 44 and 48 percent the 
following 2 weeks, then rose to 66 percent the week ended 
February 12. For the most recent week for which data were 
available when we prepared this statement (the week ended March 
4, 2000), the level of service had risen to 72 percent.\4\
---------------------------------------------------------------------------
    \4\ According to IRS, at the ``best in class'' private sector 
companies, 85 percent of callers are connected to an assistor within 30 
seconds.

IRS Addressed Some of the Problems That Contributed to Poor 
---------------------------------------------------------------------------
Telephone Service in 1999

    As noted in our report on the 1999 filing season, despite 
several changes IRS made to improve its toll-free telephone 
operations, service actually declined in 1999.\5\ For the 2000 
filing season, IRS has addressed some of the problems that 
contributed to that decrease; however, issues surrounding 
declining productivity and optimal staffing levels have not yet 
been resolved.
---------------------------------------------------------------------------
    \5\ GAO/GGD-00-37.
---------------------------------------------------------------------------
    Before 1999, IRS used a messaging system to handle calls 
from taxpayers with questions on certain complex topics that 
were known to usually require long conversations. Taxpayers 
were asked to leave their name and telephone number with the 
expectation that someone in IRS would return their call within 
2 to 3 days. Because of an expected increase in the 
productivity of its telephone assistors in 1999, IRS believed 
that it could answer all calls, even the more complex ones, as 
they came in. Thus, at the start of the 1999 filing season, IRS 
discontinued use of the messaging system. IRS subsequently 
reinstated the system when it realized that its expectations of 
increased productivity had not materialized and that the 
system's discontinuance had a negative effect on telephone 
access.
    IRS is continuing to use a messaging system this filing 
season. However, it modified the messaging procedure to improve 
management of the message workload. Now, instead of being 
routed to a voice messaging system, calls involving certain 
complex topics are routed to an assistor who adds the 
taxpayer's name, phone number, and question to a centralized 
database. IRS compliance staff nationwide can then access the 
database and return the taxpayer's call to answer the question.
    Inadequate staffing plans and work schedules for IRS' 24 
call sites also contributed to the reduced level of telephone 
service in 1999. Those plans and schedules were created using 
faulty productivity assumptions and demand data and were not 
completed until just before the start of the 1999 filing 
season. According to cognizant officials, IRS improved the 
timeliness and accuracy of its work schedules this year, 
allowing them more time for planning and providing the ability 
to better match staffing at sites with call volumes.
    Because it assumed that it would have adequate staffing for 
the 1999 filing season, IRS initially decided not to use a 
feature of the telephone system, known as selected expanded 
access (SEA), that gives taxpayers access to automated services 
when they would have otherwise received a busy signal because 
of high call volume. If the service the taxpayer desires is not 
available through automation, the only option is to hang up and 
call back later. In response to high levels of busy signals and 
resulting low accessibility in the early part of the 1999 
filing season, IRS began using SEA in early February 1999. This 
year, IRS has used SEA from the start of the filing season. 
IRS' use of SEA is most likely reflected in the reduction of 
about 10.7 million busy signals during the first 2 months of 
the 2000 filing season compared to the same period in 1999. 
What is not clear is to what extent the automated information 
satisfactorily answers the taxpayer's question. We will be 
following up on taxpayer use of SEA as we continue our review 
of the filing season.

Decline in Productivity and Fewer Staff May Be Keeping 
Telephone Service Below 1998 Levels

    Although the 63-percent level of service as of March 4, 
2000, was a significant increase over the 43-percent rate 
achieved as of the same time last filing season, it was still 
about 10 percentage points lower than in 1998. IRS officials 
cited two factors that have likely played a part in keeping the 
level of service below the 1998 level--a drop in productivity 
compared to 1998 and fewer staff dedicated to answer telephone 
calls.
    According to IRS officials, productivity--the rate at which 
assistors answer telephone calls--is down considerably from 
1998. Although they speculate that some of the decline may be 
due to their emphasis on assistors taking as long as necessary 
to fully resolve a taxpayer's question or problem, IRS does not 
conclusively know what factors have contributed to the 
productivity decline and whether this has resulted in better or 
worse service. IRS has undertaken two studies to determine the 
reasons for declining productivity and what, if any, corrective 
action should be taken. We will monitor the results of those 
two studies as we continue our review.
    Another factor that may be keeping level of service during 
this filing season from reaching the level achieved in 1998 is 
the decision to reduce the staff dedicated to providing toll-
free telephone assistance. For fiscal year 2000, IRS allocated 
fewer positions to provide telephone service and shifted the 
remaining positions to non-telephone work, such as responding 
to taxpayer correspondence and contacting taxpayers who owe 
taxes. Cognizant officials said that when a disproportionate 
number of staff are diverted to any one type of service, the 
other services suffer with large and aged inventories. They 
added that the resources and demand for telephone and 
correspondence assistance are highly interrelated because 
taxpayers who have not received a timely response to their 
correspondence call IRS, thus increasing telephone demand.

                  IRS' Fiscal Year 2001 Budget Request

    For fiscal year 2001, IRS is requesting $8.986 billion and 
100,133 full-time equivalent (FTE) positions, including $145 
million and 2,082 FTEs to be funded outside the discretionary 
spending caps for the Earned Income Tax Credit compliance 
initiative.\6\ As shown in appendixes I and II, that request is 
about 9 percent more than IRS' proposed operating level for 
fiscal year 2000 ($8.256 billion) and is the net result of 
several increases and decreases, including increases for (1) an 
initiative called ``Staffing Tax Administration for Balance and 
Equity'' (STABLE), (2) information systems and technology 
investments, and (3) organizational modernization.\7\
---------------------------------------------------------------------------
    \6\ Fiscal year 2001 will be the fourth year of funding for this 5-
year initiative.
    \7\ In our report on IRS' fiscal year 1999 financial statements, 
Financial Audit: IRS' Fiscal Year 1999 Financial Statements (GAO/AIMD-
00-76, Feb. 29, 2000), we discussed certain issues related to IRS' 
budget, such as concerns about IRS's ability to ensure compliance with 
the laws governing its use of budget authority and IRS' controls over 
property and equipment. We are not discussing those issues in this 
testimony.
---------------------------------------------------------------------------
    In analyzing the request for STABLE, it became apparent 
that several portions of IRS' request do not contain clear 
links between the resources being requested and expected 
results. Given IRS' ongoing reorganization and its efforts to 
develop new or revised performance measures, we believe that 
IRS has an opportunity to make future budget requests more 
useful to Congress.

IRS Requests Funds to Stabilize Its Workforce

    IRS is requesting $144 million and 1,633 additional FTEs to 
stabilize and strengthen tax compliance and customer service 
programs in fiscal year 2001. IRS has also proposed a 
supplemental fiscal year 2000 appropriation of $39.8 million 
for this initiative, collectively known as STABLE, to allow it 
to hire some of the new staff in fiscal year 2000. According to 
IRS, approval of the supplemental appropriation would allow IRS 
to train those new hires in fiscal year 2000, thus maximizing 
their impact in fiscal year 2001.
    As shown in table 3, the STABLE initiative includes 
staffing increases for several IRS program areas.

                                 Table 3:--FTEs Requested for STABLE Initiative
----------------------------------------------------------------------------------------------------------------
                                                     Fiscal year      Fiscal year      Fiscal year
                 Budget activity                         2000             2001             2001          Total
                                                     supplemental    annualization      initiative
----------------------------------------------------------------------------------------------------------------
Submission Processing............................              50              150              208         408
Telephone and Correspondence
Toll Free........................................              63              189              248         500
  Automated Collection System....................              75              225              150         450
Document Matching
  Underreporter..................................              40              120               40         200
  Combined Annual Wage        Reporting..........              10               30               64         104
Examination......................................              11               33              778         822
Collection
  Field Collection...............................               0                0               50          50
  Walk-In........................................              48              142               43         233
Tax Exempt and Government     Entities...........               4               12               52          68
                                                  --------------------------------------------------------------
Total FTEs.......................................             301              901            1,633       2,835
----------------------------------------------------------------------------------------------------------------
Note: The FTEs shown in the column headed ``Fiscal year 2000 supplemental'' reflect IRS' assumption that the
  persons hired under the supplemental appropriation will be coming on board around July 1, 2000, and thus will
  be working for only 3 months of the fiscal year. Thus, for example, the 50 FTEs for Submission Processing in
  that column represent 200 persons working for 3 months in fiscal year 2000. Because those 200 persons would be
  expected to work a full year in 2001, the number of FTEs needed that year would be 200--or 150 more than
  provided for in the fiscal year 2000 supplemental. That 150 increase is reflected in the column headed
  ``Fiscal year 2001 annualization.'' The same rationale applies to the other numbers in that column.
Source: IRS' Fiscal Year 2001 Congressional Justification.

    Before discussing specific parts of this initiative, we 
have two overall comments.
     Because IRS' request for fiscal year 2001 assumes 
that many of the new staff will not be brought on board until 
April 1, 2001, the number of FTEs associated with STABLE in 
fiscal year 2001 reflects the fact that many of the new staff 
will not be working the entire fiscal year. Because they will 
be working full time the following year, the number of FTEs 
associated with STABLE will increase to 4,003 in fiscal year 
2002, according to IRS. Thus, if Congress funds the initiative 
and IRS implements it as intended, IRS can be expected to seek 
a further increase in fiscal year 2002 to fund the additional 
staffing costs associated with this growth in FTEs.
     However, there is ample precedent to question 
whether IRS will be able to implement STABLE as intended. Many 
times in the past, IRS has not filled enforcement positions 
that were funded by Congress because shortfalls in other areas 
caused IRS to use those funds elsewhere. In that regard, IRS' 
budget justification says that, for fiscal year 2000, it has 
had to ``adjust projected spending on personnel, operational 
support, and other support costs,'' which ``required that we 
not fill 2,339 FTE devoted to tax law enforcement in the 
[fiscal year] 2000 President's Budget.''
    In responding to our second overall comment, IRS' Budget 
Office said the following:

        ``We agree that for the past few years we have had to divert 
        labor resources to fund unfunded mandatory items such as 
        telecommunications and contracts, as well as reduce the number 
        of FTE due to an unfunded labor shortfall. This could happen 
        again if we do not receive our full [fiscal year] 2001 budget 
        request. However, as currently submitted, our [fiscal year] 
        2001 budget is balanced and will allow us to fund all requested 
        FTE. If fully funded we expect to be able to recruit and fill 
        all of the requested positions.''

    The rest of our discussion of STABLE focuses on those 
elements related to (1) telephone service, (2) submission 
processing (3) examination, (4) collection, and (5) the 
underreporter program.

Telephone Service

    STABLE includes 500 additional FTEs for IRS' toll-free 
telephone service. With the additional staffing, according to 
the budget request, IRS plans to provide a 60-percent level of 
service for toll-free assistance in fiscal year 2001 and reduce 
its dependence on revenue agent detailees from Examination.
    Of the 500 FTEs being requested for toll-free telephone 
service, 200 will be used to free Examination staff from having 
to support customer service activities. In effect, IRS will be 
hiring Customer Service staff to replace Examination staff who 
have been detailed to answer the phone. Since the net effect of 
those 200 FTEs is not to increase the resources available to 
answer the telephone but rather to increase the resources 
available to do examinations, we will discuss that part of the 
request in the next section. The other 300 FTEs would actually 
increase the number of resources devoted to answering the 
telephone.
    Although we asked IRS for documentation further justifying 
this proposed staffing increase, IRS did not provide sufficient 
detail on how it determined the size of the staff increase or 
how such an increase would affect service. In addition, IRS 
cannot project the level of service it can expect from its 
current staffing, much less the level of service it can expect 
from more staff. In that regard, IRS has shown that it may be 
able to provide better service with even fewer staff than 
before. As we discussed earlier, the level of service during 
the current filing season has improved significantly over last 
year--63 percent as of March 4, 2000, compared to 43 percent at 
the same time in 1999--even though IRS allocated fewer staff to 
toll-free service this year.
    Although we agree that IRS needs to improve its toll-free 
telephone service, we do not believe that IRS has provided 
adequate justification for increasing the number of FTEs 
devoted to that service. Although IRS' stated goal (a 60-
percent level of service) may have seemed reasonable at the 
time the fiscal year 2001 budget was prepared, it appears 
clear, based on the preliminary results of this year's filing 
season, that IRS does not need additional staff to achieve that 
level of service.

Matter for Consideration by Congress

    We believe that Congress should consider withholding 
approval of this part of the STABLE request until IRS provides 
a revised estimate of the level of telephone service it can 
expect to provide in fiscal year 2001 with the increased 
staffing and clearly demonstrates that the revised estimate 
considers (1) the service level achieved this filing season, 
(2) reasonable expectations for further improvements in 
management and processes, and (3) any planned technological 
changes.

Submission processing

    The STABLE initiative includes 408 additional FTEs that IRS 
says will be used to transcribe data from 18 million Schedules 
K filed on paper.\8\ According to IRS, these paper schedules, 
together with those filed electronically, represent in excess 
of $500 billion in total income. IRS says that processing of 
these documents will allow IRS, as part of its document 
matching program, to reconcile K data with information reported 
on individual tax returns.
---------------------------------------------------------------------------
    \8\ Schedules K provide information on income (or losses) 
distributed by business entities to individual partners, beneficiaries, 
and shareholders.
---------------------------------------------------------------------------
    IRS' plan is consistent with a recommendation we made in 
1995--namely that IRS devise ways to enter all Schedules K onto 
the computer so they can be used in the document matching 
program and for other compliance programs.\9\ We presented 
cost/benefit information in the report and said that IRS could 
reduce the cost of transcribing this information if it could 
encourage more partnerships to file the schedules 
electronically. At that time, only 1.7 million of the total 
17.3 million Ks were filed electronically. IRS has made 
progress in that regard--about 4 million are now processed 
electronically and IRS is projecting about 11 million by 2001.
---------------------------------------------------------------------------
    \9\ Tax Administration: IRS' Partnership Compliance Activities 
(GAO/GGD-9551, June 16, 1995).
---------------------------------------------------------------------------
    It should be noted that the transcription of K data 
starting in fiscal year 2001 could significantly increase IRS' 
document matching workload starting in fiscal year 2002. It 
remains to be seen what IRS is able to do with that increased 
workload since, as discussed later, IRS is currently unable to 
investigate many of the discrepancies identified by its 
document matching program. Thus, the increased matching 
workload resulting from the processing of K data could affect 
IRS' budget request for fiscal year 2002.

