[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
IMPLEMENTATION OF THE INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM
ACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JULY 22, 1999
__________
Serial 106-77
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
67-584 CC WASHINGTON : 2001
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
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
Advisories announcing the hearing................................ 2
WITNESSES
Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner. 14
U.S. General Accounting Office, James R. White, Director, Tax
Policy and Administration Issues, General Government Division,
accompanied by Randolph C. Hite, Associate Director,
Governmentwide and Defense Information Systems, Accounting and
Information Management Division................................ 60
______
Implementation Group, and Electronic Tax Administration Advisory
Committee, Charles A. Lacijan.................................. 49
IMPLEMENTATION OF THE INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM
ACT
----------
THURSDAY, JULY 22, 1999
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:05 a.m., in
room 1100, Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisories announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
FOR IMMEDIATE RELEASE CONTACT: (202) 225-1721
July 15, 1999
No. OV-10
Houghton Announces Hearing on
Implementation of the Internal Revenue Service
Restructuring and Reform Act
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 to review the progress of the
implementation of the Internal Revenue Service (IRS) Restructuring and
Reform Act of 1998 (P.L. 105-206) one year after its enactment. The
hearing will take place on Thursday, July 22, 1999, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 10:00 a.m.
Oral testimony at this hearing will be from invited witnesses only.
Invited witnesses will include IRS Commissioner Charles O. Rossotti;
Tax Policy and Administration Issues Director James R. White, U.S.
General Accounting Office; and Chairman Charles A. Lacijan, Electronic
Tax Administration Advisory Committee. Any individual or organizational
not scheduled for an oral appearance may submit a written statement for
consideration by the Committee or for inclusion in the printed record
of the hearing.
BACKGROUND:
The passage of the Internal Revenue Service Restructuring and
Reform Act (RRA) reflected the recognition by the Congress that the IRS
required major reform. The RRA established an Oversight Board within
the U.S. Department of the Treasury, including a super-majority of
members from the private sector, to monitor the
administration, management, conduct, direction, and suppervision of the
execution and application of the tax laws. The RRA also mandated
specific structured and management reform including:
(1) an independent appeals function,
(2) authority to hire experts and high level managers,
(3) an independent National Taxpayer Advocate who represents the
interests of taxpayers with broad authority,
(4) provisions to hold IRS employees accountable for their actions,
and
(5) streamlined oversight by the Congress and the Treasury
Inspector General.
Congress also took steps to ensure that taxpayers are treated
fairly and that they are accorded additional rights when dealing with
IRS officials. The RRA created more than 50 taxpayer rights including:
(1) providing that divorced or separated individuals are not liable
for taxes as an innocent spouse or only responsible for taxes on his or
her own income,
(2) shifting the burden of proof to the IRS in court proceedings,
(3) suspending interest when the IRS does not provide appropriate
notice within 18 months, reducing the failure to pay penality by one
half while the taxpayer is participating in an installment agreement,
and requiring management approval of non-computer generated penalities,
(4) making it easier for taxpayers to enter into installment
agreements, and
(5) ensuring due process for taxpayers in collections activities.
In announcing the hearing, Chairman Houghton stated: ``One year
ago, the President signed into law the most significant reform of the
Internal Revenue Service in its history. We intend to review the
progress that the IRS has made to reform itself into a modern,
efficient, customer-friendly agency and what challenges remain to be
met. We also intend to review the effectiveness of taxpayer rights
created by the law.''
FOCUS OF THE HEARING:
The Subcommittee will review the efforts of the IRS to reorganize,
modernize, and reshape itself into a service-oriented agency.
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 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday,
August 5, 1999, 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 Committee office, room 1102 Longworth House Office
Building, by close of business the day before the hearing.
FORMATTING REQUIREMENTS:
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1. All statements and any accompanying exhibits for printing must
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including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing of the official hearing
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2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
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3. A witness appearing at a public hearing, or submitting a
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4. A supplemental sheet must accompany each statement listing the
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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://WWW.HOUSE.GOV/WAYS__MEANS/'.
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
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noted above.
NOTICE--CHANGE IN TIME
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
FOR IMMEDIATE RELEASE CONTACT: (202) 225-1721
July 21, 1999
No. OV-10-Revised
Change in Time for Subcommittee Hearing on
Thursday, July 22, 1999,
on Implementation of the Internal Revenue
Service Restructuring and Reform Act
Congressman Amo Houghton (R-NY), Chairman of the Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee hearing on the Implementation of the Internal Revenue
Service Restructuring and Reform Act scheduled for Thursday, July 22,
1999, at 10:00 a.m., in the main Committee hearing room, 1100 Longworth
House Office Building, will now be held at 9:00 a.m.
All other details for the hearing remain the same. (See
Subcommittee press release No. OV-10, dated July 15, 1999.)
Mr. Houghton. Good morning, everybody. The meeting will
come to order.
In June 1997, after a year of work, the National Commission
on Structuring and Internal Revenue Service issued its report,
which was a vision for the new IRS. The Commission was co-
chaired by our Subcommittee colleague, Rob Portman, along with
Senator Bob Kerrey. Our Ranking Democrat, Bill Coyne, served on
the Commission as well. An enactment of the report's
recommendation began with hearings and a report from the
Subcommittee, culminating in passage of the IRS Restructuring
and Reform Act of 1998, which was signed into law about a year
ago.
Now, the Commission identified three broad concerns,
including No. 1, a lack of long-term vision, No. 2, difficulty
in developing structured plans to obtain specified goals, and
No. 3, an inability to follow through and sustain efforts to
meet those goals.
So in addressing these issues, it is not as glamorous as
enacting new taxpayer rights. And it is equally important. Mac
McKinney had a wonderful story that I was going to tell, but it
took about half an hour to tell it, so I'm eliminating that
story, it had to do with Will Rogers. I'll tell you,
Commissioner, about it a little later.
As difficult as I'm sure it was to achieve a consensus
within the Commission, and as challenging as it was to secure
passage of the reform implementation, that of course is the
hard part. We are now entering a time of risk, a time of
changing processes, spending large dollars and moving people
around.
So the responsibilities of the Commissioner, the Treasury
and the Oversight Board, and I'm assuming that a board will
soon be in place, are clear. And of course, Congress is equally
responsible for making it clear that these reforms are not just
a flash in the pan, and for making sure that they are
implemented effectively.
The RRA requires us to coordinate congressional oversight,
and our first joint review was held last May. The review
provided an excellent overview of the many challenges facing
the IRS, completing our Y2K readiness, modernizing systems,
reorganizing major business groups and implementing a new
taxpayer protection policy.
So today we need to focus on specifically the
implementation of the RRA. We need to determine whether the
Service has the financial and management and personnel
resources it needs to do the job. And we need to learn more
about what the Service is doing to train employees to implement
the new taxpayer rights. Also, we'd like to find out about the
reports that collection and enforcement activities have
dropped.
So as we consider the difficult steps that lie ahead, the
Subcommittee will be examining them against the backdrop of the
Commission's findings and the need for long-range vision and
strategic business plan, and a consistent follow-through.
What I'd like to do now is recognize the Ranking Democrat,
Mr. William Coyne, for his opening statement.
Mr. Coyne. Thank you, Mr. Chairman.
On the first anniversary of the enactment of the IRS
Restructuring and Reform Act of 1998, it is appropriate that
the Ways and Means Oversight Subcommittee hold today's
hearings. Over the past 2 years, the Subcommittee has served as
the catalyst for the development of the IRS reform legislation.
Most recently, the Subcommittee has engaged in continued
oversight of the IRS. Today we have discussion of the progress
the IRS has made to date in
implementing the 1998 IRS reform bill.
This major reform legislation included over 70 taxpayer
rights provisions, including those providing innocent spouse
relief, abatement of interest and penalties, streamlined
installment agreements and offers of compromise, a more
powerful Office of Taxpayer Advocate and funding for low-income
tax clinics. Also, the new law provides for IRS reorganization,
hiring of management experts and the creation of public-private
IRS oversight board.
The IRS reform legislation enacted last year has had a
positive effect on the taxpaying public. A new IRS management
team, a modernized tax system, and improved taxpayer services
are beginning to have an effect. Taxpayers are seeing the
impact of reformed innocent spouse rules, improved taxpayer
notification of audit issues, and clearer IRS forms and
instructions.
However, there is disconcerting news as well. Press reports
raise serious questions about recent trends in tax compliance
and IRS enforcement. IRS statistics show that the IRS has
largely shut down its compliance programs, with liens, levies
and seizures at an all-time low and dropping. Interviews with
IRS employees have
indicated that they considered their jobs at risk when talking
to taxpayers, should they commit one of the 10 deadly sins, or
worse, fear that they would be subject of the next Senate
hearing alleging that they abused taxpayers.
I have attached three recent news articles which raise
these issues and should be discussed by the Subcommittee today.
Now is the time for us to assess the current state of the IRS
and to make any adjustments that we need to. We must make sure
that our tax system is balanced, fair, for all taxpayers,
especially the 98 percent of individual taxpayers who
voluntarily pay taxes on time by April 15.
Finally, it is unfortunate that the House last week adopted
an amendment to cut the IRS budget for fiscal year 2000 by $135
million. The IRS Commissioner had communicated to the Congress
before the vote in no uncertain terms that such action would
result in the inability of the IRS to deliver the mandates of
the IRS reform bill.
In the words of the IRS Commissioner, Mr. Rossotti, by
letter dated July 15:
A funding reduction would severely restrict, if not
completely impair, IRS' ability to deliver the Restructuring
and Reform Act mandated by Congress in 1998. Every aspect of
the agency's commitment to reorganize the organization and
improve customer service and taxpayers' rights would be in
jeopardy. It would constrain the agency's ability to implement
the initiatives so critical to changing how IRS delivers on
customer service and improves its treatment of taxpayers and
focus on taxpayer's rights.
The cut would result in reduced plans to deliver better
telephone service and tax assistance in Spanish. IRS staff has
already been reduced 14 percent since fiscal year 1993, thereby
continuing the rapid decline and exam collection and criminal
tax compliance operations. It would reduce funding for the
electronic tax administration program, thereby jeopardizing the
congressionally mandated goal of 80 percent electronic filing
by the year 2007. It would impair the creation of operating
units to help in specializing groups of taxpayers, including
small business and ordinary wage earners. Finally, it would
delay the implementation of important taxpayer rights
initiatives.
I have attached a copy of this letter, which discusses the
threat that inadequate funding poses to the IRS reform effort.
I look forward to working with Subcommittee Chairman Houghton
and others to ensure proper implementation of IRS reform as
well as the necessary funding for IRS in fiscal year 2000 and
into the future.
Thank you.
[The opening statement and attachments follow:]
Statement of Hon. William J. Coyne, a Representative in Congress from
the State of Pennsylvania
On the first year anniversary of enactment of the IRS
Restructuring and Reform Act of 1988, it is appropriate that
the Ways and Means Oversight Subcommittee hold today's hearing.
Over the past two years, this Subcommittee served as the
catalyst for the development of the IRS reform legislation.
Most recently, the Subcommittee has engaged in continued
oversight of the IRS, review of the 1999 tax return filing
season, and consideration of the IRS's fiscal year 2000 budget.
Today I look forward to discussion of the progress that the
IRS has made in implementing the 1998 IRS reform bill. This
major reform legislation included over seventy taxpayer rights
provisions, including those providing innocent spouse relief,
and abatement of interest and penalties, streamlined
installment agreements and offers-in-compromise, a more
powerful Office of the Taxpayer Advocate, and funding for low-
income tax clinics. Also, the new law provides for IRS
reorganization, the hiring of management experts, and creation
of a public-private IRS Oversight Board.
The IRS reform legislation enacted last year has had a
positive effect on the taxpaying public. A new IRS management
team, a modernized tax system, and improved taxpayer services
are beginning to have an effect. Taxpayers are seeing the
impact of reformed innocent spouse rules, improved taxpayer
notification of audit issues, and clearer IRS forms and
instructions.
However, there is disconcerting news as well. Press reports
raise serious questions about recent trends in tax compliance
and IRS enforcement. IRS statistics show that the IRS has
largely shut down its compliance programs, with liens, levies
and seizures at an all-time low and dropping. Interviews with
IRS employees indicated that they considered their jobs at risk
when talking to taxpayers (should they commit one of the ``10
deadly sins'') or, worse, feared that they would be the subject
of the next Senate hearing alleging that they abused taxpayers.
I have attached three recent news articles which raise these
issues and should be discussed by the Subcommittee today.
Now is the time for us to assess the current state of the
IRS and to make any adjustments needed. We must make sure that
our tax system is balanced and fair for all taxpayers,
especially the 98 percent of individual taxpayers who
voluntarily pay taxes on April 15.
Finally, it is unfortunate that the House last week adopted
a Republican-
sponsored amendment to cut the IRS's budget for fiscal year
2000 by $135 million. The IRS Commissioner had communicated to
the Congress before the vote, in no uncertain terms, that such
action would result in the inability of the IRS to deliver on
the mandates of the IRS reform bill.
In the words of the IRS Commissioner, by letter dated July
15, 1999, ``A funding reduction of $135 million would:
Severely restrict, if not completely impair, IRS's
ability to deliver on the Restructuring and Reform Act mandated
by Congress in 1998. Every aspect of the agency's commitment to
reorganize the organization, improve customer service and
taxpayer rights would be in jeopardy
Constrain the ability (of the IRS) to implement
the initiatives so critical to changing how IRS delivers on
customer service and improves its treatment of taxpayers and
focus on taxpayer rights. For example, the cut would result in
reduced plans to deliver better telephone service and tax
assistance in Spanish.
Require reduced staffing levels in order to free
up the funds necessary to implement congressionally mandated
RRA requirements. IRS staff has already been reduced 14 percent
(or 15,600 FTE) since FY 1993--thereby continuing the rapid
decllne in exam, collection and criminal tax compliance
operations.
Reduce funding for the Electronic Tax
Administration program, thereby jeopardizing the
Congressionally mandated goal of 80 percent electronic filing
by the year 2007.
Impair the creation of operating units to help
specialized groups of taxpayers including small businesses and
ordinary wage earners.
Delay implementation of important taxpayer rights
initiatives.''
I have attached a copy of this letter which discusses the
threat that inadequate funding poses to the IRS reform effort.
I look forward to working with Subcommittee Chairman
Houghton to insure proper implementation of IRS reform, as well
as the necessary funding for IRS in fiscal year 2000 and into
the future.
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Mr. Houghton. Thank you very much, Mr. Coyne.
Mr. Hayworth, Mr. Watkins, do you have any comments?
All right, fine, thank you. We're honored to have Hon.
Charles O. Rossotti, Commissioner of the Internal Revenue
Service, here today. Commissioner.
STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
REVENUE SERVICE
Mr. Rossotti. Thank you, Mr. Chairman, and thank you, Mr.
Coyne. I appreciate your holding this hearing on the
anniversary date. It does give us a good opportunity to look
back and see what our progress has been so far on implementing
this important legislation. But I think it's also important, to
look forward and see what we need to do in the future to
continue on course.
As important as are all these individual provisions of this
Act, I think it's even more important what the legislation told
us about the IRS. I think it told us that we needed to
fundamentally change direction. We must not only collect taxes,
but we must see our job as serving the people who are paying
the taxes, America's taxpayers.
In the 20 months that I've now been in office, I have
become even more convinced than I originally was that we can
succeed in this mandate that Congress has given us, provided we
are given necessary resources. I do not believe that this
mandate implies or requires less effective tax collection. What
I do believe is that we can have a tax agency that does a
better job across the board on all aspects of our mission.
One of the Act's critical components was the expansion of
taxpayer rights. I think a year ago when this bill was passed
none of us fully understood the consequences of some of the
dramatic changes incorporated in some of these provisions.
Especially the tremendous amount of time and resources that
were going to be needed to implement some of these rights. I
think it's honest to say that we did not fully understand the
budgetary consequences either until recently.
I want to stress that we are completely and wholly
committed to implementing every one of the taxpayer rights in
RRA 1998. It is a No. 1 priority for us and we are committed to
getting the job done and getting it done right, notwithstanding
the fact that we have made some mistakes and we've been delayed
in implementing some of these changes. But we're going to
persist until we get them right.
But we do have to understand that delivering on the
hundreds of specific changes and major implications for the way
we do business in our organization is a large undertaking. It
has placed a strain on our resources.
I would like to just mention one important example, which
is the innocent spouse provision. From April 1998 until the
passage of the Act, there were about a total of 3,000 claims
under the innocent spouse provisions at that time. Since the
passage, there have been about 27,000 claims. And we are
continuing to receive these claims at a rate of 4,000 per
month.
This is far greater than we ever thought, and in addition,
the complexity of implementing these provisions is quite large.
The net effect is that we've had to increase the number of
staff assigned by about tenfold, from 30 to about 359. In spite
of adding these resources, there is still a very large backlog.
Also related to this one example is the fact that the old
technology we have in place just does not allow us to do what
this provision requires, namely separating a single tax
liability on a single return into spouses with multiple
liabilities. So, we have to do this kind of tracking manually,
which of course increases the time and increases the risk of
error.
So this is an example of one provision that is very
important. We do have a backlog. We will clear it up and we
will get it right, but it's going to take some time and
resources.
Very closely related to this problem of resources is the
amount of training that is required in order to meet the Act's
mandates and provide better service. Essentially, every one of
the more than 100,000 IRS employees requires training. For
example, Congressman Coyne mentioned section 1203, which is
dealing with termination of employment for misconduct. Every
employee needs this training.
We gave training to every employee within 6 months of the
passage of the Act. And frankly, it had the effect of probably
raising concerns about employees, but without necessary
answering the specific questions they had about this. So we are
now continuing to work and going forward with another set of
training. In June, we began to implement additional
instructions on procedures.
We know that some IRS employees have been reluctant to
pursue some collection actions for fear of 1203 violations.
However, this is only one factor that has reduced the number of
collection actions. The additional processing time required by
the Act and the reduction in resources have also been important
factors, which we are working on.
The Act not only contains specific taxpayer rights, it also
created an expectation that every taxpayer would receive a
better level of service, while ensuring that the law is applied
fairly. We have a new mission statement that reflects that
expectation and three strategic goals needed to achieve the
mission, which are listed on this chart over here. By
clarifying this mission and our goals, through a series of new
balanced performance measures, we are transmitting in a
practical way this new set of goals and mission to every
employee in the IRS.
These directional changes and communications are very
important. But we won't succeed without also revamping the way
we do business. We need to take advantage of better business
practices and better technology. We don't have time to go into
them here, but listed on that chart are just an example of some
of the major kinds of business changes that we are beginning to
make and will make over time that can help us on all aspects of
our goal, both service to taxpayers and compliance. In the
short term, we're concentrating on 161 near term actions to
move in this direction.
Another important part of RRA, which I think is essential
to achieving our goals, is the reorganization into customer
focused units, so that we can manage according to the way the
customer sees the world, rather than just the way the IRS sees
the world. We've made some progress on that, although there is
a great deal of work to do.
The first two of the four operating divisions are going to
be coming up later this year or early next year, and we've
selected the heads of those units and announced them, which was
an important step. You're going to have more information on
electronic tax administration later. We have prepared our first
strategic plan to enable us to move toward the goal of 80
percent electronic filing by 2007. We conducted several
important pilots which next year we hope to build on for the
2000 season.
Finally, let me mention something about technology. We
clearly are not going to succeed in achieving these new
business practices and goals without replacing this 30-year old
base of fundamentally deficient technology, which really does
not provide us up-to-date, accurate information about
taxpayers, which is the foundation of everything we do.
I'm very pleased to report to the Committee that earlier
last month we received from the Appropriations Committees
authorization for the first release of funds from the
Information Technology Investment Account. This is $35 million
that really will enable us to complete planning. The important
thing is it's really the first installment toward developing a
complete new set of systems.
This is going to take years to do and a significant
financial investment. But it will be a foundation for
everything that the IRS does in years to come, including
transitioning all of our taxpayer accounts eventually from our
tape-based master file system to a modern data base.
Finally, just let me comment briefly on our budget request
and not really so much in terms of the details of the current
budget request. Which I believe is the bare minimum that we
need to move forward, but just look a little bit more broadly
at the relationship between the IRS mission and goals, the
assignments that Congress has given us and our resources.
I think if you look at this colored chart over here which
says, IRS shrinks as a fraction of the economy, you can see
that even before RRA and continuing now, we have shrunk by
about 30 percent relative to the economy. And even if the full
budget request of 2000 is granted, we will continue that
shrinkage during 2000.
So what we have here is a case of increased demands due to
the increased economy and the additional provisions of the law,
while we have reduced resources. The effect of this is simply
to reduce the level of activity, especially in the most case-
oriented, labor-
intensive activities, which are examinations, criminal
investigations and collections.
So for example, the number of individual tax returns with
over $100,000 income has increased by 56 percent over the last
5 years. But the number of returns that have been examined in
that category has decreased by 21 percent. And now with RRA,
because of the other increased resources, even fewer resources
are going to be available for initiating new such cases. So
this decline will continue.
I think doing business the same way and continuing this
trend, resources declining, economy growing, is eventually
going to undermine our whole tax system. I think as we've
discussed in earlier hearings, there is a better way to do
this, and we can succeed. But it does depend on getting assured
investment funds every year for the improvements that we need
to make in organization, training, business practices and
technology, while we stabilize the level of activity in our
current operations.
We are obviously doing what we can with short-term changes.
But in the meantime, we have just in the taxpayer rights area,
a requirement of about 3,000, the equivalent of about 3,000
full time employees just to implement these new requirements on
existing cases. We do need, of course, at the same time, for
funds to make the investments needed to implement these new
practices.
So we have a stress on resources that is really quite
severe, in current year and going forward over the next several
years.
Mr. Chairman, I believe that the IRS is fundamentally
changing in the direction that was mandated by the
Restructuring Act. It's changing in virtually every aspect.
But we are at a crossroads. I think we need the
understanding of the Congress for the magnitude of this
challenge. We need the understanding in really two ways, one in
that it is going to take some time to carry out all these
mandates, and it will take some resources.
One forecast that I made when I took office was that it
would take the better part of a decade to reach our goals for
the IRS. Now having been here for 20 months, I think that's one
forecast that I will stand by. I believe it is doable, I
believe it is worthwhile. But it is a long and difficult
journey, and we need your support.
Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Hon. Charles O. Rossotti, Commissioner,
Internal Revenue Service
Introduction
Mr. Chairman, I am pleased to testify before the
Subcommittee on the anniversary of the signing of the IRS
Restructuring and Reform Act of 1998 (RRA '98 or Act).
Today's hearing presents an excellent opportunity to
examine our progress on the mandates set forth by this landmark
bipartisan legislation, the challenges and obstacles, and more
importantly what we must do now and in the future to keep on
course to achieve all of the RRA '98 goals.