Examination

    STABLE would increase Examination staffing in two ways. 
First, as discussed earlier, the telephone service portion of 
STABLE includes 200 FTEs to free up Examination staff who have 
been detailed in the past to help the Customer Service function 
answer taxpayers' questions. Second, the Examination portion of 
STABLE includes 822 FTEs, which would allow IRS to hire 
additional staff for the Examination function. IRS says that 
the staffing increase will lead to an increase in audit 
coverage for high-income individuals (those with taxable income 
of more than $100,000) from 0.76 percent to 1.10 percent. We 
have no way of knowing what an appropriate level of audit 
coverage would be. Assuming 1.10 percent is a reasonable goal, 
the question becomes whether IRS needs additional staff to 
achieve that goal or whether it can be achieved by using 
existing resources more efficiently.
    Because there was insufficient information in IRS' budget 
justification to address that question, we obtained additional 
data from IRS. The data we received showed that
     the number of revenue agent FTEs has declined by 
about 17 percent between fiscal year 1995 and fiscal year 1999, 
with a further decline of 4 percent expected in fiscal year 
2000;
     between fiscal years 1995 and 1999, the number of 
returns filed by high-income individuals and corporations (the 
type of returns generally audited by revenue agents) increased 
by about 36 percent;
     primarily because of an increase in the amount of 
FTEs spent in training and helping Customer Service, the 
percent of revenue agent FTEs spent doing examinations (known 
as direct examination time) decreased from 53.9 percent in 
fiscal year 1997 to 45.2 percent in fiscal year 1999; and
     time spent per examination case has increased due 
to such factors as (1) changes in the mix of work; (2) the 
learning curve associated with new laptop computers; (3) the 
stops and starts associated with details to Customer Service; 
and (4) various new documentation, taxpayer notification, and 
other requirements associated with implementation of RRA98.
    Although direct examination time and time per case could 
improve as details to Customer Service become less necessary 
and staff become more familiar with the provisions of RRA98 and 
although other increases in efficiency are surely possible, we 
find it hard to argue against increasing Examination staff in 
light of the 21-percent decline in revenue agent staffing since 
fiscal year 1995 while the number of filed returns in 
categories audited by revenue agents has been increasing at an 
even greater rate.

Collection

    STABLE includes 283 additional FTEs for IRS' Collection 
activity--50 for the Field Collection function and 233 for the 
walk-in program. According to IRS, much of this initiative is 
designed to address (1) declining staffing levels among revenue 
officers, (2) a downward trend in collection case closures, and 
(3) substantial increases in the time required per case due to 
provisions of RRA98.
    IRS' budget request did not contain details on the downward 
trends in revenue officer staffing and case closures or the 
upward trend in case times. We pursued those issues with IRS 
and obtained the following information:
     Revenue officer FTEs declined from about 8,130 in 
fiscal year 1995 to about 6,480 in fiscal year 1999--a drop of 
20 percent--and have continued to decline this year.
     The number of tax delinquent accounts and tax 
delinquency investigations closed by the Field Collection 
function decreased by 30 percent and 49 percent, respectively, 
between fiscal years 1997 and 1999.
     The Collection function is expected to spend about 
1,400 FTEs in fiscal year 2001 administering various provisions 
of RRA98, which, according to IRS, more than offsets the 
productivity gains associated with the recently completed 
national roll-out of the Integrated Collection System.
    In addition to the decline in overall staffing levels, some 
revenue officer FTEs have been used to provide assistance at 
IRS walk-in sites. According to data obtained from IRS, the 
number of revenue officer FTEs devoted to that effort increased 
from 289 in fiscal year 1998 to 542 in fiscal year 1999. 
According to IRS, of the 233 FTEs being requested for the walk-
in program under STABLE, 200 are intended to allow IRS to 
reduce this reliance on revenue officer help. We agree in 
principle with the desirability of replacing revenue officer 
detailees with persons hired and trained specifically to 
provide customer service. Doing so should not only allow the 
revenue officers to concentrate on collection case work but 
also improve customer service. A person who has been hired and 
trained for a customer service position should be able to 
better assist taxpayers than a person who has been hired and 
trained to collect taxes.
    Unlike the 200 FTEs discussed above, which would increase 
the staffing devoted to collecting taxes, the other 33 FTEs 
being requested for the walk-in program would increase the 
number of FTEs devoted to providing walk-in assistance. IRS' 
budget request provides little information that can help 
Congress evaluate the need for additional walk-in staff. IRS 
says that funding of its request will ``increase the level of 
customer service.'' However, although IRS has efforts underway 
to measure such service indicators as wait time and quality, 
its budget currently includes no such measure. In fact, one 
measure in IRS' budget request (customer satisfaction with 
walk-in assistance) indicates that service might already be at 
an acceptable level. According to that measure, customers gave 
the walk-in program a satisfaction rating of 6.4 on a scale of 
1 to 7, with 7 meaning ``very satisfied.'' That rating is the 
highest of all the customer satisfaction ratings reported in 
IRS' budget request.
    Information we received from IRS' Budget Office indicated 
that the additional walk-in staff would allow IRS to enhance 
the accessibility of its walk-in assistance by expanding the 
hours of service at walk-in offices and expanding efforts to 
help taxpayers (through such nontraditional outlets as shopping 
malls and taxmobiles) who cannot easily reach a walk-in office. 
However, the budget request does not reflect any impact from 
that expanded service. In fact, the request shows that IRS 
expects 10.0 million walk-in contacts in fiscal year 2001--the 
same number as in 1999 and 2000.

Underreporter Program

    STABLE also includes 200 FTEs for additional document 
matching within IRS' Underreporter Program. IRS' budget 
justification contains no performance measures related to the 
Underreporter Program that can be used to help assess the 
reasonableness of this request. In our report on IRS' fiscal 
year 1999 financial statements, however, we presented the 
following information on IRS' performance in this area.\10\
---------------------------------------------------------------------------
    \10\ GAO/AIMD-00-76.
---------------------------------------------------------------------------
    ``For tax year 1996 [the most recent year for which 
substantially complete matching program results were 
available], IRS' matching program for individual taxpayers 
screened about 155 million individual income tax returns and 
found that about 12 million (8 percent) had potential 
underreported taxes due totaling at least $15 billion. However, 
IRS investigated only about 3.1 million (26 percent) of these 
returns, accounting for estimated underreported taxes due of 
about $5.2 billion (35 percent). . . According to IRS, resource 
constraints precluded them from investigating more of these 
discrepancies and the related estimated underreported taxes 
due.''

Fiscal Year 2001 Information Technology Budget Request: 
Observations and Suggestions

    Beginning in 1995, we reported on serious and pervasive 
information technology (IT) management and technical weaknesses 
at IRS and made recommendations for correcting them.\11\ To 
minimize the risk of IRS investing in systems before the 
recommendations were fully implemented, we suggested in 1996 
that Congress limit IRS' IT spending to cost effective 
activities that (1) support ongoing operations and maintenance; 
(2) correct pervasive management and technical weaknesses, such 
as a lack of requisite systems life cycle discipline; (3) are 
small, represent low technical risk, and can be delivered in a 
relatively short time frame; or (4) involve deploying already 
developed systems that have been fully tested, are not 
premature given the lack of a complete systems architecture, 
and produce a proven, verifiable business value.\12\ Since 
1996, we have reported on IRS' progress in implementing our 
recommendations and reviewed IRS' annual budget requests to 
ensure their consistency with IRS' IT management capability and 
these spending categories.\13\ While IRS has made progress over 
the last 4 years in addressing our recommendations, it has yet 
to fully implement them, and thus they remain operative in 
assessing IRS' fiscal year 2001 IT budget request.
---------------------------------------------------------------------------
    \11\ Tax Systems Modernization: Management and Technical Weaknesses 
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-9556, July 
26, 1995).
    \12\ Tax Systems Modernization: Actions Underway But IRS Has Not 
Yet Corrected Management and Technical Weaknesses (GAO/AIMD-9606, June 
7, 1996).
    \13\ Tax Administration: IRS' Fiscal Year 2000 Budget Request and 
1999 Tax Filing Season (GAO/T-GGD/AIMD-9940, Apr. 13, 1999); Tax 
Administration: IRS' Fiscal Year 1999 Budget Request and Fiscal Year 
1998 Filing Season (GAO/T-GGD/AIMD-9814, Mar. 31,1998); Tax 
Administration: IRS' Fiscal Year 1997 Spending, 1997 Filing Season, and 
Fiscal Year 1998 Budget Request (GAO/T-GGD/AIMD-97-66, Mar. 18, 1997); 
Tax Administration: IRS' Fiscal Year 1996 and 1997 Budget Issues and 
the 1996 Filing Season (GAO/T-GGD-96-99, Mar. 28, 1996).
---------------------------------------------------------------------------
    For fiscal year 2001, IRS' Information Systems 
appropriation request is $1.58 billion and includes 7,531 FTEs. 
Of the $1.58 billion, $1.54 billion is to fund the operation 
and maintenance of existing systems. The remaining $40 million 
is for what IRS terms ``Business Line Investments.'' The 
investments are intended to add new capabilities to five 
operational systems and develop three new systems that, 
according to IRS officials, address business needs that are 
unique to some of IRS' newly formed operating divisions and are 
not related to, or dependent upon, IRS' core business systems 
modernization program.
    In addition to the $1.58 billion, IRS is requesting $119 
million for fiscal year 2001--and an advance appropriation of 
$375 million for fiscal year 2002--for IRS' multiyear capital 
account that is intended to fund contractor costs associated 
with IRS' core business systems modernization program. This 
account, referred to as the Information Technology Investments 
Account (ITIA), currently contains $438 million in 
appropriated, but unobligated, funds.\14\
---------------------------------------------------------------------------
    \14\ Of the $438 million, $227 million is to expire on September 
30, 2000, and the remaining $211 million is to expire on September 30, 
2002.
---------------------------------------------------------------------------
    Pursuant to legislation,\15\ funds from the ITIA are not 
available to IRS for obligation until IRS and Treasury submit 
to Congress for approval an expenditure plan that (1) 
implements the IRS Modernization Blueprint; (2) meets Office of 
Management and Budget (OMB) investment guidelines; (3) is 
reviewed and approved by IRS' Investment Review Board,\16\ OMB, 
and Treasury's IRS Management Board and is reviewed by us; (4) 
meets requirements of IRS' life cycle program; and (5) is in 
compliance with acquisition rules, requirements, guidelines, 
and systems acquisition management practices of the federal 
government. In May 1999, IRS submitted its first expenditure 
plan, seeking to spend about $35 million for modernization 
initiatives through October 31, 1999. We reported to Congress 
that the plan was an appropriate first step toward successful 
modernization, but that the key to success for IRS would be to 
effectively implement the plan.\17\ Subsequently, the relevant 
appropriations subcommittees agreed to IRS' obligation of $35 
million from the ITIA.
---------------------------------------------------------------------------
    \15\ The fiscal year 1998 Treasury and General Government 
Appropriations Act (P.L. 105-61) and the fiscal year 1999 Omnibus 
Consolidated and Emergency Supplemental Appropriations Act (P.L. 105-
277).
    \16\ According to IRS, the Investment Review Board has been 
replaced by the Core Business Systems Executive Steering Committee, 
which is chaired by the Commissioner of Internal Revenue.
    \17\ Tax Systems Modernization: Results of Review of IRS' Initial 
Expenditure Plan (GAO/AIMD/GGD-99-206, June 15, 1999).
---------------------------------------------------------------------------
    IRS was unable to finalize its second expenditure plan 
before the original $35 million was obligated and on December 
14, 1999, it requested approval to obligate $33 million from 
the ITIA as a ``stopgap'' measure until the next expenditure 
plan was submitted. In briefings to the relevant appropriations 
subcommittees and IRS, we reported our concerns about IRS' lack 
of progress in completing and implementing an enterprise 
systems architecture and system development life cycle and the 
risks associated with IRS' plans to develop selected systems 
without these critical management controls in place. In 
approving IRS' $33 million request, the appropriation 
subcommittees directed IRS to, among other things, (1) expedite 
completion and implementation of the architecture and system 
life cycle methodology and (2) explain in future expenditure 
plans how IRS plans to manage the risk of performing detailed 
design or development work if the architecture is not completed 
or the life cycle is not implemented.
    In response to these and other concerns raised by the 
appropriations committees, OMB, and us, IRS has reassessed its 
plans and is in the process of restructuring its modernization 
program to scale-back its new system development efforts until 
it first puts in place the requisite modernization management 
capability, including developing its enterprise architecture 
and implementing its system life cycle methodology. In early 
March 2000, IRS submitted its second expenditure plan to 
Congress seeking approval to obligate $176 million of the $438 
million currently in the ITIA.

Fiscal Year 2001 Information Systems Budget Request Appears 
Consistent With Established Spending Categories

    The vast majority (97 percent) of IRS' fiscal year 2001 
request of $1.58 billion for its Information Systems 
appropriation appears in line with the aforementioned spending 
categories. Specifically, $1.54 billion is being requested to 
operate and maintain existing information systems that support 
day-to-day tax administration functions and activities. The 
remaining 3 percent, or $40 million, is for eight relatively 
small ``Business Line Investments'' that are to enhance 
existing operational systems and develop new ones. 
Specifically, five investments, estimated at about $13 million, 
are to add capabilities to operational systems, such as the 
Integrated Case Processing System and the Chief Counsel Case 
Management System. The other three investments, estimated at 
about $27 million, are to develop new systems for some of IRS' 
new operating divisions.
    For example, one of these investments--referred to by IRS 
as the Near Term Electronic Filing and Electronic Fraud 
Detection System project--is for the Wage and Investment Income 
Division and the Small Business and Self Employed Division. 
This system is to provide the capability to accept additional 
tax forms and schedules that IRS is currently not capable of 
receiving electronically. According to IRS, the system will 
support IRS' goal of enabling more taxpayers to file their tax 
forms and schedules electronically.