As important as the individual provisions of the RRA '98
are, the Act as a whole said something even more important. It
told the IRS we must fundamentally change direction. We must
not only collect taxes, but we must think of our job as serving
the people who are paying the taxes, America's taxpayers.
In the nearly 20 months that I have been in office, I have
become even more convinced that we can succeed in the mandate
Congress gave us if we are given the necessary resources. I do
not believe this mandate implies or requires less effective tax
collection. I firmly believe we can have a tax agency that does
a far better job across the board on all aspects of our
mission.
Today I would like to discuss how we are interpreting and
implementing the RRA mandate and how it relates to the
resources we will require. I am also submitting for the hearing
record a document entitled ``Modernizing America's Tax
Agency,'' which describes our overall change program.
Taxpayer Rights and Employee Training
One of the critical components of RRA '98 was the expansion
of taxpayer rights. However, the Act also differed strikingly
from other tax legislation the IRS previously implemented. RRA
'98 not only changed the Tax Code; it broke new ground by
substantially altering the internal processes and procedures
needed to manage these changes.
A year ago, no one fully understood the consequences of
such a dramatic change, especially the enormous amount of time
and resources needed to implement these new taxpayer rights.
Certainly, the IRS did not fully appreciate the budgetary
consequences of RRA '98 until recently.
I want to stress that we are wholly committed to
implementing each and every taxpayer right in RRA '98. It is
our number one priority and we will get the job done, and we
will get it right, not withstanding some delays and mistakes.
Delivering on the Restructuring Act and the hundreds of
specific changes to both the tax code and our organization is
an enormous task. We are in the process of: (1) implementing 82
near-term RRA '98 initiatives to improve service and treatment
of taxpayers; (2) implementing 423 tax code changes, many of
which require significant and complex interpretations to guide
taxpayers and employees; and (3) providing essential training
related to these many changes to nearly every one of our over
100,000 employees, including technical training for 75,000 of
them.
Let me highlight some of the progress to date in
implementing RRA '98: a massive training effort is underway;
two new forms are being developed; 153 forms have been revised;
39 publications have been revised; 33 items from Chief Counsel
were published (14 regulations, 8 revenue procedures, and 11
notices/announcements); more than 75 guidance memoranda have
been issued; and 1,300 implementing actions have been
identified. Obviously, this is an enormous undertaking that has
placed an enormous strain on IRS's resources. The direct effect
on operations is equivalent to nearly 3,000 FTEs.
I want to particularly stress that increased training of
our employees is essential for delivering on the mandates that
Congress gave us and the service that taxpayers expect. About
70 percent of IRS employees deal directly with taxpayers.
Taxpayers have every right to expect that in every such
encounter with an IRS employee, whether it is a phone call
asking a question about how to fill out a return, or a meeting
with a revenue agent in an audit, the IRS employee should
understand the current tax law and have the skills to
understand the facts and circumstances of that taxpayer.
A year and a half ago, when I took office, it was
abundantly clear that there was already a serious deficit in
this area. Since then, Congress has given us the responsibility
of implementing 1260 changes to the Tax Code, including those
in RRA '98, and a mandate to restructure the whole way we do
business with taxpayers. This will require extremely complex
training for our employees. The money in our FY 2000 budget
request, including that part included for the modernization
program, is essential and will only begin to rectify our
training deficit.
There are three phases to our RRA '98 training, and even
prior to enactment of RRA '98, we began to take action. In July
of 1998, we established a National Resource Center to
coordinate policy and program questions to insure that
consistent messages were sent to stakeholders. Also in July,
approximately 185 RRA '98 field coordinators in each IRS
district, region and service center were identified and trained
to be local points of contact for coordination and questions. I
held my first RRA video conference on July 17, five days before
the President signed the legislation into public law.
RRA '98 Phase I training took place from July 1998 to
January 1999. Some of the actions we took included: (1)
providing 60,000 front-line employees with up to 1.5 million
hours of basic implementation training on new statutory
requirements and key procedures; (2) developing individual
training plans for each IRS function; (3) implementing a course
completion certification process; (4) establishing weekly
conference calls with over 180 RRA '98 Coordinators and
Education Branch Chiefs; and (5) posting information on our
Corporate Education Web Site and links to the National Resource
Center.
We are now in the midst of RRA '98 Phase II training. Our
overarching goal is to provide formal training with clear
learning objectives, testing and evaluation. We have developed
video courses on: Collection Due Process, Installment
Agreements, Offers in Compromise, Seizures, Relief from Joint
and Several Liability, Third Party Contact and Interest
Netting.
The goals for RRA Phase III Technical Training for FY 2000
are to: (1) embed specific provisions of RRA '98 and the newly
revised Internal Revenue Manual into IRS day-to-day operations;
(2) supplement Phase I and Phase II training as needed; (3)
deliver Phase II of Customer Service Training; and (4) continue
to evaluate, monitor and update training as necessary.
Another one of our critical training needs is Section 1203
(Termination of Employment for Misconduct) for which all
100,000 IRS employees must be trained. The initial mandatory
training that all employees received was certainly an important
first step, but we found that it raised concerns among
employees without answering their specific questions. In March,
all employees received with their pay stub a special brochure
on Section 1203. It includes a plain language summary of all
the provisions, how potential violations are reported, employee
appeal rights and other important reminders. We are also
encouraging our employees to take advantage of the IRS Labor
and Employee Relations Resource Center that can help answer
many of their Section 1203 questions.
We will then build on this information with better training
and guidance. In June, we began to provide employees with
detailed instruction on the procedures to be used in handling
Section 1203 cases. This instruction, including a training
video, was based on a new Section 1203 Procedural Guide issued
in May. It emphasizes good customer service and case management
practices.
Some IRS employees have been reluctant to pursue collection
actions for fear they will be charged with a Section 1203
violation. However, this is only one factor that has reduced
the number of collection actions. The additional processing
time required by RRA '98 and a lack of resources have
contributed to the overall decline in compliance activity.
We are working very hard to re-enforce the message among
all IRS employees that the Section 1203 provisions are intended
to address serious and willful incidents of misconduct. Simple
mistakes in the course of doing your job in good faith are not
Section 1203 violations.
At this point, I would like to address the implementation
of three specific RRA '98 taxpayer rights that I believe
illustrate the challenges we faced, the lessons we learned and
how we are better managing the implementation process: innocent
spouse, third party notices, due process and offers in
compromise.
Innocent Spouse
In January 1999, the IRS issued new versions of its form
and publication for innocent spouse relief, each revised to
incorporate the changes made by RRA '98. This is the latest of
several steps we have taken in our ongoing effort to help
innocent spouses. We hope that our materials will effectively
explain the new law to taxpayers and assist them in taking full
advantage of their rights. We also appreciate the comments we
received last fall on the draft form and welcome suggestions on
how we might further improve these items. In addition, the IRS
plans to incorporate additional feedback from taxpayers and
practitioners--as well as our own experience in processing
these requests--so we can provide even better products.
Nevertheless, there have been problems associated with
processing the innocent spouse claims. Foremost are the number
of claims. From April 1998 until the passage of RRA '98, there
were 3,000 innocent spouse claims; since passage of RRA '98,
there have been approximately 27,000 claims. Claims are
continuing to rise at a rate of 4,000 per month. Nevertheless,
this growth in claims is a good sign that America's taxpayers
are learning about the innocent spouse provision from many
sources, including our aggressive outreach program and the
Taxpayer Advocates.
However, to meet this unprecedented demand, the estimated
number of FTEs needed to process these cases surged from 30 to
359, and the estimated time per case grew from 10 hours per-
case to 12 hours per-case. In spite of shifting resources,
there is still this very large backlog in these claims. We are
also hamstrung by our current technology that does not allow
separating single tax liability for spouses into multiple
liabilities. We still must use manual tracking that increases
costs, errors and delays. Furthermore, to insure that we get
these important claims right, we are subjecting them to a
thorough review.
We are taking steps to address not only the backlog of
cases, but the process for handling them. We recently developed
a method for identifying the simpler cases that can be examined
in a correspondence/telephone contact with the taxpayer. The
complex cases will be examined through a face-to-face contact
with the taxpayer.
We are also identifying two, full-time, innocent spouse
issue specialists whom IRS examiners can contact to receive
guidance on innocent spouse relief as they are working these
cases. We are also identifying a part-time innocent spouse
issues specialist for community property states as these states
present unique innocent spouse issues.
Beginning this month, additional training will be provided
to examiners looking at the simpler cases to ensure that
taxpayers provide the specific documentation needed to qualify
for innocent spouse relief.
Third Party Notices
The third party notice was a classic example of the IRS
trying to implement an RRA '98 improvement but not succeeding
the first time. The third party notice was intended to help
taxpayers, including small business owners, by requiring that
the IRS give notice to taxpayers whenever we might be
contacting a third party, such as a bank, about that taxpayer's
situation.
I want to stress that in the vast majority of cases, it is
the IRS' practice to get information directly from the
taxpayer. In only a small percentage of cases is it necessary
to get information from third parties.
In implementing this provision, the new notice was sent to
many more taxpayers than needed. In addition, it was poorly
written, causing undue concern to many taxpayers. Senate Small
Business Committee Chairman Christopher Bond, as well as
several practitioner groups, called this mistake to our
attention. With his assistance, we moved as quickly as possible
to fix the problem, including soliciting input from
practitioners and other interested parties.
We have now issued internal instructions so that in audit
cases, the notice will only be provided when there is a
possible need to contact third parties. We are continuing to
work on improving the content and distribution of the notice to
cover all situations appropriately, and as I noted, we are
accomplishing this with the active involvement of our various
stakeholder groups. When we finish this process, we will have a
clearer, better written notice and process for distributing
this notice.
Mr. Chairman, obviously, we would have preferred to have
gotten the third party notice right the first time, but we
didn't. However, we recognized our mistake and took actions to
fix it. More importantly, we learned some important lessons
from this experience that can be used beyond the third party
notice. Foremost, we must always apply one of our modernization
guiding principles when we implement these important RRA
provisions, or anything affecting taxpayers, namely:
``Understand the customer's point of view and use this
understanding to prevent and solve problems and provide quality
service.'' That means that we get Congress, stakeholder groups
and taxpayers involved earlier in the process to make sure that
we are meeting their needs and expectations.
Due Process in Collection
In the area of due process, taxpayers now have the right to
request a hearing before an impartial appeals officer after a
notice of lien has been filed or a notice of intent to levy has
been sent. In addition, the IRS must provide the taxpayer with
a written notification of this appeals right. If the taxpayer
requests a hearing during this period, the proposed levy may
not take place until after the appeals officer makes a finding.
The taxpayer also has 30 days to challenge the appeals
finding in U.S. Tax Court or U.S. District Court, during which
the IRS may not levy. During the appeals process the taxpayer
can also request the IRS to consider establishing collection
alternatives, such as an installment agreement, to pay off the
tax bill. Under the new law, the IRS must consider all other
payment possibilities before seizing the assets of a business.
The significant changes to the notice of levy process have
not been without effect. First, is the number of levies. From
February to April 1998, there were 586,685 levies. For the same
period in 1999, there were 16,490. Most of this drop in levies
can be attributed to the process time. Prior to the changes to
the notice of levy process made by RRA '98, the turnaround time
was 156 days. Following last year's changes, the turnaround
time is estimated to be anywhere from 156-411 days.
As I discuss in greater detail in the ``Resource'' section
of the testimony, in the exam and collection compliance
functions, the combination of reduced total staff and mandatory
allocation of staff to implement new RRA provisions will also
significantly reduce available staff for audits and
collections.