Fiscal Years 2001 and 2002 ITIA Requests Are Not Adequately 
Justified

    Key provisions of the Clinger-Cohen Act, the Government 
Performance and Results Act, and OMB Circular No. A1 and 
supporting memoranda, require that, before requesting multiyear 
funding for capital asset acquisitions, agencies develop 
accurate, complete cost data and perform thorough analyses to 
justify the business need for the investments. For example, 
agencies must show that needed investments (1) support a 
critical agency mission; (2) are justified by life cycle cost-
benefit analysis (i.e., business case); and (3) have cost, 
schedule, and performance goals.
    IRS' Chief Information Officer (CIO) acknowledged that IRS 
has not yet performed the above-cited analyses to justify its 
fiscal year 2001 investment account request of $119 million and 
its fiscal year 2002 advance request of $375 million. Instead, 
IRS officials told us that the funding requests for both years 
were based on a $300 million average annual rate of spending, 
which, according to the CIO, was derived 6 months ago based on 
full contractor staffing of the maximum number of projects that 
IRS assumed its human capital capacity would allow it to manage 
effectively at one time. However, the reliability of this 
estimate is questionable because we were not provided any 
verifiable documentation supporting the above-described 
estimating approach, and the estimate is not based on a 
complete definition of what IRS' fiscal year 2001 and 2002 
investments will be. Moreover, even using the above-described 
rationale for how the 2001 and 2002 funding requests were 
derived, the estimate is likely overstated for two reasons. 
First, IRS has recently reassessed its human capital capacity 
to manage projects and has determined that the number of 
projects it can effectively oversee needed to be scaled back, 
which in turn has reduced contractor staffing needs. Second, 
the $300 million estimate represented the upper bound of IRS' 
funding requirements for a given year, according to the CIO.

Matter for Consideration by Congress

    We suggest that Congress consider denying the $119 million 
requested for fiscal year 2001 and the $375 million requested 
for fiscal year 2002, and that it direct IRS to develop a 
credible and verifiable fiscal year 2001 ITIA budget request 
(i.e., a request that is based on defined modernization 
requirements and formal estimating methods) and to seek, if 
necessary, a supplemental appropriation for this amount in time 
to meet its fiscal year 2001 needs. Neither of these 
congressional actions should affect continuity of the 
modernization because (1) IRS' own plans for obligating 
available ITIA funds will leave $51 million in the account for 
the remainder of fiscal year 2000,\18\ and $211 million to 
cover funding needs in fiscal year 2001, even if IRS does not 
receive a supplemental, and (2) IRS can still request funding 
for fiscal year 2002 in its fiscal year 2002 budget submission, 
when it should be in a better position to reliably estimate its 
funding needs.
---------------------------------------------------------------------------
    \18\ This $51 million, if not obligated by September 30, 2000, will 
expire.

---------------------------------------------------------------------------
IRS' Reorganization Effort Is Continuing

    IRS has requested $182 million to cover reorganization 
expenses--$140 million in base funding from the fiscal year 
2000 budget plus an additional $42 million requested for fiscal 
year 2001. According to IRS, reorganization costs will peak in 
fiscal year 2001, decline in 2002, and end in 2003. This 
funding pattern is consistent with IRS' plan for implementing 
the reorganization, which shows a significant amount of 
activity in fiscal year 2001 with lesser amounts continuing 
into 2003. Other costs associated with IRS' modernization, such 
as the costs associated with training staff and upgrading IRS' 
computer systems, should continue well past 2003.
    Over the past year, IRS has made progress in shifting to 
the new organizational structure. IRS has selected the 
Commissioners and Deputy Commissioners for each of the four 
operating divisions and has put in place management structures 
for several new units, including the Taxpayer Advocate Service 
and the Tax Exempt and Government Entities Division. The two 
largest operating divisions, those serving individual taxpayers 
and small businesses, are expected to become operational this 
fall, but key aspects of the organizational designs are to be 
phased in over the following 2 years. Plans for the Wage and 
Investment Income Division, for example, include new compliance 
approaches that IRS plans to implement or pilot test in fiscal 
year 2002.
    In our testimony on IRS' fiscal year 2000 budget request, 
we commented that IRS did not separately identify an amount for 
the Office of the Taxpayer Advocate, but instead included it 
within the Telephone and Correspondence budget activity in the 
Processing, Assistance, and Management appropriation.\19\ We 
suggested that congressional oversight of the Advocate's Office 
and IRS' efforts to solve taxpayer problems would be further 
enhanced and any concerns about the Advocate Office's 
independence would be further mitigated if funding for that 
Office was separately identified in IRS' budget. IRS created a 
separate budget activity for the Taxpayer Advocate Service in 
fiscal year 2000, which it has included in its fiscal year 2001 
budget request.
---------------------------------------------------------------------------
    \19\ GAO/T-GGD/AIMD-9940.
---------------------------------------------------------------------------
    In that same testimony, we discussed how IRS' budget 
request commingles resources for enforcement and assistance. 
The Telephone and Correspondence budget activity, for example, 
includes resources for several forms of assistance, such as 
answering telephone calls and correspondence, as well as 
several enforcement activities, such as audits handled through 
correspondence and attempts to collect overdue taxes via the 
telephone. When we raised the same issue in our report on IRS' 
fiscal year 1999 financial statements, IRS said that it would 
be addressing the issue in its new organizational 
structure.\20\
---------------------------------------------------------------------------
    \20\ GAO/AIMD-00-76.

Fiscal Year 2001 Budget Request Not Clearly Linked to 
---------------------------------------------------------------------------
Performance

    As noted in our earlier discussion of STABLE, several 
portions of IRS' budget request do not contain a clear link 
between the resources being requested and expected results. As 
we have noted in the past, the Government Performance and 
Results Act of 1993 aims for a closer and clearer link between 
the process of allocating resources and the expected results to 
be achieved with those resources.\21\ We further noted that an 
agency's performance goals are of little value to congressional 
appropriation decisions without a connection to the resources 
that an agency is requesting.\22\
---------------------------------------------------------------------------
    \21\ Performance Budgeting: Fiscal Year 2000 Progress in Linking 
Plans With Budgets (GAO/AIMD-99-239R, July 30, 1999).
    \22\ Performance Budgeting: Initial Agency Experiences Provide a 
Foundation to Assess Future Directions (GAO/T-AIMD/GGD-99-216, July 1, 
1999).
---------------------------------------------------------------------------
    While we recognize that it is not easy to clearly link 
budget levels and performance results, we believe that IRS 
could do a better job of making that connection. For example, 
IRS' request does not clearly link the various budgetary inputs 
that affect toll-free level of service with IRS' goal in that 
area. What the budget shows is a request for about $1 billion 
for the Telephone and Correspondence activity and a performance 
goal of 60-percent level of service associated with that budget 
activity. What is unclear from the budget is (1) that much of 
the Telephone and Correspondence request is not for toll-free 
telephone service; (2) that some of the resources requested for 
other activities, such as Examination and Information Systems, 
are for toll-free telephone service; and (3) the projected 
level of service IRS can expect from its current staffing.
    IRS is in the process of implementing a major 
reorganization. That reorganization and any related budget 
restructuring, along with IRS' ongoing efforts to develop new 
or revised performance measures, could provide an opportunity 
to make future budget requests more useful to Congress by more 
clearly linking requested resource levels with the achievement 
of performance goals.
    That concludes my statement. We welcome any questions that 
you may have.

                               Appendix I

          IRS' Fiscal Year 2001 Budget Request Compared with Proposed Fiscal Year 2000 Operating Level
                                             [Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
                                                 FY 2000                  FY 2001              Percent change
----------------------------------------------------------------------------------------------------------------
            Budget activity                 Dollars       FTEs       Dollars       FTEs    In dollars   In FTEs
----------------------------------------------------------------------------------------------------------------
Submission Processing..................     $930,325     15,682    $1,036,818     16,040       11.45       2.28
Telephone and Correspondence...........      932,190     20,480     1,026,742     21,291       10.14       3.96
Taxpayer Advocate Service..............       133145      2,294       141,095      2,294        5.97       0.00
Document Matching......................       59,036      1,437        73,023      1,690       23.69      17.61
Management Services....................      609,771      6,694       686,155      6,694       12.53       0.00
Rent and Utilities.....................      695,579         67       735,666         67        5.76       0.00
Subtotal: Processing, Assistance, and     $3,360,046     46,654     3,699,499     48,076       10.10       3.05
 Management Appropriation..............
Criminal Investigation.................      384,549      3,750       399,065      3,750        3.77       0.00
Examination............................    1,772,371     22,089     1,885,882     22,900        6.40       3.67
Collection.............................      676,676     10,548       721,547     10,785        6.63       2.25
Tax Exempt/Government Entities.........      156,600      2,102       168,654      2,166        7.70       3.04
Statistics of Income...................       28,390        471        29,696        471        4.60       0.00
Chief Counsel..........................      225,059      2,378       234,176      2,372        4.05      -0.25
Subtotal: Tax Law Enforcement             $3,243,645     41,338     3,439,020     42,444        6.02       2.68
 Appropriation.........................
Operations and Maintenance.............    1,258,155      7,292     1,543,565      7,531       22.68       3.28
Year 2000..............................      250,426        239             0          0          NA         NA
Investments............................            0          0        40,000          0          NA         NA
Subtotal: Information Systems             $1,508,581      7,531     1,583,565      7,531        4.97       0.00
 Appropriation.........................
Information Technology Investments.....            0          0       119,000          0          NA         NA
Earned Income Credit (outside caps)....     $144,000      2,082      $145,000      2,082        0.69       0.00
Total..................................   $8,256,272     97,605    $8,986,084    100,133        8.84       2.59
----------------------------------------------------------------------------------------------------------------
Source: IRS' Fiscal Year 2001 Congressional Justification.

                              Appendix II

 Comparison of IRS' Fiscal Year 2000 Proposed Operating Level and Fiscal
                        Year 2001 Budget Request
                         [Dollars in thousands]
------------------------------------------------------------------------
                                          Subtotal           Total
------------------------------------------------------------------------
Fiscal year 2000 proposed operating                           $8,256,272
 level (includes Earned Income Tax
 Credit appropriation)...............
Decreases for fiscal year 2001
  Information Systems (non-recur)....      ($ 50,897)
Transfer of resources to Treasury               (732)
 Inspector General for Tax
 Administration......................
Subtotal-decreases                          ($51,629)
Increases for fiscal year 2001
  Adjustments necessary to maintain           347,596
   current levels....................
  Program annualization..............          40,736
  Staffing Tax Administration for             144,071
   Balance and Equity................
  Electronic Tax Administration......           3,000
  Operational support contracts......          43,631
  Organizational modernization.......          42,407
  Business line investments..........          40,000
  Information Technology Investment           119,000
   Account...........................
  Earned Income Tax Credit compliance           1,000
   initiative........................
Subtotal-increases...................         781,441
Fiscal year 2001 budget request......                         $8,986,084
Difference between fiscal year 2000                             $729,812
 operating level and fiscal year 2001
 budget request......................
------------------------------------------------------------------------
Source: IRS' Fiscal Year 2001 Congressional Justification.

      

                                


    Chairman Houghton. Thank you, Mr. White.
    Mr. Coyne?
    Mr. Coyne. Thank you, Mr. Chairman.
    You have reported that while only about 1 million returns 
were audited in 1997, 10 million additional returns were 
subject to other forms of IRS reviews. How does the IRS review 
tax returns beyond full fledged audits?
    Mr. White. You are referring to non-audit contacts and you 
are correct, those are the overwhelming majority of audit type 
contacts. The contacts in this category, include math errors 
contacts, reviews of Social Security numbers to make sure the 
taxpayer is using a valid number, the document matching program 
and various items IRS refers to as soft notices which are in 
effect an advance warning to taxpayers about potential 
problems.
    Mr. Coyne. What are the current audit rates for individual, 
small business and corporate taxpayers?
    Mr. White. I don't have all of those numbers but the rate 
for high income individual taxpayers that is expected for 
fiscal year 2000 would be .76 percent. The numbers I have for 
fiscal year 1999, are 1.03 percent for high income individuals 
and 1.51 percent for corporate returns.
    Mr. Coyne. There has been an improvement this year relative 
to telephone service that fell sharply last year. I guess it is 
up by about 30 percent this year. To what do you attribute 
that?
    Mr. White. Last year, IRS switched to 7 day a week, 24-hour 
a day telephone service. As they did that, they experienced a 
pretty severe decline in productivity. This year productivity 
appears to be up, although staffing this year is actually down 
somewhat. In fact, they have actually achieved the goal this 
year with less staffing that they set for themselves next year 
if they got the additional staffing they requested as part of 
the STABLE request.
    Mr. Coyne. In your review, have you been able to find out 
what types of telephone calls are being answered and which are 
not?
    Mr. White. They are doing some things differently.
    Mr. Attianese. Last year, IRS did away with a process where 
they would take complex calls and route them to a messaging 
system and the taxpayer would leave a name and number and 
somebody that knew about that issue would call back and give 
them an answer.
    At the beginning of last year, IRS decided not to use that 
process because they thought they would have enough people to 
answer all the calls as they came in. That was one of the 
reasons they had a problem last year because they didn't have 
enough people to answer the calls.
    Those kinds of complex calls this year are getting routed 
to a system whereby the taxpayer leaves a message and somebody, 
generally a revenue agent who knows that issue, will call the 
taxpayer back in a couple of days and give an answer to the 
question. So those complex calls are actually getting answered 
better this year than they were last year because of that 
messaging system.
    Mr. Coyne. Does your review enable you to determine how 
long a taxpayer waits to talk to an IRS assisted, someone to 
respond to them, what the average telephone wait is?
    Mr. White. We don't have that information for this filing 
season. We have some work ongoing that was actually requested 
by the Subcommittee, so later this year, we hope we will be 
able to report on that.
    Mr. Coyne. Thank you.
    Chairman Houghton. I have three questions. One is the use 
of the additional 2,500 people for the IRS. I would like your 
comments on that. Second is an updating on the 1997 
modernization plan. How is it going? Third, I would like to ask 
about some of your comments in the audit on page seven.
    Mr. White. With respect to the staffing, a couple of points 
to make. One is that most of the staffing would go to 
enforcement and compliance activities. With respect to the part 
going to customer service, there is about 300 FTEs.
    Chairman Houghton. I don't mean the allocation. Do you feel 
it is an effective use of people and increased funds?
    Mr. White. With the exception of the 300 FTEs going to 
telephone service. We don't think right now that part of the 
request is adequately justified because they have already met 
their goal with their current staffing level.
    With respect to modernization, a couple of points there. 
First of all, the reorganization that I mentioned in my oral 
statement and that the Commissioner talked about is well 
underway but that is only one part of the overall modernization 
efforts at IRS. There are other key parts to the overall 
modernization.
    In addition to reorganizing IRS into four operating 
divisions by taxpayers, the other key parts of the 
modernization effort include systems modernization, development 
of a balanced set of performance measures and the development 
of new business processes, new ways of interacting with 
taxpayers.
    Before we see significant results from modernization at 
IRS, we are going to have to see significant parts of 
modernization enacted.
    Chairman Houghton. How do we get a handle on that? You talk 
about systems and performance measures and the business 
processes. In the next 12 months, how do we get a handle on 
those?
    Mr. White. I think partly it requires recognizing this is 
going to take time. IRS is well into the reorganization part of 
this but systems modernization, because of the age of IRS' 
systems and the complexity of those systems, the number of 
taxpayers involved, and the size of the investment, it is going 
to take time to do that right.
    The reorganization and the fact that executives have been 
named to manage the new operating units is designed now to 
allow those newly named executives to begin to think about 
redesigning business processes. That is how those units would 
actually interact with taxpayers. Those people are just getting 
into place, so that kind of thought and planning is just 
beginning.
    Randy, do you want to expand on the systems part?
    Mr. Hite. You asked the question with regard to the 1997 
modernization blueprint. That blueprint included a number of 
things: An enterprise architecture which would define in both 
business and technical terms the environment IRS wants to get 
to; some high level business requirements that would be used as 
a basis for developing new systems; and a systems life cycle 
which would be the cradle to grave set of processes and 
procedures for managing those systems.
    We reviewed that back in 1997 and said that was a good 
first step but it wasn't complete and more needed to be done in 
order for it to be the basis for modernizing. The Commissioner 
agreed. As of today, we are still waiting for an update to the 
enterprise architecture and the blueprint. We are still waiting 
for implementation of the system life cycle methodology.
    I believe it was about 9 months ago when they requested and 
received a first draw down from the investment account for 
modernization. During that time, they have been working to put 
these things in place. I think it is fair to say they have gone 
through some growing pains in getting to the point where they 
have these type of program management and technical controls in 
place to guide the modernization.
    Chairman Houghton. This Committee has to keep an eye on 
this. We have to have some milestones, so what are the 
milestones we have to have in order to understand and our job 
responsibly?
    Mr. Hite. When Mr. Rossotti responded to that question he 
mentioned these expenditure plans that are required under the 
1998 and 1999 Appropriation Acts. They submitted the first plan 
in May of last year. We reported on that in June. We concluded 
that was a reasonable first step, a reasonable plan for 
launching the modernization effort. The key to it would have 
been implementation of the plan.
    He also mentioned they submitted the second expenditure 
plan about a month ago. We are reviewing that now and we are 
under obligation to report to the Appropriations Committees in 
a few days on the results of that. We would be happy to brief 
your staff on the results of that also.
    Those plans include the details on the projects in terms of 
what is going to be accomplished by when and it makes 
commitments in terms of deliverables. That is what you should 
hold them to.
    Chairman Houghton. Thank you. On page seven of the report 
put out in February, you mention ``The key issues IRS faces 
include the following.'' The Commissioner has said that some of 
these things are management receptive. In others words, you can 
change them. The other things have to wait until better 
equipment, better computers are involved. Do you agree with 
that?
    Mr. White. Yes, we do. To do this right is going to take 
some time, to redesign IRS' business processes and to develop 
the kinds of systems that will support those processes given 
the place they are starting from, it is going take time.
    Chairman Houghton. Mr. White, gentlemen, thank you very 
much for being with us. It has been very helpful. I hope we can 
keep in touch with you.
    Chairman Houghton. Now we have another panel. Our panel is 
Mr. Gregory Steinbis, Enrolled Agent, Immediate Past President, 
National Association of Enrolled Agents from California; Bryan 
Gates, Enrolled Agent, National Society of Accountants from 
Florida; and Deborah Pflieger, Chairman, American Institute of 
Certified Public Accountants Relations Internal Revenue Service 
Committee. Thank you for being with us.
    Ms. Pflieger.

 STATEMENT OF DEBORAH PFLIEGER, CHAIR, RELATIONS WITH THE IRS 
 COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

    Ms. Pflieger. Mr. Chairman, Mr. Coyne, thank you for 
inviting the AICPA to testify before you today. I am Debbie 
Pflieger, Chair of the AICPA Relations with the IRS Committee.
    The AICPA's members provide tax services to all types and 
sizes of taxpayers and it is from this broad base of experience 
that we offer our comments today.
    The AICPA has been a long-time advocate for adequate 
funding of the IRS. Providing sufficient funding is 
particularly important now as the IRS strives to perform its 
tax administration duties, implement the numerous taxpayer 
rights provisions recently enacted by Congress and at the same 
time reorganize its structure and modernize its technology.
    The IRS has had its share of problems in the past and in 
RRA 1998, Congress directed the Service to change. We believe 
the change process is well underway and that this movement is 
in the right direction. We look forward to seeing the final 
results but those results will not occur without adequate 
funding.
    The Administration has proposed a fairly significant 
increase in the IRS' budget. While the specific dollar amounts 
and allocations are beyond the scope of our review, given the 
day-to-day, practical experiences of our members, we offer the 
following general views and insights on the subject.
    Included in the administration's proposed budget increase 
is funding for the STABLE initiative. We welcome this new 
initiative as a means to achieve a balance between taxpayer 
service and enforcement since both are critical for effective 
tax administration.
    News reports about the extremely low audit levels and lack 
of collection activity by the IRS are widespread. Commissioner 
Rossotti discussed them here again today. The AICPA believes 
strongly that it is vital to our voluntary tax system that this 
lack of audit and collection activity be reversed immediately 
and that the increase in enforcement be widely publicized.
    When the IRS is or appears to be unable or unwilling to 
actively administer and enforce the tax laws, serious damage to 
our tax system results. Those who normally flaunt the law will 
continue to do so at no risk. Those who have reluctantly 
complied in the past only because of a fear of enforcement may 
become noncompliant and the normally compliant taxpayers will 
lose all faith in the system.
    For the voluntary tax compliance system to operate 
effectively, taxpayers must perceive that everyone pays their 
fair share and that, if they do not do so voluntarily, the IRS 
will force them to do so.
    The current lack of enforcement is a matter of great 
concern to our members who see on a day-to-day basis its impact 
on the attitudes of taxpayers. This is a problem that must be 
addressed quickly. We fear that any damage to the voluntary 
nature of our tax system will be difficult to reverse. 
Therefore, we urge Congress to provide the Service with funds 
for additional personnel as well as for the proper training of 
its staff.
    Through recent legislation, Congress has taken much needed 
and much heralded steps to improve the IRS and our Nation's tax 
system. Commissioner Rossotti has assumed responsibility for 
leading the IRS in making the comprehensive changes to its 
structure, manner of operation and technology that you 
mandated. He has made impressive strides in doing so.
    It is crucial that Congress follow through on the reforms 
it started by providing the IRS with the necessary funds to 
accomplish its goals. At this point, a failure to support the 
continuing implementation of these reforms through adequate 
funding will cause havoc not only on the reforms but to our 
entire tax system.
    We were also asked to discuss the status of the current 
filing season. However, at this time, we have heard little from 
our members regarding this filing season, probably because as 
we sit here today, they are totally immersed in it.
    Related to filing season issues, however, is the matter of 
electronic filing. We are completely supportive of the 
expansion of the electronic filing program. However, we have 
concerns about the inability to electronically transmit all 
forms and all schedules, including white-paper schedules, 
elections and related compliance disclosures. We see this 
inability as the greatest barrier to widespread use of 
electronic filing by our members, who tend to prepare more 
complex returns.
    Given that effective disclosure is central to our current 
tax reporting system, it is unrealistic to believe that 
electronic filing can be used for complex returns until all 
forms and all schedules can be filed electronically.
    In conclusion, the AICPA is encouraged by the progress the 
IRS has made in becoming more responsive to taxpayer needs. 
Although we are concerned about the decline in audit and 
collection activity, we regard the administration's budget 
proposal as indicative of the Service's attempt to correct that 
decline. Therefore, we urge Congress to continue to support 
Commissioner Rossotti and the IRS in those efforts by providing 
them with adequate funding.
    Congress instituted the massive and much needed reforms now 
going on within the IRS. It is crucial that you now support 
appropriate appropriations for their implementation.
    Thank you.
    [The prepared statement follows:]

Statement of Deborah Pflieger, Chair, Relations with the IRS Committee, 
American Institute of Certified Public Accountants

    Mr. Chairman and members of this distinguished 
Subcommittee:
    Thank you for inviting the American Institute of Certified 
Public Accountants to testify before you today. I am Deborah 
Pflieger, Chair of the AICPA Relations with the IRS Committee. 
The AICPA is the national, professional organization of 
certified public accountants comprised of more than 330,000 
members. Our members advise clients on Federal, state, and 
international tax matters and prepare income and other tax 
returns for millions of Americans. They provide services to 
individuals, not-for-profit organizations, small and medium-
size businesses, as well as America's largest businesses. It is 
from this broad base of experience that we offer our comments 
today.

                               IRS Budget

    The AICPA has long advocated that funding for the IRS must 
be sufficient for the Service to efficiently and effectively 
administer the tax laws and collect tax. Providing adequate 
funding is particularly important currently as the IRS both 
performs its tax administration duties, including implementing 
numerous new taxpayer rights provisions enacted by Congress, 
and, at the same time, is reorganizing its structure and 
modernizing its technology.
    The IRS has had more than its share of problems in past 
years and, in the Internal Revenue Service Restructuring and 
Reform Act of 1998 (RRA98), Congress directed the Service to 
change. We believe the change process is well under way, and 
the movement is in the right direction. We look forward to 
seeing the final results. But, those results will not occur 
without adequate funding.
    The Administration has proposed an increase in the IRS's FY 
2001 funding by $769 million more than the FY 2000 budget; the 
majority of this amount would be for ``current'' day-to-day 
operations and the balance would be for the reorganization of 
the IRS's structure and the modernization of its technology. 
The merits of the specific dollar amounts and allocations in 
the budget proposal require knowledge of facts and an analysis 
beyond the scope of our review; however, given the insights 
gained by the day-to-day practical experiences that our members 
have working with the IRS, we offer the following general views 
on the subject.

``Current'' Operations

    Included in the Administration's proposed budget increase 
for IRS's ``current'' operations is funding for additional 
employees to strengthen the tax compliance and customer service 
functions of the IRS; FY 2001and supplemental FY 2000 funding 
is requested for this purpose. This initiative to increase IRS 
staffing, aptly called STABLE (Staffing Tax Administration for 
BaLance and Equity), is a welcome measure. We applaud the IRS 
for recognizing its weaknesses and commencing numerous taxpayer 
service initiatives since the passage of RRA98. We also applaud 
the STABLE initiative as a means to achieve a balance between 
taxpayer service and enforcement. Both are necessary for 
effective tax administration.
    Reports about the extremely low audit rates and lack of 
collection activity by the IRS are widespread. In his recent 
testimony before the House and Senate Appropriations 
Subcommittees, Commissioner Rossotti indicated that, because of 
a reduction in staff, an increase in return filings, and 
additional workload created by RRA98, there has been a ``steady 
erosion'' in audit coverage, enforcement, and case closures.
    It is vital to our voluntary compliance tax system that 
this lack of audit and collection activity be reversed 
immediately and that the increase in enforcement be widely 
publicized. When the IRS is, or appears to be, unable or 
unwilling to actively administer and enforce the tax law, 
serious damage to the effectiveness of our tax system results. 
Those who normally flaunt the law will continue to do so at no 
risk; those who in the past have reluctantly complied only 
because of a fear of enforcement may become noncompliant; and, 
the normally compliant taxpayers will lose faith in the system 
and may be tempted to become noncompliant as well. For the 
voluntary tax compliance system to operate effectively, 
taxpayers must perceive that everyone pays their fair share and 
that, if they do not do so voluntarily, they will be forced to 
do so by the IRS.
    The current lack of enforcement is a matter of great 
concern to our members who see on a day-to-day basis the impact 
it is having on the attitudes of taxpayers. It is a problem 
that needs to be addressed--and addressed quickly, for we fear 
that the damage to the voluntary nature of our tax system will 
be difficult to reverse. We support the IRS in its decision to 
add additional personnel to its staff to strengthen its 
enforcement activities.
    Furthermore, emphasis should be placed on the training and 
knowledge of IRS personnel. Well trained, well paid, and 
knowledgeable enforcement personnel would be welcome. Some of 
the most frustrating experiences for taxpayers and tax 
practitioners in dealing with the IRS occur because of the lack 
of training and knowledge of the IRS employees. It is a lot 
easier to work out a solution that is fair to both the tax 
system and the taxpayer if the individuals dealing with the 
issues are knowledgeable of the subject matter.
    We urge Congress to provide the Service with funds for 
additional personnel and for the proper training for its entire 
enforcement staff.

Restructuring of Organization and Modernization of Technology

    By the enactment of RRA98, Congress took much-needed, and 
much-heralded, steps to improve the IRS and our nation's tax 
system. In the year and a half since Congress directed it to do 
so in that legislation, the IRS has initiated plans for 
comprehensive changes to its structure, manner of operation, 
and technology. Commissioner Rossotti has assumed 
responsibility for leading the IRS in making those changes and 
has made impressive strides in doing so. It is crucial that 
Congress follow through on the reforms it started, by providing 
the IRS with the necessary funds to accomplish its agenda. At 
this point, a failure to support the continuing implementation 
of these reforms through adequate funding would wreak havoc not 
only to the reforms but also to our entire tax system.
    The American taxpaying public is beginning to get the 
Internal Revenue Service that Congress looked for when it 
passed the IRS restructuring legislation. It is critical that 
Congress facilitate moving the reform process ahead without 
delay by providing the necessary funding.