Modernization and Restructuring
Mr. Chairman, as I mentioned at the beginning of my
testimony, the Restructuring Act is not only specific taxpayer
rights. It also created an expectation that all taxpayers would
receive far better service while ensuring that the law is
applied fairly and that the highest level of compliance is
achieved. In addition, RRA '98 mandates an entire
reorganization of the IRS from its present geographic structure
to one based on serving distinct groups of taxpayers with
similar needs. The Act includes sweeping directives on
electronic filing, improved customer service and balanced
measures of performance, to name some of the more prominent.
The challenge is whether we can pull together all the pieces
and make the entire change program work.
As required by RRA '98, we have restated our mission to
clarify the purpose of the agency. It is: ``Provide America's
taxpayers top quality service by helping them understand and
meet their tax responsibilities and by applying the tax law
with integrity and fairness to all.'' To make this mission a
reality we have reformulated our strategic goals--the standards
by which we will measure our own performance in achieving our
mission.
As shown on the chart entitled ``IRS Mission and Goals,''
we have three strategic goals. We will not achieve our mission
unless we achieve all three of these strategic goals. The first
two are derived directly from our mission statement that
describes the two ways we serve taxpayers. Individually, we
must provide each taxpayer the service he or she expects and
protect the rights he or she deserves. Collectively, we must
serve all taxpayers by administering the law fairly, ensuring
that those who do not comply are not allowed to unfairly burden
those who do. Finally, our third strategic goal is to conduct
our mission with the fewest possible resources, which we will
achieve by providing a high-quality, productive work
environment.
One of the most important steps we have taken is to clarify
and communicate our mission and goals through the new system of
balanced performance measurements we are beginning to implement
this year. In this fiscal year, we are conducting extensive
training for every executive and nearly every manager on this
balanced measurement system. We are also revising our job
descriptions and appraisal system for most employees, aligning
it with the mission and goals.
Business Practices
As important as are the changes in mission, goals and
measurements, we will not succeed in achieving all three
strategic goals without revamping the way we
actually go about doing business. We must take advantage of
modern and well-
established business practices and strategies.
Within the IRS itself and in other private and public
sector organizations, there are innumerable successful examples
of how we can improve our way of doing business. These
improvements hold out the prospect of advancing all three of
our strategic goals to a great degree. However, these kinds of
advancements often depend on making investments in
organization, training and technology.
The chart entitled ``Improved Business Practices Advance
All Three Strategic Goals'' lists some of the areas for
improvement in IRS business practices. This is not a complete
list; yet, each one of these broad areas implies hundreds or
even thousands of more specific changes in the way business is
done at the IRS. We have a process in place to set priorities
for improvements to be made over the next 12-18 months and have
settled on 161 near-term actions. These are but a small
beginning on what we can do over the longer term.
Reorganization
As directed by RRA '98, the modernized IRS will be
organized around the needs of specific groups of taxpayers.
Four operating divisions will be responsible for serving
specific groups of taxpayers. They are: Wage and Income, Large
and Mid-sized Business, Small Business/Self Employed and Tax
Exempt and Government Entities. This structure is similar to
one widely used in the private sector. Four functional
organizations will be responsible for specific issues and
cases. Two support organizations will be responsible for
providing common services across the entire agency. Finally, a
much smaller National Office will provide high-level strategy
and policy setting.
Working with our management consultants, the IRS is
undertaking a phased-in approach to designing and implementing
this new organization structure. Implementation will proceed on
a separate track based on the size, complexity and level of
change required of the specific organization. For example, the
Information Systems and Taxpayer Advocate organizations began
implementation in April, while the four primary operating
divisions will be established over the next few years.
Implementation will include physically establishing new
offices, transitioning employees and managers to the new
organization and reassigning workflow. The entire
implementation will take approximately 2-3 years.
The IRS recently announced that we are recruiting for the
newly-created, top executive positions of Division
Commissioner, Wage and Investment Operating Division, and
Division Commissioner, Small Business and Self-Employed
Operating
Division. These are four-year appointments with special pay
rates, as outlined in RRA '98. The head of the Tax Exempt and
Government Entities Division was selected earlier this year and
our choice for Division Commissioner for the Large and Mid-size
Business was announced last week.
Electronic Tax Administration
The IRS made significant progress implementing the
Restructuring Act's Title II provisions relating to Electronic
Filing. The following are some of our accomplishments to date.
As required by RRA '98, the IRS issued its first-ever
Strategic Plan for Electronic Tax Administration (ETA),
entitled a Strategy for Growth. It was released for public
comment on December 3, 1998. Based on the comments received and
current developments, the IRS will be issuing an updated
version of the Strategic Plan in December 1999. A Strategy for
Growth is designed to eliminate barriers, provide incentives
and use competitive market forces to make significant progress
toward the congressionally-mandated goal of 80 percent of all
tax and information returns being filed electronically by 2007.
As also required by RRA '98, the IRS established the
Electronic Tax Administration Advisory Committee (ETAAC) in
September 1998 to provide an organized public forum for the
discussion of ETA issues in support of paperless filing. On
June 30, 1999, the ETAAC issued its first annual report to
Congress on the status of Electronic Tax Administration. In the
report, the ETAAC compliments the IRS for making a good start
in setting out a program to achieve the electronic filing goals
established by Congress. However, it also notes that the IRS
faces a number of strategic challenges and opportunities while
seeking to achieve these goals.
During the 1999 filing season, the IRS also took advantage
of the provision contained in RRA '98 which authorizes the use
of mass communications to promote the benefits of and to
encourage the use of ETA programs. The IRS' use of paid
advertising in the print media, radio and television
contributed to another successful filing season during which
over 29 million taxpayers filed their tax returns
electronically.
The IRS is on target to implement successfully the
provision that extends the date that information returns are
due to the IRS if they are filed electronically. Beginning next
year, electronically filed information returns will be due to
the IRS by March 31 instead of by February 28.
In conjunction with the Department of Treasury, the IRS
plans to issue an interim report to Congress in the near future
regarding the feasibility of extending the due date for
providing information returns to taxpayers from January 31 to
February 15. Although an across-the-board extension of the due
date would not be advisable because of the millions of
taxpayers who file early to obtain a refund, the findings also
indicate that there must be a balance between the needs of
early filers of tax returns and the need for correct and
complete information returns that avoid confusing taxpayers and
causing subsequent amendments to income tax returns.
As also envisioned by RRA '98, the IRS conducted two pilots
during the 1999 filing season which provided a paperless filing
experience for over one million taxpayers. These pilots
involved the use of Personal Identification Number (PIN) as the
taxpayer's signature, eliminating the need to file the paper
jurat.
Over 650 thousand taxpayers participated in the On-Line
Signature Pilot where the IRS distributed e-file Customer
Numbers to taxpayers who prepared their own returns using tax
preparation software to file from their home computers.
Another 490 thousand taxpayers participated in the
Practitioner Signature Pilot where taxpayers choose a PIN when
filing through 8,100 participating practitioners.
Technology
Updating our business practices to better serve taxpayers
requires almost a complete replacement of IRS' information
technology systems. They are built on a 30-year old
fundamentally deficient foundation that cannot provide accurate
up-to-date information about taxpayer accounts. GAO has
repeatedly reported that IRS cannot provide reliable taxpayer
account and financial information to manage the Agency.
Implementing new technology based on revamped business
practices is critical to properly supporting our modernization
concept and fully complying with the mandates of RRA '98. If
properly funded, we expect our technology modernization
initiative to realize the following benefits. In the short
term, there will be: improved access to IRS customer service
representatives; improved service to internal and other Federal
customers; the start-up of electronic communication with
taxpayers; and timely, accurate information for personnel
systems.
Mid-term benefits include: improved financial management;
expanded electronic filing and payment options; and expanded
electronic interaction with taxpayers. And the long-term
benefits are: more accurate and timely information for
increased customer service; more customer friendly collection
capabilities; faster refund processing; secure and auditable
access to all taxpayer account information through a single
terminal; and far greater productivity for all IRS employees.
On December 9, 1998, the IRS awarded a Prime Systems
Integration Services Contract (PRIME) to Computer Sciences
Corporation (CSC) and their partners to help begin the long
process of modernizing IRS' core business and technology
systems.
Earlier this month, we received from the Appropriations
Committees authorization for the release of funds from the
Information Technology Investment Account. This is a first
installment toward developing a new computer set of systems and
a significant financial investment in our overall modernization
plan.
This $35 million in funding was released from the overall
Investment Account in which $506 million was set aside in 1998
and 1999 for use in modernization. To receive the funding, IRS
met stringent requirements, including demonstrating
improvements in our management of the program and a strong
partnership between the business and IT organizations.
The IRS received approval from the Treasury Department, the
Office of Management and Budget, and a favorable review from
the General Accounting Office. GAO praised the IRS' plan,
calling it an appropriate first step toward a successful
systems modernization. House Appropriations Subcommittee on
Treasury, Postal Service and General Government Chairman Jim
Kolbe wrote: ``The incremental approach that you have proposed
for proceeding with the modernization should help avoid many of
the problems associated with past attempts at modernizing the
Internal Revenue Service's information systems.''
With this money, we can continue to roll out improvements
for the 2001 filing season. Some of these include enhancing our
customer service call-management capabilities, improving
electronic tax administration, and upgrading systems security.
The funding will also allow us to complete a business
systems plan which will define the major projects to be
undertaken over the next two to five years, including
transitioning taxpayer accounts from a tape-based Master File
to a more modern database. We will make a full report of the
five-year plan available in October.
In addition to technology modernization work performed in
partnership with the PRIME partners, IRS is undertaking
significant work to build bridges between today's systems and
modernized systems. This requires sustaining the old while
planning and implementing the new. The transition also requires
a large training effort. IRS will be training its IT
professionals to ensure they can operate successfully in the
new environment as well as training the entire workforce on new
end-user software to be implemented over the next few years.
This year, IRS successfully delivered several technology
improvements even as we are continuing to finalize and test our
Y2K work. The new Integrated Submission and Remittance
Processing System (ISRP) combines and improves the processing
of return submissions and payments. And the consolidation of
mainframe computers into central computing sites upgraded the
IRS' disaster recovery capabilities. These efforts will need
continued support over the next few years. In addition, IRS
will continue the Service's commitment to ensure adequate
testing of its tax systems.
One of the most significant challenges over the next few
years will be system realignments and technology changes needed
to implement the new IRS organization. These requirements
include applications changes to align taxpayer segments and
employees with the new operating divisions and modifications in
payroll, financial management, personnel, accounting, reporting
relationships, and workload management. Finally, determining
changes and reworking infrastructure based on capacity,
performance, and telecommunications assessments for the new
organization structure are a major part of our modernization
effort.
resources
At many of my hearings so far this year, I have been asked
what resources are needed to accomplish the mandate we have
been given. I do not believe I am different from most other
heads of organizations in the philosophy that we can do more if
we are given more resources. And given the enormous job we have
at the IRS, more resources can most definitely be put to good
use to benefit taxpayers. At this hearing, however, I think it
would be most useful to step back from the details of our
current budget request--which I consider to be a bare minimum--
and consider the relationship between the IRS and our mission
and goals and resources over the next few years.
Looking at the chart titled ``IRS Shrinks as a Fraction of
the Economy,'' we can see that the IRS has been shrinking in
size relative to the economy, and this trend will continue
through FY 2000. Over this period, the economy grew in real
terms by 20.1 percent, and the number of full-time equivalent
employees shrank by 13.7 percent. Thus, in relative terms the
IRS shrunk by 28.7 percent. It is also important to note that
about 70 percent of IRS employees deal directly with taxpayers,
either in providing information or assistance or in working on
specific cases.