                           2000 Filing Season

    Having heard little from our members regarding the current filing 
season (as we meet today, they are totally enmired in it), it appears 
that the filing season is progressing without major problems. It is the 
experience of our members, however, that many of the more complex 
returns are yet to be filed at this point in a filing season. Also, 
since historically we have not solicited input from our members 
regarding the positives and negatives of a filing season until after 
the season has ended, it is not unusual for us to have had little 
feedback at this time unless there is a major systemic problem. If in 
the future we become aware of any items of significance regarding the 
current filing season, we will provide you with that information.
    Related to filing season issues is the matter of the electronic 
filing program. We are completely supportive of the expansion of 
electronic filing. However, we do have some concerns about, and 
accordingly express our disappointment in, the inability of the 
electronic filing program to accept all forms and all schedules. This 
inability to accept all forms and all schedules, including white paper 
schedules, elections and related compliance disclosures, is the 
greatest barrier to widespread use of electronic filing by AICPA's 
members (who tend to work with the more complex returns). Given that 
effective disclosure is key to the modern tax reporting system, it is 
unrealistic to believe that electronic filing can be used for complex 
returns until all forms and all schedules, including white paper 
schedules, elections and compliance disclosures, can be filed 
electronically.
    At the present time, many CPA tax return preparers cannot be 
certain that the returns they will prepare in the current filing season 
can be filed electronically. Given that uncertainty, the vast majority 
of these preparers have not elected to use the electronic filing 
system; to do so would require the establishment and operation of two 
separate filing procedures in their offices, which would result in a 
needless increase in workload and costs. Only when it its clear that 
all forms and all schedules can be accurately filed electronically can 
preparers be expected to begin the natural migration from filing paper 
returns to filing electronic returns.
    We all have heard the reports about the marked increase in the use 
of electronic filing and we hope that the trend continues. Nonetheless, 
we would expect that the vast majority of taxes continue to be assessed 
on paper returns. Electronic returns are only available for the less 
complex scenarios in which most taxpayers are being charged only 
relatively modest amounts of tax. While the exact statistics are not 
available to us, a key question that should be asked and answered is: 
What percentage of the personal income tax is assessed on paper returns 
versus electronic returns? Evidence of a successful electronic filing 
system should at least be partially based on the amount of tax 
ultimately collected through the electronic return submission process.

                               Conclusion

    The AICPA is encouraged by the progress the IRS has made in 
becoming more responsive to taxpayers. Although we are concerned about 
the decline in audit and collection activity by the IRS, we regard the 
STABLE initiative as indicative of the Service's acknowledgment of the 
problem and attempt to correct it. We are optimistic that, under 
Commissioner Rossotti's leadership, the IRS soon will attain an 
appropriate balance between taxpayer service and enforcement.
    We urge Congress to continue to support Commissioner Rossotti and 
the IRS in those efforts by providing adequate funding for the IRS's 
day-to-day operations as well as its organizational restructuring and 
technology modernization. Congress instituted the massive and much-
needed reforms in the IRS; it is crucial that it now support their 
implementation.
    We appreciate this opportunity to offer our comments to you and 
would be happy to discuss any of these matters in further detail with 
you or members of your staff if you so desire.
      

                                


    Chairman Houghton. Thank you, Ms. Pflieger.
    Mr. Gates.

   STATEMENT OF BRYAN E. GATES, ENROLLED AGENT, AND MEMBER, 
 FEDERAL TAXATION COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS, 
                      ALEXANDRIA, VIRGINIA

    Mr. Gates. I represent the National Society of Accountants 
which is much smaller than the American Institute of CPAs and 
generally represents very small business.
    We circulated the request regarding the filing season to 
our members throughout the United States and heard specifically 
from about seven or eight States and felt we had made a pretty 
good inquiry.
    The report was what everyone is saying here now. This 
filing season is beyond anything in anybody's recent memory as 
going well. The glitches that the newspapers have picked up are 
of no interest to our members. They don't engage in those 
activities, they don't know about them. The electronic 
machinery is operating just fine. The only thing they would 
like to see is it operate better.
    The electronic filing contemplates an intermediary. The 
Internal Revenue website is so wonderful that I wish I could 
take my entire time to explain to you what that is doing to 
practice out there. Practitioners now are communicating with 
the Internal Revenue Service daily through its website. In 
fact, it wasn't mentioned by the individual from GAO who talked 
about the phone service, but we can see the phone service 
disappearing very quickly.
    It is not widely known but the Service will answer a 
question on the web now. They give an e-mail answer within 
about 24 hours, a written answer. It is very beautiful. I am 
afraid if word got out to the public right now, IRS would be 
totally overwhelmed by e-mail requests for information.
    I have asked personally very difficult questions just to 
test the ability of the system to work and in fact have gotten 
correct answers in writing, in e-mail within 24 hours. If the 
Service could ever get to the point where every taxpayer who 
has a question could simply go to the web, type in the question 
and get an e-mail answer, they will have done it. That would be 
tax administration at its highest.
    Specifically, the only things that were really mentioned a 
problems were the ones you are well aware of. The earned income 
tax credit is a nightmare for practitioners, return preparers. 
They never know, we don't know, whether our clients are telling 
us the truth when they give us information about the earned 
income tax credit and their eligibility. If they have the 
misfortune to live in a family with multiple members in the 
household, the complexity becomes absolutely unbelievable.
    The original idea of the earned income credit was to give 
back money to people who need it, the earning people. Once they 
get in a controversy with the Internal Revenue Service over the 
credit they were supposed to get, it is unending. Specifically, 
one member said, what am I going to do filing the 1999 return 
when I am still arguing over whether they were eligible for the 
1997 credit they took. It is a nonending thing.
    We find people who don't even know where the United States 
Tax Court is being handed petitions and told you can work it 
out by petitioning the United States Tax Court. This is a 
person who is eligible for their earned income credit. 
Absolutely unbelievable.
    It was suggested to one of the IRS citizens advisory 
panels, that the Internal Revenue set up, that perhaps it is 
time for Congress to reconsider whether the Internal Revenue 
Service should even be administering this form of return of 
earnings to the American citizen. There might be a better way 
to do it.
    Chairman Houghton. I am not going to interrupt now but I 
wish you would explain that later on in the questioning.
    Mr. Gates. Yes, sir.
    The increasing incidence of the alternative minimum tax is 
hitting more and more people as a result of inflation and also 
to the extent that some of their credits are phasing out. It is 
beginning to grate on taxpayers our members don't believe it 
was ever intended to affect. They are not high income people; 
they are medium income people. They are finding that the 
alternative minimum tax requires them to pay more tax than they 
would otherwise have to pay.
    One other thing brought to our attention was the difficulty 
of the Service to stay up with changes in our lives. The web 
now permits trading, day trading, and our members are having to 
fill out Schedule D's designed years ago to put hundreds and 
hundreds of gains and losses involving pennies. How the Service 
can ever keep up with the rapid change of this nature, I think 
they will need all the help they can possibly get.
    Last, with my time gone, we are still are having and our 
members can never stop talking about the difficulty of getting 
just the signup number, their Federal Employer Identification 
Number. Some day when the Service is able to change this 
technology so it is as easy to get a Federal ID number as it is 
a library card, our members and their clients will have a new 
faith.
    They can't open bank accounts without those numbers, the 
Service says they need the personnel to answer the telephone. 
They need more staff to serve these people who are complying.
    I would love to tell you how wonderful Commissioner 
Rossotti is doing but I think you already know it. Our members 
were skeptical at first but we think this is the greatest 
experiment ever done in Federal taxation. If he is successful 
in teaching people what is expected of them, how to do it and 
then making it easy and convenient for them to do it, we think 
he is going to revolutionize the way this country collects tax.
    The few people that are talked about and not audited enough 
and so forth, as many former commissioners can tell you, you 
tighten up the screws a little bit, you can audit so many 
people in this country that the hissing would be heard for 
miles around. The Federal tax lien stays in place for 10 years 
anyhow. I hope the press will leave him alone a little bit and 
you will trust him with the budget he needs so we can see if 
his experiment is going to work.
    I am sorry I ran over.
    [The prepared statement follows:]

Statement of Bryan E. Gates, Enrolled Agent and Member, Federal 
Taxation Committee, National Society of Accountants, Alexandria, 
Virginia

                              Introduction

    The National Society of Accountants appreciates the 
opportunity to testify before the Ways and Means Subcommittee 
on Oversight and offers this statement concerning the 2000 tax 
filing season, the Fiscal Year 2001 Budget for the Internal 
Revenue Service, and IRS Restructuring and Reform.
    Through our national organization, and affiliates in 54 
jurisdictions, the National Society of Accountants represents 
the interests of approximately 30,000 practicing accountants 
and tax practitioners. Generally, our members are sole 
practitioners or partners in small to medium-sized accounting 
firms. They provide accounting, tax preparations, 
representation before the Internal Revenue Service, tax 
planning, financial planning and managerial advisory services 
to approximately nineteen million individuals and small 
businesses. The members of NSA are pledged to a strict code of 
professional ethics and rules of professional conduct.
    I am Bryan E. Gates, a federally authorized tax 
practitioner (Enrolled Agent), who has represented taxpayers 
before the IRS for over twenty-five years. I offer this 
testimony in my capacity as a member of the National Society of 
Accountants' Federal Taxation Committee. NSA has been given the 
privilege of testifying before this Committee on several other 
occasions, and, as always, we greatly appreciate the 
invitation.
    Our statement is based on (1) our reaction to the 2000 tax 
filing season to date; (2) our thoughts on the administration's 
fiscal year 2001 budget request for IRS; and (3) our view on 
the IRS restructuring effort.

                        Year 2000 Filing Season

    NSA keeps in touch throughout filing season with its 
members. Through our online communications and surveys, we gain 
insight from front-line practitioners who are seeing taxpayers. 
NSA also maintains a tax research hotline for its members which 
gives us a basis on which to comment on some of the filing 
issues our Tax Manager, Bernie Phillips, has received so far 
this season. In addition, after we were invited to testify, we 
requested information from NSA members in all fifty states as 
to any problems or concerns they may have had with the filing 
season to date. We are able to report that there were few 
complaints or concerns expressed by our members this year. We 
heard from members who practice in Hawaii, Florida, Wisconsin, 
California, and more. Typical of their comments were, ``a 
relatively calm filing season'' to ``filing season 2000 
involves, so far, fewer problems than in recent years.'' The 
lack of problems may be the result of the increasing ability of 
the IRS to process return information electronically and the 
increasing expertise of our members in submitting electronic 
data. In terms of IRS processing operations, there are several 
issues our members would like to bring to your attention. Our 
members have told us that the following specific issues are of 
greatest concern:
    The first issue is information returns. Our members realize 
that every financial institution cannot become adept in 
handling the intricacies of the Internal Revenue Code. But, 
they believe the Service should demand greater compliance with 
information reporting requirements. Incomplete and inaccurately 
completed forms in the IRS 1099 series cause unbelievable 
problems for taxpayers, practitioners and IRS personnel during 
filing season. This is particularly true with respect to the 
returns required of mutual securities funds. Our members report 
a neverending struggle to separate combined reporting of 
dividends and short-term gains. Other members report continuing 
difficulties with Roth versus regular IRA reporting, Roth 
conversions and re-characterizations, and brokerage reports. 
These are practitioners who are familiar with and who have read 
IRS publications 590 devoted to the matter. NSA believes the 
Service should make special education outreach efforts to the 
entities who are required to prepare these information reports.
    The second issue surrounds the Earned Income Tax Credit. 
Many taxpayers and practitioners alike remain confused by the 
eligibility requirements. They are particularly concerned in 
light of specific due diligence requirements and the 
repercussions of making a mistake. For example, multiple family 
households present a myriad of questions having little to do 
with the credit. Moreover, there are many types of income which 
must be considered to determine if they apply for purposes of 
the Earned Income Tax Credit. In our view, the rules are 
unacceptably difficult for the taxpayer, the tax practitioner, 
and the IRS: those who believe this program should be 
administered under another section of the United States Code 
may be correct.
    The third issue is the Alternative Minimum Tax (AMT). More 
and more of our members' clients are being subjected to the AMT 
and we are beginning to hear complaints about the increasing 
incidence of this tax. Since the AMT was designed to prevent 
circumstances in which high-income taxpayers enjoyed little or 
no tax liability it is particularly unwelcome when it strikes 
taxpayers who do not enjoy a high income in the real sense. We 
feel strongly that Congress needs to address the dramatic 
growth in the numbers of taxpayers becoming subject to the AMT 
as it was never intended to have such a broad application.
    The fourth issue concerns the effect of ``day trading'' on 
tax reporting responsibilities. Our members realize that this 
phenomenon is relatively new to the world of tax practice but 
are finding the impact on clients to be overwhelming. Following 
the existing reporting requirement that each transaction be 
listed in detail is overly burdensome in many cases. Some NSA 
members report the frustration of pages and pages of details 
concerning tiny individual gains and losses. We are confident 
that IRS personnel are hearing these concerns and changing the 
reporting requirements to reflect the reality of current 
financial markets.
    The fifth issue is logistical in nature. Since the IRS 
mailed postcards instead of return packages, many taxpayers had 
difficulty obtaining forms and instructions. Taxpayers appeared 
at practitioner offices in search of forms saying that their 
requests for forms had not been answered by the Service and 
that they were unable to obtain forms in banks, post offices, 
or libraries. NSA's President, Jeffrey Adelstone in Tucson, 
Arizona, among others, reported a considerable number of 
taxpayers unable to obtain needed forms without a visit to IRS 
offices. NSA believes taxpayers should have to go no further 
than the closest bank to get the instructions and forms they 
need to prepare a simple tax return.
    An issue which will go unnumbered since it does not involve 
the year 2000 filing season was mentioned repeatedly by our 
members. Members are unable to obtain Federal Employer 
Identification Numbers for their new clients in a prompt and 
convenient manner. This complaint is continuous and widespread. 
It goes without saying that a new businessman's introduction to 
the world of employment tax should not include difficulty in 
obtaining an account number which will prove necessary to 
deposit, report and pay tax withheld from employee wages. NSA 
strongly urges that an end be put to this systemic failure. 
Employer identification numbers should be easier to obtain than 
telephone numbers. Immediate assignment of numbers is a crucial 
enhancement to the prospects for voluntary compliance.
    Lastly, Electronic Tax Administration remains an NSA 
concern. The IRS is requesting $3 million for ETA to continue 
progress toward the Congressional goal that 80 percent of all 
tax and information returns be filed electronically by 2007. In 
RRA 98, Congress established the interim goal that all returns 
prepared electronically, but filed on paper, be filed 
electronically by 2003. Increasing taxpayers' awareness and 
understanding of IRS e-file services and benefits will require 
expanded marketing efforts that communicate the benefits of IRS 
e-file to both taxpayers and practitioners. The IRS should not 
only advertise the benefits of electronic filing but also, at 
the same time, the benefits of web access. As the public 
becomes more comfortable with the web and security available on 
the web, taxpayers will be less hesitant to trust e-filing for 
tax transactions. Since more than 50% of all tax returns are 
prepared by a professional tax preparer or accountant, IRS must 
also make the process of electronic filing more advantageous 
and less complicated for the practitioner. Continual dialogue 
between the IRS and organizations such as NSA are essential to 
the ultimate realization of Congressional objectives. Ongoing 
refinements and improvements can happen if both practitioners 
and the IRS explore in partnership the underlying reasons for 
the unwillingness of many taxpayers and practitioners to file 
their returns electronically. NSA, for its part, is eager to 
continue discussions on this matter with members of Congress 
and IRS personnel.