While some of the shrinkage in staff has been offset by
real productivity improvements, for the most part this
shrinkage has simply resulted in less activity, especially in
the most expensive, case-oriented activities such as
examinations, criminal investigations and collections. For
example, the number of individual returns with over $100,000
income increased by 56 percent over the last 5 years, while the
number of such returns examined decreased by 21 percent. The
recent press publicity about the decline in examination
coverage simply reflects this basic arithmetic. Furthermore, as
it has become evident that service to taxpayers is inadequate
and a backlog of problem cases has built up, and with the
passage of the many new taxpayer rights provisions of RRA '98,
even fewer resources are available for initiating new cases.
Clearly, doing business the same way while the economy
grows and resources decline will eventually undermine the whole
tax system of the U.S. Fortunately, as I have discussed briefly
here today and in more detail in the document submitted for the
record, I believe there is a better way. One part of it is to
take advantage of improved management and business practices
and new technology to improve the way we accomplish our mission
and goals.
This approach also critically depends, however, on
obtaining assured investment funds every year for improvement
of organization, training, business practices, and technology.
I want to stress again that in the past five years, the IRS has
shrunk 28.7 percent relative to the economy. IRS staff has
declined by 11,000 FTEs while the economy and the tax code have
been growing in size and complexity.
In addition to the continuing decline in relation to the
economy, the IRS is responding to RRA '98 with a program of
both short-term and long-term changes aimed at fulfilling its
mandates efficiently. As I previously discussed, in the short
term we are implementing taxpayer rights provisions, such as
innocent spouse, due process in collections and offers in
compromise. We are also implementing service improvements, such
as electronic filing, longer hours of phone service and walk-in
service at times and locations convenient to taxpayers. In the
long-term, we must modernize our organization and management.
The short-term changes have required us to divert
resources, training and contract support from other areas
(specifically compliance programs). In particular, the taxpayer
rights provisions (e.g., innocent spouse) call for 2,955 person
years of staff time for procedural requirements to process
existing cases.
The long-term changes require investments in contract
support, training, technology and related costs (e.g.,
relocation, buyouts and facilities renovation), but will also
result in improved long-term efficiency and effectiveness.
In the exam and collection compliance functions, the
combination of reduced total staff and mandatory allocation of
staff to implement new RRA '98 provisions will reduce available
staff for audits and collections by 19 percent compared to FY
1997. Combined with the continued growth of the economy, the
effect will be a continued decline in audit coverage and
collection action.
While enforcement levels are declining, service levels are
also still below acceptable levels. Phone service is available
for longer hours, but the chances of a taxpayer actually
getting through were only 54 percent in 1999, lower than in
1998, and may not improve in 2000. About 80 percent of these
``customer service'' calls are taxpayers calling because they
have received a notice from the IRS or because there may be an
error in their account with the IRS. Mr. Chairman, answering
these calls is not optional.
The IRS will need continued support for its modernization
program in order to succeed. In particular, it will need
support for its technology modernization program, begun earlier
this year, and, resource requirements resulting from the
passage of RRA '98.
Conclusion
Mr. Chairman, I believe that the IRS is fundamentally
changing in the direction mandated by RRA '98. And it is
changing in virtually every aspect--in mission, goals and
principles, practices and procedures, management and
organization, training, performance measures and technology.
Through these changes, we can succeed in producing an IRS that
better serves America's taxpayers--individually and
collectively--but we must realize that there are no quick
fixes, magic bullets or low risk plans. We must realize too
that RRA '98 comes with a price tag.
Mr. Chairman, we are at a crossroads. Without adequate
funding, the entire reform and restructuring program demanded
by Congress and the public could stall, and in the worst case
scenario, fail.
What we need most of all, given the current situation at
the IRS, is the sustained support of Congress and the public
while we make these fundamental changes and while we administer
a huge and complex tax system. And I have been very pleased at
the support we have received to date from all quarters.
However, we will also need your understanding of the
enormity of our challenge. We need your understanding of the
time it will take to carry out all of RRA '98 and the resources
it will demand. One forecast I made at my confirmation hearing
before this committee was that it would take the better part of
a decade to reach our goals for the IRS. Having now been in
office for l7 months, this is one forecast that I stand by. But
I believe that the destination is worth the long and difficult
journey we have begun.
[GRAPHIC] [TIFF OMITTED] T7584.007
[GRAPHIC] [TIFF OMITTED] T7584.008
[GRAPHIC] [TIFF OMITTED] T7584.009
Mr. Houghton. All right, thank you very much, Commissioner.
I'd like to ask a question or two, and then I'll pass it
off to Mr. Coyne and then go down the row.
Let's get right into this budget issue, because this is
obviously very important to you and very important to us. There
were three areas I understand that you felt would be impacted
here. One is the law enforcement. Second would be the
processing and third really is the Y2K computer repairs, or the
Year 2000 computer repairs. Do you want to break that down a
little bit?
Mr. Rossotti. Basically what you have is a budget which no
matter how many labels you put on it has mainly two components
that drive most of the budget. One is the staffing that we need
to do, process cases and process returns. The other is the
supporting technology that we need to help do both of those.
So when we cut the budget, or have less budget, it has to
come out of one of those two places. When we cut the staff, the
only thing that we can do is reduce the number of cases. In the
short-term, the only thing we can do is reduce the number of
cases that we follow. That is why the statistics that you cited
and Mr. Coyne cited are going down so rapidly, because we've
had a decline in resources. Before RRA, we've had an increased
demand in processing time as a result of the new rights in the
cases. The net of those is that the enforcement or compliance
activity goes down.
The other part of it is the technology, there is really
very minimal investment money, in fact, virtually none in the
2000 budget request as it is. So to the extent that it is cut,
what happens is that basically, we would have to cut the few
things that are deferrable, such as purchase of equipment,
which leaves us then with obsolete equipment, which then costs
more money to operate in the long run.
Then finally, with respect to some of the change
initiatives that we have underway, I mean, we are in a
situation where we have a 100,000 person organization that is
undergoing a massive change, not only organizational, but
cultural. It's very, very risky in my view, to leave that in a
state of suspended animation.
Actually, our employees and our managers are asking me now,
not what they said a year ago, do we need the change, but
they're saying, let's get this done, let's get this change done
so that we can really operate according to the new way. To
operate in a state of suspended animation is a very risky and
difficult thing to do. I think, Mr. Houghton, you know that
from your work with some large organizations.
The impact of cutting, even compared to the minimal budget
request we had I believe is going to increase risk as well as
reduce in very tangible ways current operational activities.
Mr. Houghton. So you don't believe this is chump change, as
indicated in the article?
Mr. Rossotti. Mr. Chairman, I do not believe it is chump
change. We have to remember that we started with the request as
a result of a tight budget situation, which was virtually level
to begin with. It was not a budget request that was in any
sense
inflated. In fact, I would say to put it in the most optimistic
way, the bare minimum that you would need to continue to make
progress if we got every dollar of it.
Mr. Houghton. I wonder whether Mr. Portman at some point in
his questioning could refer to the plan, I think it was, of set
a level funding over 3 years, which was originally accepted.
But anyway, that's enough for my questions, and I'll turn it
over to Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Commissioner, how many taxpayers have claimed since
enactment of the IRS Reform bill that IRS employees are abusive
in a manner prohibited by section 1203 and what is the basis
for most of the complaints?
Mr. Rossotti. Well, let me see if I've got the statistics
here. The number of complaints that have been accepted by the
IG under the section related to harassment is, I believe,
somewhere, I will have to get you the precise number, but it's
somewhere in the vicinity of about 60 that have been accepted
for investigation. The precise number, I can't quite find it
here, but it's in that vicinity.
This does not mean that they were found to be substantive.
That's just the number that got through the preliminary
screening to be accepted. I think that the important thing I've
tried to communicate to employees, that is not, compared to
some of the beliefs out there that hundreds of thousands of
complaints are coming in, willy nilly, it is really not the
case. There are complaints, but they are in relatively limited
numbers.
And of course, that's only the first step. Then they have
to be investigated, evaluated, and you know, many of those will
be found not to be substantiated.
[The following was subsequently received.]
August 18, 1999
Memorandum for all IRS Employees
From: Charles O. Rossotti, Commissioner of Internal Revenue
Subject: Report on Actions Concerning Misconduct
Allegations and Disciplinary Actions
Bob Wenzel and I are committed to open communications on
all matters affecting IRS employees. Few matters are of greater
interest than the actions taken by the agency to investigate
and resolve allegations of misconduct. Surveys over the years
have indicated great concern about how such matters were
addressed in the Service, including concerns over lack of
appropriate action, disparate treatment among various groups
and levels, and, most recently, how Section 1203 of the
Restructuring and Reform Act of 1998 would be administered.
One of the factors that fuels concern is lack of accurate
information about actions actually taken in these matters.
Therefore, in accordance with our policy of open
communications, with this memo we are beginning some important
steps to share with all employees on a continuing basis
information about how misconduct allegations at all levels have
been resolved. You may recall that this was one of the key
recommendations of the Bowsher report that I commissioned in
1998. Earlier this year, we established the Commissioner's
Complaint and Analysis Group, headed by Steve Whitlock, a
former DoD executive with experience in these matters. An
important part of the responsibility of this unit is to prepare
regular reports to employees on how allegations are resolved.
With this memo, we are taking three important steps:
1. We are announcing a plan, in agreement with the National
Treasury Employees Union (NTEU), to report periodically on
every disciplinary action taken in the IRS.
2. We are including a review of the results of the first
year of activity under Section 1203.
3. We are releasing a detailed review of all of the actions
taken over the past two years to investigate and resolve
allegations related to misuse of enforcement statistics and
inappropriate seizures. This includes a summary of all
disciplinary actions taken.
Summary of Plan for Release of Disciplinary Actions
We have entered into an agreement with the NTEU regarding
the release of information on disciplinary actions. Under this
agreement, we will provide regular periodic summaries of
disciplinary actions taken. The summaries will not identify the
particular employees affected, but will include enough
information to understand the nature of the offenses, the
actions taken and the level and general positions of the
employees. The first report will be issued this fall, and will
address actions involving IRS executives and GS-15s. Future
reports will cover all IRS employees.
Results of Investigation into 1203 Allegations
The second issue relates to Section 1203 of the
Restructuring and Reform Act of 1998. I know that Section 1203
has been a source of concern for many of you. The processes we
have established are designed to ensure protection of the
rights of taxpayers, taxpayer representatives, and IRS
employees--including employees who are the subject of Section
1203 allegations. We will provide updated information in the
future so that you can see how those processes are working.
The key point is that we are committed to investigating and
resolving every case based on the facts of the case and in
accordance with the intent of the law, which, as I have said
repeatedly, is aimed at serious and willful instances of
misconduct.
The missing element in our communications on this subject
to date has been information about our experience in applying
Section 1203 to the allegations received. We now have
preliminary data to share with you, and will provide more on a
regular basis.
As of July 15, 1999, we have received 449 allegations that,
if substantiated, would be violations of Section 1203. When a
Section 1203 allegation is made, we must determine the relevant
facts and then make decisions about what those facts mean. We
must then decide whether those facts indicate a violation of
Section 1203 or some other type of misconduct. The inquiry and
analysis is essential to our commitment to ensure fair and
equitable treatment for taxpayers, for their representatives,
and for IRS employees--including those employees who are the
subjects of a Section 1203 allegation. This takes time, and so
far we have completed the analysis of 214 of the 449
allegations.
The results of the analysis and inquiry into the 214
completed so far indicate that 15 percent are probable Section
1203 violations (probable pending final Deciding Official or
Review Board determination), 75 percent were not substantiated,
and 10 percent indicate other types of misconduct that do not
meet Section 1203 criteria, but are serious nonetheless.
Following is a summary of the analysis, and Attachment I to
this memo contains a breakdown of the types of allegations
received. Attachment II flowcharts the process from allegation
and inquiry to disposition.
Summary of Analysis of Section 1203 Allegations
------------------------------------------------------------------------
In percent
------------------------------------------------------------------------
Probable 1203 Violations...................... 33 15%
Probable Other Misconduct..................... 20 10
Allegations Not Substantiated................. 161 75
-------------------------
Total....................................... 214 100
------------------------------------------------------------------------
Of the 33 allegations that involve Section 1203 violations,
the Service has completed action on 4 cases, all of which
demonstrated willful non-compliance with tax laws. Three of the
four employees claimed that the tax laws do not apply to them,
and one had a series of disciplinary actions for previous non-
compliance. All four employees were recommended for removal;
the Review Board, which evaluates the potential for lesser
penalties in these cases, concurred with the recommendation;
and the employees were removed. The Service is continuing to
work the remaining 29 cases using the process illustrated in
Attachment II.
When I hear employees' concerns about Section 1203 conduct
provisions, I hear most about Section 1203 (b)(6) which
involves violations of the Internal Revenue Code, Treasury
Regulations, or IRS Policy with the intent to harass or
retaliate. It is also the most frequently cited provision of
the cases in inventory, accounting for over 60 percent or 269
of the total allegations. Inquiries have been completed on 141
of these 1203(b)(6) allegations with one substantiated as a
probable violation, 14 as other misconduct, and 126 not
substantiated.
While we are just beginning to gather enough data to start
identifying trends and drawing conclusions, I think there are
two important observations to make at this stage. First, we are
taking a very thoughtful and thorough approach to making the
best determination regarding willfulness and intent to be sure
that mere mistake or inadvertent action does not trigger the
mandatory removal penalty. Second, while the majority of
allegations made have been determined not to be potential
Section 1203 violations, there have been some substantiated
violations, and these should not be tolerated in the IRS.
Finally, I will continue to share information with you
about these types of conduct cases and their disposition as we
gain more experience in the process. As we learn more, we can
identify problem areas on which to concentrate our education
efforts and provide information to you that can help you do
your jobs with confidence.
[GRAPHIC] [TIFF OMITTED] T7584.010
[GRAPHIC] [TIFF OMITTED] T7584.011
Results of Investigations Concerning Misuse of Enforcement Statistics
and Inappropriate Seizures
Chronology of Events
The Service has taken a number of actions regarding misuse
of enforcement statistics, identified in the September 1997
hearings before the Senate Finance Committee. The Special
Review Panel noted that ``there is a tension between the
requirement of the IRS to perform effectively in collecting the
largest amount of lawful taxes due at the least cost to the
taxpayer and the equally rational view that, in a free society,
fairness is questioned when the performance of tax collection
workers is driven by quotas or goals in their work plans.'' I
am confident that effective implementation of our balanced
measures will ensure that we do not again allow our priorities
to be skewed in favor of the collection at the expense of
fairness. While a few individual cases remain to be resolved, I
am pleased to report that Service-wide efforts to review past
practices in this area have concluded, and we can now focus on
the future.
In September 1997, the Senate Finance Committee held three
days of oversight hearings on the Internal Revenue Service
(IRS). During these hearings, several taxpayers testified that
they felt the IRS used unreasonable enforcement tactics.
Several current IRS employees testified that certain IRS
practices violated restrictions on the use of enforcement
statistics. These practices, the employees believed, might have
resulted in inappropriate actions against taxpayers.
Following the hearings, the IRS Inspection Service
conducted internal audits overseen by the Office of the
Inspector General, Department of the Treasury. These reports
documented considerable historical pressure on the IRS to
improve productivity, resulting in a strong emphasis on
productivity results throughout the organization. Congressional
scrutiny, General Accounting Office reports, the Government
Performance and Results Act of 1993, and various Administration
initiatives required the IRS to generate more revenue with
fewer resources. In response, the IRS measured and reported
progress against dollar productivity goals. The reports found
that the IRS environment emphasized revenue production without
always providing a corresponding emphasis on quality or the
fair treatment of taxpayers.
In January 1998, IRS Commissioner Charles Rossotti
established a Special Review Panel comprised of executives from
outside the IRS to objectively and independently review and
assess the evidence developed by IRS Inspection Service
concerning allegations of misuse of enforcement statistics, and
to recommend, if appropriate, disciplinary or adverse actions.
The Panel members were Douglas Browning (Assistant Commissioner
for International Affairs, U.S. Customs Service), Stephen
Colgate (Assistant Attorney General for Administration,
Department of Justice) and Richard Hankinson (Assistant
Director, Office of Inspection, Bureau of Alcohol, Tobacco and
Firearms).
Over the course of its 6-month thorough investigation, this
Panel found that, in IRS's efforts to achieve greater
productivity, IRS policy guidance was modified regarding the
use of enforcement statistics and the importance of safeguards
was minimized or lost.
In addition, Commissioner Rossotti sponsored an independent
review of the IRS Inspection Service, led by former Comptroller
General Charles A. Bowsher. This review reported that
management's lack of attention to early warnings about the
inappropriate use of enforcement statistics illustrated the
need for an effective system to track and manage the handling
of employee and taxpayer complaints within IRS from time of
receipt to final disposition.
Following up on the Special Review Panel issues,
Commissioner Rossotti asked John Layton, former Inspector
General for the Department of Energy and the Department of
Treasury, to head the Disciplinary Action Review Project
(DARP). Mr. Layton reviewed the investigative reports
concerning statistics and seizures and, using the same criteria
as the Special Review Panel, recommended any necessary
disciplinary action. Mr. Layton also considered the findings of
the audit reports, and other reviews conducted by Chief
Operations Officer, Chief Counsel and regional staffs.
The disciplinary actions resulting from these four very
thorough reviews underscore the IRS's commitment to thoroughly
investigating every allegation of misconduct or failure to
observe taxpayer rights, and to take action based on the
specific facts of each case.
Internal Audit Reports: Key Findings
The IRS Chief Inspector's Internal Audit function produced
two reports immediately after the Senate Finance Committee
September hearings: one concerning the use of statistics in the
Collection field function and the other on the Arkansas-
Oklahoma District. From those initial audits, IRS requested two
further audits on the use of statistics in the Examination
Division and on the use of seizure authority in the Collection
field function. The audit of the use of seizure authority in
the Collection field function resulted in a more focused review
of ``special projects'' in the New Jersey District Collection
Division. The table below describes each report's key findings.
------------------------------------------------------------------------
Internal Audit Report Date Key Findings
------------------------------------------------------------------------
Review of the Use of Statistics and
the Protection of Taxpayer Rights in
the Arkansas-Oklahoma District
Collection Field Function
Dec 1997 The audit
This report evaluated managment's use concluded that
of enforcement statistics in this District
Arkansas-Oklahoma, including whether office had an
the alleged impropriety led to the unbalanced focus
abuse of taxpayers. on measuring
performance by
productivity.
Statistical goals
and expectations
had become the
primary means to
measure
productivity. The
audit also
concluded that
although legal
requirements were
met in all of the
seizures
examined, some
cases might not
have followed all
of the IRS
procedures.
Use of Enforcement Statistics in the
Collection Field Function
January 1998 The report
Use of Seizure Authority in the
Collection Field Function
July 1998 The IRS did not
Examiniation Division's Use of
Performance Measures and Statistics
July 1998 This report found
Review of Special Project in the New March 1999 This audit found
Jersey District that special
projects were
used to ensure
the Collection
Division of the
New Jersey
District met
statistical
goals. Those
projects resulted
in mistreatment
of taxpayers. For
example, as a
result of
instructions to
initiate levy
actions without
ensuring notices
had been issued
or performing
initial analysis,
some levies were
issued on
taxpayers who
were deceased,
had financial or
medical
hardships, or
were not liable
for the tax.
------------------------------------------------------------------------
Note: The functions of the Office of Chief Inspector were transferred to
the new Treasury Inspector General for Tax Administration (TIGTA) in
January 1999. Prior to that date, Internal Audit examined, evaluated
and reported on the operation of IRS management policies and
procedures. It referred to Internal Security any possible violations
of law or IRS rules of conduct by individual IRS employees. In its
Reports of Investigation (ROIs) and Special Inquiries, Internal
Security determined whether any such violations did indeed occur.
Internal Audit Reports: Actions Taken
Beginning with the release of the very first Internal Audit
report, the IRS has announced a series of actions that it had
already taken or planned to address the various issues raised
in the Senate hearings and the Inspection reports. Some of
these corrective actions were subsequently legislated in the
IRS Restructuring and Reform Act of 1998. Among these actions
were:
Stopping the practice of ranking regional and
district offices and evaluating employees on enforcement-
related statistics, for both the Collection and Examination
functions.
Suspending distribution of goals relating to
revenue production to field offices.
Requiring higher management approval of proposed
seizures of property.
Updating and clarifying seizure procedures, as
required by the IRS Restructuring and Reform Act of 1998, to
incorporate consideration of reasonable alternative collection
methods before deciding to seize assets.
Forming an executive task force to develop
balanced performance measures that will promote quality,
customer service, taxpayer rights and productivity.
Implementing new quarterly certification
requirements that affirm Collection Divisions are following the
restrictions on use of statistics.
Establishing a task force (part of the
Disciplinary Action Review Project) to institute improved ways
of evaluating and acting on complaints made by or against IRS
employees. As has already been noted, John Layton, former
Inspector General for the Department of Energy and the
Department of Treasury, was appointed to head this effort.
In addition, Internal Revenue Commissioner Rossotti
announced the following
A complete management evaluation of all open and
recently closed seizures for compliance with legal requirements
and IRS procedures to be completed in all 33 District offices
by the end of September 1998.
A directive to all employees underscoring the
importance of an the need to comply with Taxpayer Bill of
Rights, and the severe consequences of failing to do so.
The creation of an independent panel from outside
the IRS to objectively determine disciplinary actions to be
taken in cases arising from the Chief Inspector's
investigation.
Special Review Panel: Key Findings
On January 13, 1998, Commissioner Rossotti announced the
creation of a panel of senior officials from the other Federal
agencies. The panel's purpose was to objectively and
independently determine disciplinary/adverse actions to be
taken in cases arising from the Chief Inspector's investigation
into the inappropriate use of enforcement statistics in the IRS
Collection field function and possible abuses of taxpayer
rights.
The Special Review Panel reviewed the Internal Audit
reports as well as Reports of Investigation and Special
Inquiries resulting from the Internal Audit reports. One Report
of Investigation covered development and issuance of policy
guidance in the national office and two regions. The second
Report of Investigation was specific to the Arkansas-Oklahoma
District office. The Panel's report was delivered to the
Commissioner of Internal Revenue in late August 1998.
While the Panel's specific recommendations concerning
disciplinary action covered the national and regional office
and one district office, the Panel's general findings took into
account all of the information available to the Panel,
comprising some 5,000 pages of information.
The Panel's report stated that the IRS felt external
pressures from the Administration, Congress, and GAO to close
the revenue gap through improved productivity. The Panel found
that ``there is a tension between the requirement of the IRS to
perform effectively in collecting the largest amount of lawful
taxes due at the least cost to the taxpayer and the equally
rational view that, in a free society, fairness is questioned
when the performance of tax collection workers is driven by
quotas or goals in their work plans. This is not an easy
difference to reconcile or administer; and managing between
those two principal goals is greatly complicated in an
organization with over 100,000 employees in 33 district offices
and ten service centers nationwide.'' During this period, the
IRS was shifting to a more productivity-focused work
environment, managed primarily by revenue statistical goals and
measures, with heavy emphasis on use of enforcement statistics.