        Administration's Fiscal Year 2001 Budget Request for IRS

    Congress sought by means of the IRS Restructuring and 
Reform Act to provide a more balanced environment in which IRS 
would focus on both compliance and taxpayer service. The Act 
directed IRS to revise its mission statement to achieve this 
balance. In addition, the Act directed the IRS to reorganize 
its structure by moving away from a geographical, region and 
district organization toward a structure that focuses on groups 
of similar taxpayers with unique needs. This directive 
essentially ended a way of doing business which had existed for 
nearly fifty years. Since the IRS performs an essential 
government function, however, it could not be closed down while 
it was being restructured but must, instead, maintain 
operational activity at acceptable levels. Some have likened 
this directive to the task of rebuilding an airliner while it 
is still flying.
    The National Society of Accountants foresees a new era when 
Commissioner Rossotti has fully implemented the '98 Act and 
accomplished tangible and visible changes in service, 
compliance and productivity that taxpayers expect and deserve. 
Commissioner Rossotti has testified before other committees 
saying that the IRS will be able to perform all aspects of its 
new mission more effectively and efficiently, and in line with 
the best private and public sector practices, by reengineering 
IRS business practices and IRS technology, which will require 
only a limited staff increase. NSA believes that Commissioner 
Rossotti has made excellent progress and that he should be 
trusted with the additional funding he is requesting. He has 
assembled an impressive group of top executives to make the 
four planned customer type/unique need operating divisions a 
reality. Although some are saying the IRS is now in a position 
where it is not yet meeting the legitimate service expectations 
of compliant taxpayers who voluntarily pay their taxes and is 
letting compliance activity, such as examination coverage and 
collection enforcement activity, drop rapidly NSA believes it 
is too early to judge.
    Commissioner Rossotti's idea that increased, pre-filing 
taxpayer education will reduce the need for post-filing 
examination has not yet been tested. His critics who point to a 
declining percentage of tax returns examined do not consider 
that deterrence may not be tomorrow's answer to voluntary 
compliance. Commissioner Rossotti's idea that increased 
alternatives for paying taxes will reduce the need for enforced 
collection measures has not been tested yet. His critics who 
point to declining IRS seizure statistics ignore the fact that 
the federal tax lien created by Congress remains in effect 
against the income and assets of taxpayers who do not pay for 
ten years. They also ignore Commissioner Rossotti's business-
like theories that effective collection practice in the future 
consists of rapid problem solving intervention with taxpayers 
before taxes become past due.
    Restructuring of necessity involves retraining IRS 
personnel. NSA understands that some two million hours of 
training were necessary to acquaint IRS employees with RRA-98's 
specific administrative provisions. Training will continue to 
be an expensive challenge in FY 2001 to insure that business 
practices and strategies are actually changed and that new 
information technology is instituted. NSA believes Commissioner 
Rossotti's commitment to continue a high level of training 
necessary to implement every taxpayer rights provision and make 
them work as intended while still collecting taxes that are due 
should be funded fully.
    NSA believes that full implementation of the Act's 
legislative intent will require years of dedicated effort and 
may require continued appropriation of additional funds to the 
Service to support Congress's long overdue reform efforts. 
Oversight by your Subcommittee, other committees who share 
oversight responsibility, the taxpaying public, and 
professional organizations such as NSA must, of course continue 
as to whether additional funds are actually needed and whether 
the funds are being used appropriately to accomplish the 
reforms. While NSA is not prepared to suggest specific dollar 
amounts which might achieve the continuing reforms, NSA urges 
this Subcommittee to advocate sufficient resources to support 
the IRS continuing efforts to carry out its Congressional 
mandate. NSA believes the increases will mean the 88,000 
remaining IRS employees will turn the corner with Commissioner 
Rossotti and finish re-engineering the IRS. NSA believes the 
increases will result, for the taxpayers, in an IRS which views 
the majority of taxpayers as customers whose willingness to pay 
their fair share deserves quality help and assistance. NSA is 
confident that the re-engineered IRS providing top quality 
service to the majority of American taxpayers will also be able 
to deal decisively with the few taxpayers who do not pay unless 
forced to do so and the even smaller number of taxpayers who 
attempt to evade tax by violating the criminal statutes.

                           IRS Restructuring

    In recent NSA/IRS meetings with Commissioner Rossotti, we 
experienced a new degree of IRS openness and a new spirit of 
cooperation. Commissioner Rossotti and his senior management 
team are open to new partnerships with professional 
associations such as ours who work for the wellbeing of the 
American taxpayer. The partnerships they are forging recognize 
that our members individually and collectively can help, not 
hinder, them in helping taxpayers comply voluntarily and 
willingly with our tax laws. It is our view that Commissioner 
Rossotti and his new staff are working diligently to create the 
IRS that the American people want and deserve.
    Our only concerns with the IRS restructuring and reform 
program are beyond the control of IRS personnel. Our first 
concern is that Congress will become impatient prematurely as 
headline-seeking reporters focus on temporary shortcomings and 
urge us to return to the overly intrusive tactics of imprudent 
enforcement. Secondly, NSA is concerned that the delay in 
confirming members to the oversight board for the IRS is 
sending mixed signals to IRS employees, tax law practitioners, 
and the American people. Congress intended the board to help 
the IRS set and maintain its objectives, including such 
important matters as its annual budget and modernization 
program. Further delay or use of the nominees as political 
footballs will not contribute to accomplishment of the 
Congressional mandate or create the IRS taxpayers deserve.
    NSA is particularly pleased with the progress the IRS has 
made in implementing a transition from the office of Taxpayer 
Advocate into the Congressionally mandated National Taxpayer 
Advocate and the Taxpayer Advocate Service. The change in title 
accompanied by increased authority and new independence is 
already being administered effectively.
    The Taxpayer Advocate Service has implemented a modernized 
structure as called for in RRA '98. It is now an independent, 
modernized organization ready to deliver service to each 
taxpayer through individual casework and to every taxpayer 
through systemic analysis. Taxpayer Advocate managers are now 
in place and the managers are selecting the remaining staff. 
The new organization establishes a career for Taxpayer Advocate 
caseworkers to begin working on routine cases. Based upon their 
skill level, caseworkers can now earn promotions to technical 
advisors, advocacy analysts, or even Taxpayer Advocates. NSA 
understands that more than 8,000 IRS employees applied for 
positions in the new Taxpayer Advocate Service. We applaud this 
indication of new interest by IRS employees in taxpayer 
service. The new and dedicated employees of the Taxpayer 
Advocate Service appear to have taken the new TAS Mission 
Statement, ``We help taxpayers solve problems with the IRS and 
recommend changes that will prevent the problem'' to heart. NSA 
members report that TAS personnel are enthusiastic in their 
efforts to assist taxpayers who need help. For many years, the 
former PRO program fixed problems and made the system better. 
Personnel with the new Taxpayer Advocate Service appear poised 
to do even more. For example, the National Taxpayer Advocate 
recently identified, reported to Congress and made 
recommendations on the top 20 problems affecting taxpayers. 
Addressing and managing the changes needed to reduce or 
eliminate these problems may require significant IRS management 
attention and may require additional resources.
    Finally, NSA would like to join the chorus of praise for 
the IRS website. The IRS has greatly expanded its web site and 
continues to provide vast amounts of information to both 
taxpayers and tax practitioners. IRS forms, instructions and 
publications are easily accessed. Official forms can be filled-
in on line and printed or downloaded blank. The site includes 
searching features and interactive calculation whereby 
taxpayers and practitioners can determine acceptable 
installment payment terms. Another assistance feature is a tax 
law research site: taxpayers can enter their query in a 
question box and e-mail it for a prompt IRS reply. For 
professionals, the site provides each issue of the Internal 
Revenue Bulletin and even some portions of the once secret 
Internal Revenue Manual. There is more information now on the 
IRS website for a taxpayer who wants to know than there was at 
one time in an entire IRS office. Experienced NSA members 
contrast this to the time when ``two'' was the limit on IRS 
publications, the comprehensive Publication 17 cost 50 cents, 
and IRS employees threw out more information at the end of a 
filing season than they gave out during the filing season.

                               Conclusion

    I would like to conclude by thanking the Committee and 
Chairman Houghton for their leadership and attention to the 
issues which, when adequately addressed, help the IRS and 
taxpayer representatives achieve a more effective, efficient, 
and progressive tax collection system under the law. NSA, for 
its part, plans to remain an active part of the process and 
continue helping the IRS achieve its modernization and reform 
objectives. We are greatly encouraged by the achievements made 
thus far. Thank you.
      

                                


    Chairman Houghton. Thank you, Mr. Gates.
    Mr. Steinbis.

STATEMENT OF GREGORY H. STEINBIS, ENROLLED AGENT, AND CERTIFIED 
PUBLIC ACCOUNTANT, MORGAN HILL, CALIFORNIA; AND IMMEDIATE PAST 
      PRESIDENT, NATIONAL ASSOCIATION OF ENROLLED AGENTS, 
                     GAITHERSBURG, MARYLAND

    Mr. Steinbis. Thank you, Mr. Chairman.
    My name is Greg Steinbis. I am from Morgan Hill, 
California, a suburb of San Jose which is the heart of Silicon 
Valley.
    On behalf of my fellow Enrolled Agents, I would like to 
thank you and express their appreciation to the Oversight 
Subcommittee for your annual review and evaluation of the 
filing season and the IRS budget request.
    Over this past tax filing season, you have heard there has 
not been too much. We have heard that customer service has 
finally arrived at the IRS. It has a home there. IRS personnel 
are exceptionally professional now. They volunteer to give 
their name and their ID number immediately; they are going that 
extra mile to answer questions and solve problems.
    The electronic filing administration continues to receive 
accolades from the practitioners. Taxpayers are getting their 
refund checks in much quicker time if it is direct deposit, 
well within the tolerances posted by the IRS.
    There has been a cost for this great success at the IRS and 
that is because all employees of the IRS, including auditors 
and highly trained staff, are sitting at the front desks, at 
the walk-in offices handing out forms and answering tax 
questions.
    What is falling apart, you heard, is that the innocent 
spouse relief is not being resolved, offers and compromises are 
being held up, abusive trusts are not being looked at. In fact, 
there seems to be a new animal out there called LLC where 
people are putting their houses into the LLC to then write off 
that house as if it was a rental property just like it was in 
the old abusive trust.
    Our members are voicing concern that the lack of resources 
will lead to greater noncompliance. As you have heard from the 
press as well as from my fellow member sitting here, there have 
been fewer audits which can only translate into lower 
compliance, with more taxpayers willing to play the audit 
roulette, the lottery you don't want to win.
    This year, the glitches are few but the IRS has responded 
quickly and professionally.
    What we would like to see is all forms capable of being e-
filed. Our members too are starting to fill out those complex 
returns. By not being able to e-file all forms, there is more 
paper being filed to the IRS, especially if the IRS is going to 
meet its 2007 goal of 80 percent of tax returns being filed 
electronically.
    We would also like to see elimination of the two signatures 
on the 8453. When someone sits home with the telephone and can 
do a telefile and not have to submit a form, why can't 
taxpayers who come to my office not have to submit a form? 
Generally, I only have one taxpayer, either the spouse or the 
husband there, so the administration in my office of that form 
becomes very complex.
    We need to standardize the 1099. The 1099 dividends are 
starting to look like W-2s a few years ago. They are not 
standard. Even though they have the same box numbers, the paper 
comes in different sizes, the 1099 interest comes in different 
sizes and the 1099 dividends are being attached to the 1099(b) 
for brokerage statements. Our tax clients are not sure what 
they are supposed to bring to their appointment, so we have to 
send them back home and can't complete the returns in a timely 
manner.
    The IRS budget it very important. Even though the request 
is more than it was last year, NAEA believes the IRS is in a 
very critical position during the next several years to respond 
to some extraordinary challenges that lay ahead. We feel the 
full budget needs to be there.
    What are those challenges--to continue to transform itself 
into a customer service agency base; to respond to those 
changes you mandated in RRA 1998; and modernization. Most of us 
in our practices change our computers every 2 years. Our 
software requires us to keep on changing our computers.
    You wouldn't want a policeman chasing you in a car that was 
built in 1970 and we don't want the IRS chasing us with a 
computer built in 1970. So the investment in modernization of 
computers will eliminate some of the problems you heard about 
like staffing. The more computers, the more efficient you are 
and you can balance the people that are needed.
    We believe that the budget request of the IRS is a 
reasonable budget to continue the work you set out for them. It 
meets the three challenges I described. As professional tax 
practitioners, we see the results firsthand.
    Thank you very much for your time.
    [The prepared statement follows:]