As policy guidance was modified regarding the use of
statistics, safeguards on use of enforcement statistics to
measure or set goals for front-line employees were minimized or
lost. The Panel found that policy guidance documents both in
the national office and in two regions were flawed both in
process and content. Proper coordination did not occur on all
issues, and executives at the national and regional levels
failed to exercise due diligence in administering Collection
programs and policies. As a result, provisions in the documents
allowed the sharing of enforcement statistics in a manner that
led to violations of the Taxpayer Bill of Rights (TBOR) and the
IRS Policy Statement P-1-20, The Use of Enforcement Statistic.
In fact, violations of P-1-20 and TBOR occurred in the
Arkansas-Oklahoma District, as well as other districts studied.
Special Review Panel: Actions Taken
As the Special Review Panel recommended, disciplinary
actions were taken concerning executives and managers,
primarily at the national office. The table below summarizes
those disciplinary actions. The panel did not have
investigative reports concerning seizures before it for
consideration. In addition, the Panel did not consider
additional investigative reports on possible misuse of
enforcement statistics at the District level.
----------------------------------------------------------------------------------------------------------------
Employees Reprimands Admonishments
----------------------------------------------------------------------------------------------------------------
Executives 6 0
Managers and Management Officials 6 2
----------------------------------------------------------------------------------------------------------------
Disciplinary Action Review Project Action on Misuse of
Statistics and Levy and Seizure Cases
The DARP, as a successor to the Special Review Panel,
reviewed 81 specific matters concerning possible misuse of
enforcement statistics developed by the IRS Inspection Service.
These matters included the use of enforcement statistics in
performance appraisals and the establishment of collection
goals that followed the pattern identified by the Panel. The
DARP was also provided 72 cases developed by the IRS Inspection
Service concerning levies and seizures that may have violated
the Internal Revenue Code, the Internal Revenue Manual, or
both. At the request of DARP, inquiries were also made by the
TIGTA into managers' conduct related to the approvals of the
defective levies and seizures. A total of 94 levy and seizure
matters were considered by the DARP.
The DARP reviewed the results of the Inspection Service/
TIGTA investigations of levy and seizure actions and found that
deficiencies in individual performance occurred at the group
manager levels as well as with the revenue officers. There also
were deficiencies at the district, division, and branch levels.
In most of the instances the supervising managers, at a
minimum, approved the seizures.
The authority to levy and seize taxpayers' property is a
function of the IRS Collection program and with significant
impact on taxpayers. The levy and seizure cases provided to
DARP by both the former Inspection Service and TIGTA contain
evidence of failures to correctly apply the Internal Revenue
Code and the Internal Revenue Manual. Taxpayers were not
provided with adequate notice of seizures, and group managers
were not adequately reviewing seizure documentation prior to
approving. Levies were issued within a particular industry
segment as part of a district project that focused on the
expeditious levying of a large number of sources without
verification of the validity of the sources. IRS management
failed to effectively control levy and seizure activities.
Failures to adhere to the specific requirements of the IRM were
neither adequately identified or corrected. Ambiguous
provisions of the IRM were not clarified. The IRS emphasis on
statistical results, as reported by the Special Review Panel,
when combined with a lack of compliance with the IRM and the
IRC created an environment where taxpayer interests were not
adequately considered with conducting levies and where taxpayer
interests were not adequately considered when conducting levies
and seizures.
Application of Criteria for Discipliary Action
The DARP considered the impact on the IRS and the taxpayers
of the failures to follow the Internal Revenue Code, the
Internal Revenue Manual, or both. Further, DARP considered the
relationship of the nature and seriousness of the offenses to
the employee's position, the employee's duties, and the
notoriety of the offenses. For example, in cases, where revenue
officer's inappropriate levy and seizure actions were expressly
directed by others, or approved or allowed to happen as a
result of the negligent or careless performance or reviewers,
the DARP recommended a lesser penalty than otherwise suggested.
The violation of taxpayer rights was considered an aggravating
factor. Also the DARP considered the clarity with which the
employee was on notice of nay rules violated, and did not
recommend disciplinary actions in cases where IRS guidance was
ambiguous. Finally, some matters for which the DARP recommended
closing without action involve practices that, because of
legislation and policy changes, would be incorrect today.
However, the DARP could not say the actions were inconsistent
with the guidance and expectations applicable to collection
activities when the enforcement actions occurred.
Disciplinary Action Review Panel: Actions Taken
The DARP reviewed 81 specific matters concerning possible
misuse of enforcement statistics, and recommended disciplinary
actions were taken with regard to seven managers. Seventy-two
matters concerning misuse of enforcement statistics were closed
because the actions taken by the emoloyees appeared to be based
on the flawed guidance discussed in the Special Panel report,
and two others remain open with the Treasury Inspector General
for Tax Administration (TIGTA).
The DARP also reviewed 94 matters involving levies and and/
or seizures, including an organized effort in one district to
issue mass levies and conduct seizures that resulted in a
failure to provide adequate notice to taxpayers of the pending
seizure or levy. Analysis of the quality of the levy sources
and the likelihood of collecting taxes were not adequately
considered in the haste to turn over approximately 3400 cases
in a few months prior to the end of an evaluation period. The
problems with levies and seizures in that district were linked
to the misuse of enforcement statistics.
Based on its review of the 94 matters involving levies and
seizures, the DARP-recommended disciplinary actions were taken
with regard to 19 managers employees. Sixty-nine matters were
closed without action, and six others remain.
Disciplinary Action Review Project Dispositions
----------------------------------------------------------------------------------------------------------------
Closed without Disciplinary
Type of issue action actions proposed Open Total
----------------------------------------------------------------------------------------------------------------
Misuse of Enforcement 72 7 2 81
Statistics
Inappropriate Levy and 69 19 6 94
Seizure Activity
Total......................... 141 26 8 175
----------------------------------------------------------------------------------------------------------------
Disciplinary Action Review Project Disciplinary Actions Proposed
----------------------------------------------------------------------------------------------------------------
Employees Reprimands Admonishments Suspensions Total
----------------------------------------------------------------------------------------------------------------
Managers 6 12 2 20
Revenue Officers 0 6 0 6
Total..................... 6 18 2 26
----------------------------------------------------------------------------------------------------------------
Mr. Coyne. On another subject, what is the overall
individual tax return audit rate? Just for returns over
$100,000.
Mr. Rossotti. For fiscal year 1999, we are estimating that
the audit rate overall for individual returns, and I'm talking
now about field audits, which is what most people think of,
that's when you actually have a person, because there are some
other audits, what we call correspondence audits which is a
letter, basically, that's sent to the taxpayer. But just
talking about field audits, the overall rate for fiscal year
1999 is going to be approximately .38 percent, that's .38
percent. For returns over $100,000, it will be 1.31 percent.
Just to compare that to 2 years ago, it's almost a
reduction in half for the overall coverage, because it was .65
percent in 1997. For the over $100,000 returns, it was down
from 1.98 to 1.31. So that's about a 30- or 40-percent
reduction in 2 years.
Mr. Coyne. Today we're going to act in the House of
Representatives on H.R. 2488, the Financial Freedom Act of
1999. It contains over 250 major tax changes as a result of it.
Is there any provision made in your budget to implement
that, or have you had a chance to look at the proposed changes?
Mr. Rossotti. As far as the provision in the budget,
there's no specific provision in the budget, because obviously
we didn't know what the provisions would be in the Act. With
respect to having had a chance to look at it, under the
provisions of the new law, we have given some information to
the Joint Committee commenting on the so-called complexity
analysis of some of the provisions. We've provided that
information to the Joint Committee.
Mr. Coyne. Well, whether it's this legislation that we're
going to act on today or any piece of legislation that contains
250 changes, could you talk about what impact that might have
on your operation?
Mr. Rossotti. Of course, what happens when there are these
changes, and it depends very much on what they are, but when
there are provisions that basically change forms, for example,
or change the way that a provision is interpreted, or
particularly when there's a brand new provision in, like a new
kind of credit, it ripples through the system in a number of
ways. No. 1 is, we have to change all of our forms, or many of
our forms and instructions and publications.
We then have to train our employees in these new forms. We
have about 25,000 employees right on the frontlines that answer
questions from taxpayers over the phone. We then of course have
to reprogram the computer systems to deal with these matters.
Then finally, downstream, there are the compliance issues, that
if people don't follow the new rules, correctly, we need to
check on those returns and we need to train our examiners,
provide the support to them that we need to do the compliance
activity.
So when we do make a tax law change, it does ripple through
the entire system.
Mr. Coyne. Thank you very much.
Mr. Houghton. All right, Mr. Watkins.
Mr. Watkins. No questions, thank you.
Mr. Houghton. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and Commissioner,
thank you for being here.
I'm sure I do have problems in the district, but I won't
get into those at this point, because there's a lot of other
questions I'd love to ask you and our time is limited. But just
following up on Mr. Coyne's comments if I could, I was
delighted to see that under the law that we passed to reform
the IRS, we also asked Congress to do some things. As you know,
we had a joint meeting which you attended with the seven
Committees who have jurisdiction over the IRS, which I thought
was very productive.
We also have in place in the Committee report of the tax
bill that we're going to consider later today the complexity
analysis that many of us fought for over some objections here
on the Hill. I think it's very valuable. I've read through it.
It's useful for me to see, in response to Mr. Coyne's question,
what some of the new tax provisions that we'll be voting on
today will do with regard to the Code, and specifically with
regard to your administration of those provisions.
I think we did a pretty good job this time of not, as you
know, adding a lot of new complexity, including the Chairman's
admonition that there be no new credits, which we stuck with
through unbelievable pressure from both sides of the aisle,
probably particularly our side. When you look at the complexity
analysis, you also note that at the end, again, printed in the
Record for the public to see and for all members to see, the
IRS comments on the major tax provisions that were identified
for complexity analysis. I think this is also very helpful.
I will say that the repeal of the AMT, the repeal of the
estate tax, the small savers provision, which is going to take
millions of Americans out of dealing with interest and dividend
income, should lead over time to remarkable simplification for
you all. Now, these provisions, as you know, are phased in over
time, particularly the AMT and the estate tax. So it's not
going to be immediate. But that will, I imagine, just as it
will help a lot of taxpayers, lighten your load considerably in
terms of compliance.
My question to you would be, were you pleased with the way
in which this process worked this year? Did you have adequate
interaction with the Joint Tax Committee to feel as though you
had opportunity to make your views known?
Mr. Rossotti. I was very pleased, it was something new, it
was a little bit of learning, but we worked with the Joint
Committee I think very well, and were able to provide some
information. As we learn more about this, we may be able to be
a little more elaborate. Right now we started on kind of the
basic thing, such as Mr. Coyne noted, the impact on the forms,
the impact on the processing. But over time, I think we'll
learn how to explain even more clearly. But I was very pleased
with the process.
Mr. Portman. OK, well, again, I'm delighted that you were
part of the process and that you were able to give some very
specific information, for example, whether a new form was
needed or not, what new boxes were needed and so on. I would
encourage you to continue to focus on that, because that will
help us legislate better. Most importantly, it will help the
taxpayers and the administration and you all over time to be
able to administer this code, this monstrosity that we all have
to deal with at this point.