Statement of Gregory H. Steinbis, Enrolled Agent, and Certified Public 
Accountant, Morgan Hill, California; and Immediate Past President, 
National Association of Enrolled Agents, Gaithersburg, Maryland

    Mr. Chairman, Members, staff and guests, my name is Gregory 
Steinbis and I am an Enrolled Agent and CPA engaged in private 
practice in Morgan Hill, California, near San Jose. In my 
practice I work primarily with individual and small business 
taxpayers.
    As Immediate Past President of the National Association of 
Enrolled Agents, I am very pleased to have this opportunity to 
present testimony on behalf of my fellow Enrolled Agents. As 
you know, Enrolled Agents are licensed by the U.S. Department 
of the Treasury to represent taxpayers before the Internal 
Revenue Service. Enrolled Agents, along with attorneys and 
CPAs, are governed by Treasury Circular 230 in our practice 
before the IRS. Enrolled Agents were created by legislation 
signed into law by President Chester Arthur in 1884 to remedy 
problems arising from claims brought to the Treasury after the 
Civil War. Today, we represent taxpayers at all administrative 
levels of the IRS and provide tax preparation assistance as 
well, thereby affording us a front-line perspective on the 
administration of our nation's tax laws. There are 
approximately 35,000 Enrolled Agents, more than 10,000 of whom 
are members of NAEA. Each year our members work with more than 
5 million individual and small business taxpayers.
    On behalf of my Enrolled Agent colleagues, I would like to 
express appreciation to the Oversight Subcommittee Chair, to 
the Members and staff for your annual review and evaluation of 
filing season and the IRS budget and operations. We believe you 
are making an invaluable contribution to improving our system 
of tax administration by regularly scheduling these hearings. 
They offer an opportunity for the practitioner community to 
share its views and an occasion for the IRS to provide 
information on its needs. This hearing is an annual benchmark 
against which we can measure accomplishments, highlight 
problems and seek remedies.
    Mr. Chairman, you are to be commended for taking a 
fiduciary interest in the management of the IRS. In the 
advisory announcing this hearing, you asked the questions: Why 
does the IRS need such a large increase in resources? What does 
this increase mean for the IRS and what will be its impact on 
the American taxpayer? From the perspective of front line tax 
practitioners, we hope to respond to your questions in our 
testimony.

              2000 Filing Season Report Card: An Overview

    As we have done in the past, NAEA has kept in touch 
throughout filing season with our members. Through our online 
communications and surveys, we have gained insight as to what 
Enrolled Agents, as front line practitioners are seeing. Our 
members have told us that this has been an extremely smooth 
filing season so far as IRS operations are concerned. The 
glitches--the few that have occurred--have been minor.
    In terms of IRS operations, there are several successes we 
would like to bring to your attention. Customer service seems 
to have found a home at IRS. IRS personnel have been 
exceptionally professional in their demeanor over the telephone 
this filing season. Members report that IRS employees 
automatically provide their name and an identification number. 
They ask how they may help sincerely and enthusiastically and 
go the extra mile to answer questions or solve a problem. The 
following two statements are typical of the scores of messages 
we received commenting very positively on IRS personnel this 
filing season:
    ``Aside from filing season, there is one thing I would like 
to get out. And that is the Tax Practitioner Hotlines and 
especially ours in Jacksonville, Florida. This is one of the 
best actions from my perspective that IRS has ever taken. The 
people in our office are all very knowledgeable, most helpful 
and eager to be helpful. I really enjoy working with them. The 
other day I had reason to speak to the Hotline in Ogden, UT. 
The gentleman there was just like our group in Jacksonville, 
very helpful and knowledgeable. I hope that the Hotlines 
continue.''
    ``[The] Northern California Practitioner Hotline has been 
very helpful in getting us information on a new corporation. 
The response would have taken 2-3 weeks in the old days. We had 
our response in 2 hours with a critical filing deadline 
approaching.''
    NAEA members are increasingly comfortable with the modern 
technology IRS is using and would like to see it available in 
more applications. For example, requests to NAEA for copies of 
federal and state tax forms have declined markedly as our 
members shift to using the IRS CD-ROM which is sold for less 
than $20 through the Commerce Department's NTIS or to the IRS 
web site where forms and publications can be downloaded easily 
24 hours a day, 7 days a week.
    Our members also find useful the IRS Help with Tax Law 
Questions site which enables practitioners and taxpayers to 
send the IRS questions by e-mail and receive a reply by e-mail, 
often within a day or two. This year the replies include the 
name and identification number of the researcher, along with a 
1-800 telephone number. Very customer friendly.
    The IRS Electronic Tax Administration (ETA), responsible 
for advances in e-filing, continues to receive accolades from 
practitioners for the smoothness of this year's e-filing 
operation. Members report that clients are receiving their 
refunds well within the tolerance posted by IRS. Practitioners 
like having access to error codes to figure out what went wrong 
on an e-filed return.
    A typical, enthusiastic reply to the success of e-filing 
this season: ``I got a call this morning from a client who 
asked if a $1,000 deposit to her checking account could be her 
federal tax refund. I checked the file and the figure she had 
was the same as her tax refund. I e-filed her return on March 
8. It was in her account on March 16. That is fantastic!''
    From a Maryland practitioner, ``Electronic filing is 
stunningly successful. People are suddenly more interested. I 
appreciate the efforts of the Service to further shorten the 
delay between e-filing and the direct deposit of the refund.''
    Last season, we told you that the Treasury Offset Program 
for non-tax debts such as child support and student loans was 
poorly handled, disorganized and dysfunctional. This filing 
season we are hearing that it is providing quick, courteous 
service.
    This year, more taxpayers than ever have turned to paid 
preparers to assist them in the completion of their tax 
returns. Our members report business up anywhere from 10% to 
20%. Many report working 14 hours a day and 7 days a week. Some 
advised that by March 15 they were considering putting clients 
on extension because they knew they wouldn't make the April 15 
deadline given the volume of work.
    Our members report that, where there have been declines in 
business, it is because taxpayers are using software to do 
their own returns. Clients who used to do their returns at home 
and then bring them in to be checked and e-filed are now 
skipping that process and e-filing them directly themselves. 
Where taxpayers do bring their returns in to be checked our 
members find that they may not take all the deductions or 
credits to which they are entitled because they are not as 
familiar with the tax code as someone who is a tax 
professional. More often, our members find they are handling 
the more complex tax returns. The easy ones are being done at 
home.
    Our members tell us that while the tax season has been 
remarkably smooth, it is because IRS is using every available 
employee to get the filing season work handled in timely 
fashion. Auditors and other highly trained staff are sitting at 
front desks in walk-in offices, handing out forms and answering 
taxpayer questions.
    However, these improvements in filing season operations 
come at a price. As one exasperated California EA put it, 
``What is wrong with the IRS? I have three offers in compromise 
that have taken over a year to work. . . no word from San Jose 
district about them except when I call. I find they have been 
reassigned and a new Form 656 must be filed. They are 
overwhelmed with the numbers of OICs coming in. They can't work 
them. Needless to say, this is putting the clients in a 
precarious position.''
    A Massachusetts EA writes, ``I've got two requests working 
for Innocent Spouse relief. Each time I follow up on them I'm 
told that 'we're swamped and have a huge backlog.''' The EA 
continues, ``Is this true?'' Unfortunately, it is. More than 
46,000 innocent spouse cases wait to be worked.
    An Oregon EA writes, ``A problem I've encountered this 
filing season involves the collections department. I have a 
corporate client that owes over $300,000 in payroll taxes to 
the IRS. We are in the process of obtaining financing and 
needed subordination. The tax collection officer assigned to 
our case was also required to spend most of his time at the 
downtown office of the IRS--handing out forms and assisting 
taxpayers with their filing questions. This meant he was only 
in his own office one morning a week. I estimate this delayed 
our financing by approximately three weeks. This is a highly 
skilled officer whose expertise was essential to the process of 
keeping my client in operation. I question the use of his time 
in this way.''
    From Washington State: ``It still takes too long to get an 
Offer in Compromise through. I have one OIC that wasn't even 
assigned to an OIC specialist until 5 months after I was 
notified that the package was processable.''
    A Florida Enrolled Agent comments, ``IRS needs well trained 
personnel in sufficient quantities to do the job and that 
requires adequate funding. As we can all attest, it takes years 
to become really conversant with the [tax] Code and able to 
handle inquiries quickly and correctly. As long as Congress 
wants to use the Code to handle social problems such as 
stimulating the economy, helping the poor, promoting education, 
etc., they must be willing to provide the resources to handle 
that complex task.''
    Finally, some of our members are voicing concern about the 
lack of resources leading to greater noncompliance. As a Texas 
Enrolled Agent wrote, ``The public is becoming aware that there 
have been very few audits. This can only translate into lower 
compliance. The audit rate needs to increase back up to [a 
respectable level].''
    Ours is a tax system based on voluntary assessment. If we 
are to maintain compliance, taxpayers in every income bracket 
must have confidence in the integrity of the system.

                              The Glitches

    This year, the glitches are very few. We have heard about 
sporadic telephone overloads and occasional problems with e-
filing when too many returns were submitted. Members whose 
clients are turning from paper returns to e-filing are having 
to contend with the inevitable glitches--names that don't 
correspond precisely to what the Social Security Administration 
has on file, taxpayers who have failed to provide SSA with a 
name change when they married, and so forth. Inevitably, these 
problems would have to be resolved anyway. Our members advise 
their clients that it is better to do so now rather than wait 
until retirement, death or disability.

Empty boxes

    Every year there is a new glitch. This year, we have had 
reports of problems where clients had a Form W-2 with nothing 
in box 1 but sick leave pay, which was stated, in box 13. Due 
to box 1 being empty, the electronically filed return was 
rejected. Paper returns were filed instead.

Form 5500EZ

    Coordination between federal agencies can be difficult. 
Last year practitioners experienced difficulty with the 
Treasury Offset Program. This year, it's coordination between 
the Department of Labor and IRS involving Form 5500EZ, which 
provides reporting of certain types of pension plans. While 
technically not a filing season problem, it has increasingly 
been handled during filing season.
    Since 1994 tax practitioners have had to alert their small 
business clients to the requirement to file Form 5500-EZ for 
their one-participant (Keogh) plans that held more than 
$100,000 at year-end. The $25 per day penalty (up to $15,000) 
is an attention-getting incentive to motivate them to file, 
even though the filing requirement itself is not well 
publicized. The return isn't due until the end of July for 
calendar year taxpayers, however many practitioners have 
trained their clients to include the information in their tax 
prep folders so that it can be addressed routinely as they 
prepare their tax returns.
    The 5500EZ has never been an easy form to integrate into a 
regular practice since many software vendors did not support 
it. This year it appeared to be almost mission impossible, yet 
even more sole-proprietor, small businesses need to file it 
because of the asset growth in the stock market. Since it was 
not included in the tax pros' super forms disk, one of our 
Members accessed the IRS web site and quickly discovered why. 
``Form 5500-EZ has been revised to take advantage of a new 
computerized system that will process the form (``;EFAST''). 
The new form is printed on special paper with green dropout 
ink. Filers were advised that they should not substitute a 
reproduction of these machine-readable pages. A copy of the 
hand-printed form is available in Package 5500-EZ. The 
instructions refer taxpayers to the IRS web site, ``How to Get 
Forms and Publications'' where they would discover they could 
not download the form for use anyway.
    We are pleased to report that once alerted to the problem, 
the IRS Office of Public Liaison responded quickly. Through e-
mail messages to practitioner groups, they advised that the 
forms had been revised, that Package 5500 and Package 5500 EZ 
had been mailed to all filers of record beginning the last week 
of February 2000 and that these packages contained the 
necessary computer-scannable forms and schedules. They also 
advised where the green ink forms could be obtained 24 hours a 
day, 7 days a week, by calling 1-800-TAX-FORM (1-800-829-3676).
    It is our hope that this marks the end of the Form 5500EZ 
debacle. However, without the outreach to practitioner groups 
done by IRS in recent years, the word could not have gotten out 
and the problem could not have been resolved. Technology and 
personnel made the difference.

           The Wish List: Improvements for Next Filing Season

All Forms Can Be E-filed

    For the fourth year in a row, we bring to your attention 
the dilemma of tax practitioners who would be willing to 
convert their operations completely to e-filing but who are 
still finding too many forms which cannot be filed 
electronically. NAEA understands the priority the IRS gave to 
ensuring its computer systems were Y2K compliant. With that 
problem behind us, it's now time to focus on bringing all forms 
online. It is particularly important if IRS is to meet the goal 
of 80% of tax returns filed electronically by 2007. If this is 
to happen, IRS must pick up a very substantial portion of tax 
returns done by paid preparers.

Eliminate the Requirement of Two Signatures on Form 8453

    There is a disconnect between reaching a goal of 80% of 
returns e-filed and requiring original signatures on Form 8453 
before a return is e-filed. We are pleased that through pilot 
programs this year IRS is attempting to resolve this issue. 
They include a PIN pilot under which taxpayers use a PIN 
instead of a signature to verify their tax return. While 
practitioners and taxpayers appear ready to embrace the 
technology, this is still a cumbersome approach.

Standardize the Form 1099

    Practitioners need the IRS to require a standardized Form 
1099. Our members tell us that the proliferation of 1099s is 
very confusing to taxpayers and contributes to stress for 
practitioners during filing season. As an EA from New York 
observed, ``Two forms--1099-DIV and 1099-B--appear on standard 
size pages, legal size pages, 12 by 12 inch pages. The 
information is late. The information is less correct this year 
than in prior years.'' In an era of computer generated forms, 
there is no excuse for nonstandardization. We will leave aside, 
for now, the issue of accuracy which the Commission on 
Restructuring the IRS considered. Among the solution, extending 
filing season for another few weeks.

Simplify the Earned Income Credit

    EIC remains a morass of complexity burdened further by fine 
distinctions that only King Solomon could reconcile. The 
personal nature of the questions practitioners may be required 
to ask EIC clients to avoid penalty are off-putting, to say the 
least. We are hearing of more and more practitioners who are 
simply turning away EIC clients.

Incentive Stock Option Publication

    The taxpaying public and tax practitioners would benefit 
from one clear publication on how the IRS wants incentive stock 
options treated, particularly when the alternative minimum tax 
applies as well as when it does not.

Complete Tax Legislation Early

    While it may seem frivolous to mention it, delayed 
Congressional action on pending tax legislation creates 
enormous problems for the IRS, for software vendors who provide 
the software used in tax preparation, and for practitioners and 
taxpayers who need forms and instructions in order to complete 
the tax preparation process. We would respectfully request that 
every effort be made to complete legislative action over the 
summer so that adequate time and attention can be given to 
these important functions in order to ensure a smooth filing 
season.

                             The IRS Budget

    Congress has done much in the last several years to transform the 
IRS into a modern, customer-focused agency. The National Commission on 
Restructuring the IRS, and the subsequent legislation, the Internal 
Revenue Service Restructuring and Reform Act of 1998 (RRA 98), both 
addressed this vision for the IRS and put the IRS on a path towards 
achieving this vision. Our members in the field tell us that progress 
is being made, but clearly much more needs to be done.
    Even though the requested FY 2001 budget of $8.9 billion is $795 
million than the FY2000 budget, NAEA believes that the IRS is in a very 
critical position during the next several years as it responds to some 
extraordinary challenges, and the full budget is needed to meet these 
challenges. The first challenge is to transform itself in an agency 
that has a customer-service focus. The IRS has worked to achieve this 
transformation through a massive reorganization into four customer-
oriented operating units. This reorganization has been thoroughly 
planned and is now being implemented. IRS needs the funding to carry it 
through to completion.
    The second challenge facing IRS is to respond to the legislative 
mandates of the RRA 98. Congress is to be commended for passing such 
sweeping legislation that provides taxpayers with more rights. However, 
the IRS needs funding to be able to implement the new provisions into 
its operating procedures and systems. Without this funding, the new 
provisions will not deliver the benefits to the taxpayer that Congress 
expected.
    The third challenge facing the IRS is modernizing its antiquated 
computer systems. Much attention has been focused in the media recently 
on the decreasing IRS resources dedicated to compliance. The proposed 
Staffing Tax Administration for Balance and Equity (STABLE) program 
will resolve some of these issues by increasing IRS staffing levels by 
2,835 Full Time Equivalent (FTE) personnel, half of which would be 
assigned to customer service and half to compliance. Until the IRS 
computer systems are modernized, however, the IRS will face the 
constant dilemma of balancing resources between customer service and 
compliance. The investment in modernized computer systems will 
eliminate the need for this balancing act by providing IRS workers the 
data they need when they need it. Particularly with the successful 
passage into the new millennium and eradication of the Year 2000 (Y2K) 
computer problem, now is the time to move forward aggressively on 
modernization. Your support is needed to fund both the business systems 
modernization program, which provides the necessary long-term 
technology solution to customer service and compliance problems, and 
the STABLE program, the immediate remedy to these problems.
    The NAEA believes the request for fiscal year 2001 is a responsible 
budget for continuing the work the IRS has begun. NAEA has testified to 
both the National Commission on Restructuring the IRS and Congress on 
the necessity for modernizing the IRS, and believes strongly that the 
three challenges described must be met. As professional tax 
practitioners, we see the results first hand. For example, cuts in 
compliance programs delay resolution of tax cases, and cost taxpayers 
more in interest and penalties. The challenges the IRS must resolve are 
serious, so serious that failure to meet them will undermine the entire 
tax collection system. Cutting the budget at this time makes it more 
difficult for IRS to succeed.

                               Conclusion

    In our view, the management team now in place at IRS, led by 
Commissioner Rossotti, has demonstrated its ability to get the job 
done. We believe IRS is making significant progress. We are getting 
results--whether it is the smooth filing season, the emergence of 
customer service programs such as Problem Solving Days, or a new 
appreciation for the taxpayer as customer. Our members and their 
clients are pleased with the changes they are seeing in the 
restructuring. However, as the reorganization continues, we 
respectfully urge you to give IRS the support it needs to conclude this 
endeavor.
      

                                


    Chairman Houghton. Thank you, Mr. Steinbis.
    Mr. Coyne.
    Mr. Coyne. I would like to ask this generally of the panel. 
The IRS has spent a lot of its resources in an outreach program 
to practitioners. I was wondering if you could comment on how 
this has helped or has not helped your members?
    Mr. Gates. It has helped tremendously. Twenty-five years 
ago, the Internal Revenue Service would not talk to 
practitioners. We were the enemy, we represented the taxpayer, 
we were adversaries, so why give away any secrets. It took a 
Supreme Court case to get the Internal Revenue Manual away from 
the Internal Revenue. They didn't want anybody to see it. 
Practitioners could not understand what their internal workings 
were like, they only had access to the Code but didn't have any 
internal operating procedure knowledge.
    The IRM was wrested away by a Supreme Court case. As a 
result, the Service got much more free, now that they had to, 
with their inner workings. They began publishing more pubs, 
they began sharing portions of the Internal Revenue Manual and 
handing it out.
    That made it easier for us to do our job and they finally 
realized maybe we weren't the enemy, that we were active 
players in the tax administration system and contributing to 
the greater good.
    As they began to think that was true, they became more and 
more generous. I think Commissioner Rossotti realized the truth 
of what I am saying because he has accelerated all of that. 
There are not going to be districts anymore, but the people who 
are going to become the area and territory managers are getting 
clear instructions that they are not only to send out 
publications, instruction sheets and share materials, but are 
to actively conduct classes, briefings, anything necessary to 
get the practitioner up to absolute full speed so that we can 
help do the job. So they have done an outstanding job in that 
area.
    Mr. Coyne. I wonder if your positive response to the 
general idea outreach by the IRS extends to the EITC 
educational outreach activities on EITC?
    Mr. Gates. That is a very, very difficult one because of 
necessity. An earned income tax recipient is not the best 
client in the world, so a lot of people take a lot of pride in 
saying I don't have to know anything about the earned income 
tax credit because none of my clients are eligible for it. So, 
since it is of necessity for low earnings people, the quality 
of people that are trying to help them with their tax returns 
is not necessarily as high. When it is not as high, the probing 
to see if they are really qualified for it can stop pretty 
early.
    In addition, in certain parts of the country, certain 
areas, a practitioner knows the truth is being withheld, that 
only enough information is being given to appear eligible. Once 
getting around those two shortcomings, then you have the 
unbelievable complexity, if it is not straightforward.
    A straightforward, eligibility case is very easy but if 
they are in a multiple household where there are three families 
living, perhaps one is unmarried with children and one is a 
bachelor with high income, trying to sort through the 
complexity to find out whether they are eligible or not can be 
mindboggling.
    With the Service reacting to the lack of diligence in this 
area, the preparer will then, on top of this, it is so 
difficult and so complicated, think, if I mess it up, I am 
going to have a due diligence charge against me, so there is a 
tendency then to back off and say I don't want anything to do 
with this because it can be a nightmare.
    The poor people who are questioned come in and don't 
understand what the IRS revenue agent is asking for. You want 
statements from my principal where he goes to school, he wants 
this, he wants that. The laundry list of what you have to do to 
substantiate a questioned earned income tax claim is 
unbelievable.
    The Service only has so much time, they dispose of these 
cases relatively rapidly with a determination that, no, you are 
not eligible, or worse, you did not bring in all the 
substantiation that is required in the time we have to give 
you. Then this puts them in a situation where they are told 
they can go to appeals. This level of people do not know the 
IRS appeals procedures. So they use up their time. They only 
have 30 days to decide whether they want to take advantage of 
their appeal rights or not. They lose their time, they get 
discouraged, they don't respond and the Service does the only 
thing it can do, it issues a notice of deficiency which now 
requires the taxpayer to submit a petition to the United States 
Tax Court before they can be given any further consideration.
    Even though this only costs $65 and the Court is very 
generous in that they will take a petition literally prepared 
on toilet paper, they don't hold the people back, but imagine 
the formidable idea of a United States court trial over this 
matter. The number of people who go on from there even if they 
could fill out a petition, never go to trial.
    The revenue officers get the collection cases and then the 
Service is left to deal with this tax liability that they 
shouldn't have to pay.
    Mr. Coyne. Thank you.
    Chairman Houghton. If I understand what you are saying, 
Commissioner Rossotti is doing a great job, probably the best 
job that has been done around there for a long, long time. The 
procedures are good, the attitudes have changed, there are 
suggestions to be made, and you think the increase in the 
budget is right. Yet I would like to ask some questions.
    Ms. Pflieger, this is something we have worried about here. 
You said on page two of your testimony, ``The current lack of 
enforcement is of grave concern to our members who see on a day 
to day basis the impact it has on the attitude of taxpayers.'' 
Do you want to elaborate on that a little bit?
    Ms. Pflieger. Yes. An example would be someone who says: 
``I read in the papers that audit rates are at an all-time low 
and there is a real good chance I am not going to be audited 
with respect to this return, so, instead of claiming the $600 
of charitable contributions that I would be entitled to, I am 
going to put down $1,800. I am never going to get caught.'' 
That is the type of concern that we certainly have when low 
audit rates are so well publicized.
    Likewise on the collection side, when it is so well known 
that the IRS is not going to come in and levy or place liens on 
certain pieces of property, a taxpayer might say: ``Well, yes, 
I owe the IRS money but who cares, it is not going to do 
anything to collect that tax.
    Again, I think the real concern is not just that we are 
losing the specific tax dollars attributable to those taxpayers 
but rather that, that attitude will spread across the American 
tax paying public and undermine our voluntary tax system.
    Chairman Houghton. Our counsel has indicated that half of 
the 2,500 new people would be on the enforcement side. Do you 
think that will be sufficient now? Once you get that attitude 
eroded, it is very hard to get it back.
    Ms. Pflieger. I think it depends on how well publicized 
that increase is. I am not here saying I want to go back to a 
mean, nasty IRS. I think the Commissioner has come a long way 
in making the IRS, if not kinder and friendlier, certainly a 
fairer and more interested organization, but I think if the 
enforcement mechanisms are put there and are publicized, then 
yes.
    It would be wonderful if we could give the Commissioner 
billions of dollars, but we cannot. So I would hope that with 
increased support and appropriate publicity, he could do what 
he needs to do.
    Chairman Houghton. Mr. Gates, you remember I interrupted 
you during your testimony about whether the IRS should be 
involved in certain dollar returns and things like that? Do you 
want to elaborate on that a bit?
    Mr. Gates. The interesting thing, the earned income tax 
credit, when Congress passed it, some people even said is this 
not a form of welfare because it is actually distributing money 
in the form of a tax credit which, to a certain extent, might 
be the same thing as giving money and questioned whether or not 
the Internal Revenue Service should even administer a program 
like that since they have been a collecting agency.
    The Service in early examinations of earned income tax 
credit eligibility, many agents said I don't know why I am even 
involved in this but it is my job and I am going to do it. They 
are trained to apply a very stringent Internal Revenue Code to 
the facts.
    People who get earned income tax credit don't generally 
have lives that can stand that kind of precise scrutiny. So we 
revisited that question with a member of one of the IRS 
citizens advisory panels that has been convened pursuant to the 
administration's response to the restructuring effort, 
particularly the one in New York. The chairman of that 
Committee talked about what they do their problem solving days 
and invite people from the community to talk to them and so 
forth. He talked about the tremendously high percentage of 
earned income tax difficulties that people from Manhattan and 
the low income of Brooklyn and so forth bring to them and the 
frustration they feel in being unable to even come up with a 
way of changing the law, changing the rules, changing anything 
else because it is so difficult for that segment to understand 
complex law.
    Chairman Houghton. So it is just a matter of questioning 
the ability of the IRS to handle something like this?
    Mr. Gates. Indeed. I found it interesting that this fellow 
who is on the citizens advisory panel because he represents 
some multiple of 60,000 to 70,000 people in New York who are 
trying to raise the standard of housing in the boroughs of New 
York, represents the very people that quite frequently are 
eligible for this.
    When he considered the concept of maybe this is being 
administered by the wrong agency, it was like a light bulb went 
off, and he began to wonder if that wasn't right, if there 
wasn't a better way to accomplish the objective than to have 
the Internal Revenue Service administer it like a tax law.
    We came to the conclusion if this Committee wanted to hear 
that and give it any thought, it might do so.
    Chairman Houghton. Mr. Steinbis, I have one final question. 
You and your members are on the frontlines in the effort to 
comply with the tax law. Based on the experience of your 
members, what do you believe should be done to simplify the tax 
law? Have you any general comments you would like to make on 
that?
    Mr. Steinbis. A lot of people would like to get rid of it 
but the easiest one would be to standardize all the 
limitations. You have the different cutoffs for standard 
deductions, the AGI limitation on standard deductions is 
different than the AGI limitation on IRAs or regular IRAs. 
There are 18 different cutoffs. Standardize those if you are 
going to continue to use the Tax Code in the manner it is being 
used. At least standardize those.
    Chairman Houghton. Anything else? It is the cancer of the 
tax system.
    Mr. Steinbis. AMT, the alternative minimum tax, has to be 
modified in some way. We had a press conference today to show 
the complexity of AMT. Like Bryan said earlier, it is picking 
up more people into the system.
    All of a sudden a gentleman has this phantom income, didn't 
receive any money but he owes $50,000 in tax. What does he do? 
He has to sell it now to pay some of that tax. Some of that tax 
will be carried over into the future when he starts to sell in 
the future. So AMT needs to be adjusted and the limits need to 
be raised. That would be another one to make it simple.
    Chairman Houghton. Thank you very much. We certainly 
appreciate your input. If there is anything else, you can send 
it to us in writing. If we have other questions, we will ask 
them of you.
    Thank you so much for being with us today.
    The hearing is concluded.
    [Whereupon, at 3:36 p.m., the hearing was adjourned.]

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