Quickly, with regard to performance measures, as you know,
the employee evaluation piece I feel very strongly about. So
does the Subcommittee. It was part of the legislation and part
of the Commission's report. This is not an easy task moving
from quantitative measurements, i.e., how much money you bring
in from a taxpayer, to more qualitative ones. Can you give us a
report on how you think the employee evaluation system is
going, and could you talk briefly about how it fits in with the
overall mission?
Mr. Rossotti. The whole issue of measurement and
performance measurement and evaluation is what we call one of
the five major, to use our buzz word, levers of change, the
things that are going to move us in the direction we want. So
we've got a whole set of activities going on in that regard.
The first thing to do is decide what direction you want to
change, too, which is why it was important to get the new
mission statement and the goals out. Then we have been working
on this new set of quantitative, what we call balanced
performance measures, which we spent a great deal of time the
first year developing and are now rolling out, as we call it.
In other words, we're actually implementing these, not in every
part of the organization, but most parts. By the end of this
fiscal year, we'll have the first set of those done.
Then the other major piece, the really big, big piece, is
actually rewriting the job descriptions and the performance
appraisal systems for essentially every employee. And we're
well on the way to doing that. We will have the managers
evaluations done basically by the end of this calendar year.
We're working with our union, by the end of 2000 we will have
basically most of those done.
In the meantime, we have done one of the specific things
that was called for by the law, which is putting in a new
standard in every evaluation that talks about fair and
equitable treatment of taxpayers. That's already been done,
including the frontline employees. So on top of all this, of
course, the big thing is training. Because it doesn't do a lot
of good to have a lot of new measures and a lot of new
performance standards without training people in them. We are
going through, we have about 400,000 hours just this year of
training for managers in this new system, and it will escalate
next year as we get the frontline employees.
So this is one of the most immediate change agents, if you
will, that we are employing to move toward the mission and the
goals, and basically the direction that was given us by the
Act.
Mr. Portman. Thank you, Mr. Chairman.
Mr. Houghton. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman, and Mr. Rossotti, good
to see you this morning.
Mr. Rossotti. Good morning.
Mr. Weller. Good to have you before us, we appreciate the
good work you're doing in moving forward on the reforms that
this Congress passed and the President signed into law.
I believe one of the greatest victories of IRS reform,
first-ever IRS reform, of course, was addressing the issue of
innocent spouses, a case where in many cases, you have a single
working mom with the kids who not only is dealing with a child
support deadbeat but also that child support deadbeat is a tax
deadbeat. Of course, in the past, they couldn't find the
deadbeats, so they went after the single working mom with the
kids who's struggling to make ends meet who wasn't receiving
her child support.
And we worked to address that in the IRS reform. I guess
the first question I'd like to ask of you, focusing on this
issue is, tell me how you're implementing that. How many cases
have you dealt with and how has this process been working?
Mr. Rossotti. First let me say that this is one of the most
important taxpayer rights provisions, new taxpayer rights
provisions, and is one that we've been spending a great deal of
time on. I have to honestly tell you that we've found that the
implementation of this has been more difficult than perhaps was
initially anticipated for two reasons. One is that there simply
have been more claims than I think, we really didn't know how
many there would be, but we've gotten a whole lot of them.
We've gotten approximately 32,000 this fiscal year, and they're
coming in at a rate of over 1,000 a week. Which is far in
excess of the innocent spouse provision under the old law, this
is far in excess of what there is.
So first of all this is just a sheer number of claims. The
second thing is what we've learned is that the law provided
really three different kinds of relief under different kinds of
circumstances. Only one of which was incorporated under the old
law. So you have really a whole new method of doing this. And
just to give you an example, this is a flow chart that we have
of what it takes to process one case. It's about 10 pages of
flow charts that you have to look at. Each one of these
requires a determination. The process of training people to get
this right has turned out to be quite significant.
And finally, there's just the issue of interpreting, for
example, what is meant by equitable relief. We had to get a
regulation out that interpreted that, and even after we had the
regulation out, it's a new concept, and we have to work on it
to get it right. So these are some of the things that we've
been facing.
But we have also made a real determination that we're going
to get this right, we're going to get every case right, and
we're going to process them. The collection action, by the way,
on any given case, is held in abeyance while these cases are in
inventory. So at the present time, we have about 29,000 cases
in inventory, which is far more than we should have. We have
applied a special task force to basically try to work on
getting this right, getting this inventory down. We're coming
up with some new job aids and some new training for the
employees.
We have actually employed, in addition to what we
originally planned to do, which was to have most of it
centralized in a couple of places, we've had to, just because
of the resources, use resources in basically all of our
districts. So we have just recently done that, to farm some of
these cases out to more places.
We're also forming, in some of these districts, teams so
they can work together with some examiners that get extra
support from experts. I could go on with more details.
But the net effect is that this has turned into something
that is really quite a substantial effort. I think once we get
through this initial backlog and we learn how to do this more,
hopefully the number of claims will stabilize and we will
become more efficient in processing them. But in the meantime,
it has been a very, very challenging effort.
I do think, however, I must say that I'm not saying any of
this along the lines of criticizing the law, because I think
it's absolutely the right thing to have done, and your point
was, I think in your opening statement, quite accurate, that
there were some really very bad cases that came to our
attention under the old law which just didn't fit the modern
circumstances.
So notwithstanding the difficulty of this, it is absolutely
the right thing to do, it's the way the law should work. And
it's just an example of the challenge we have in trying to work
under this new way.
Mr. Weller. Commissioner, of course, 32,000, 1,000 a week,
is quite a few.
Mr. Rossotti. It is.
Mr. Weller. Compared, I'm sure, to the past number of
applicants under what was a very weak innocent spouse
opportunity at that time, probably you're receiving much more
in applications.
Do you have any, as you are now implementing what we
provided for you in the law, do you have any recommendations
and changes in the law that would ease your ability to process
it?
Mr. Rossotti. No, I don't at this point. I think we might
at some future time, but frankly we're still learning about how
this applies. I mean, one of the things we're going to do is on
most of the cases, those that get into the more complex
provisions of the law, we're actually going to do 100 percent
quality review on these cases in order to first of all make
sure they're right. Because we can't be really sure they're
right the first time.
But second, I think it will help us to learn more about
what are some of the particular aspects of this law. I think
especially through the Taxpayer Advocates Report, which will
come to Congress next year, if there are any issues like that,
we would be able to surface them. But right now, I think the
problem we have is more internal. It's a matter of
understanding this law, of learning from the cases that we
process under the law, and I just want to stress that we are
determined that we are going to make every one of these cases
right, even to the extent of doing 100 percent review of the
more complex cases.
Mr. Weller. Thank you, Commissioner. Mr. Chairman, thanks
for the opportunity. I see my time has expired, Mr. Chairman.
Mr. Houghton. Mr. Hulshof.
Mr. Hulshof. No questions, thank you.
Mr. Houghton. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. Commissioner, I
referred earlier to the 10 deadly sins that we have had some
experience with. I was just wondering if you think based on
experience so far that they need to be modified. Would that be
something?
Mr. Rossotti. I think as I just answered to Mr. Weller, I
think with all the complex provisions of this law, we're going
to learn as we apply them. I think if there are needs to change
them, we would certainly come back to the Congress and ask. I
think with respect to this one in particular, we really are
still in a learning, we're just barely getting the experience
of having these cases go through.
So I don't think we're ready yet on any of these
provisions, to come back and ask for changes. But I do want to
say that just as with innocent spouse, 1203 is one of the most
important, those are probably the two provisions of the law,
two of the three or four most important provisions that we're
working on the hardest to get right.
Right now our concentration is on making sure that we train
our employees correctly what this means and we set up the right
procedures to make sure everything is fair. The last step is
that once these cases work through the pipeline they do come
up, if there are any cases where there's a recommendation of
termination of an employee, they do come up to the
Commissioner, to me, for final review. We have set up a special
process to do that. I think by that process, I will have the
opportunity to learn very concretely how this law is working,
and I can assure you, if there are any cases of what I consider
to be unfair treatment of employees under this Act, I do have
the authority to mitigate that and make sure it doesn't happen.
But I also then would have the information, potentially, if
necessary, to come back to the Congress and discuss it. But we
just haven't gotten through that pipeline yet. So I think as
with all the provisions, we're not quite in a position yet to
really say anything really intelligent or informed about what
should be done with these provisions.
Mr. Coyne. Well, I would hope, based on experience that
comes about moving into this operation that you wouldn't be
hesitant to come back to the Congress and make recommendations
about whatever changes would be helpful.
Mr. Rossotti. We won't be. Thank you, Mr. Coyne. We will.
Mr. Houghton. Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman. A little while ago I
was kind of asking about some things in my district. Mr.
Commissioner, I want to say thank you for the cooperation that
we received on some past problems and concerns.
Mr. Chairman, if I could make this statement, I came from
the business world into the political, I know my Chairman has
done the same thing. If I can put it this way, I think you've
been a breath of fresh air coming into an agency that's
criticized so much, and sometimes rightly so. But then there
are other times probably you've got to do the Lord's work for
this Uncle Sam of ours.
With the positive attitude that you've had about trying to
bring changes, which I think is quite significant, have you
seen internally the kind of changes come about that you've been
hoping to bring?
Mr. Rossotti. Well, Mr. Watkins, you have to sort of
categorize these changes. The first change was a change in
direction and attitude. That was the first thing that we really
tried to work on through communication. We've got a new mission
statement, we've got a new set of goals. We're now, as I
answered to Mr. Portman, changing the whole set of evaluations
for people to track with these things.
I think frankly, most of what you've seen in your districts
and from your constituents so far has been the result of a
change in direction and attitude more than any tangible changes
that we've been able to implement yet so far in terms of
improved service.
So my answer is, I think we have seen among our employees a
very significant understanding of the direction we're trying to
go. I think our employees in the IRS, as I've learned, and I
came into this without knowing one of them, literally not one,
basically are good employees who want to be given clear
direction as to what it is that's expected of them and try to
do that. So we've spent a lot of time trying to give them just
that, clear direction.
Now, in some areas, like in collection, there are so many
changes that they are a little confused at times what the new
role is, because it's so different as compared to what it was
in the past. But on the whole, our employees have responded
very well to this change in direction, and have tried to figure
out in their own ways how they can implement it. I think most
of what we have accomplished so far has been in that area,
because we have not yet been able to implement many of these
new business practices and new technology that are really in
the long run, the way that we're going to deliver them through
service to taxpayers.
So this whole change really includes some very intangible
things like attitudes and directions, which are reinforced with
communication goals. But then in the long run, we really have
to follow through to give these employees and to give the
taxpayers the treatment they deserve through better ways of
doing business.
So I guess that's the best answer I can give you as of now.
Mr. Watkins. Like you said, you didn't know one single
employee. But Mr. Chairman, I think the example, you didn't
come with an ax to grind, you came with an attitude, and I
think that attitude is probably filtered all the way down and
around and among all the personnel. I think that is so
revealing, or in my mind, I think that.
That's why I'm asking in my own mind, is it really
happening. Because I feel like you have brought a new direction
and attitude to the lot. And I think that's very meaningful and
very significant. We all run into different problems out there.
You and your good people will find the same thing. It depends
on how we handle those problems and what kind of a way. You can
make people walk away gnashing their teeth, wanting to commit
suicide, do all these other things, or you can really work with
them through some real problems they have out there. It all
goes back to attitude. I think in this case, definitely the
attitude that you have brought about has really brought some
changes, I think.
Mr. Chairman, I feel down in the district, people are
trying to solve problems. And that's one of the things that I
want you to know I appreciate very, very much. I know you
cannot control every single employee, you cannot change their
thought or their attitude. There's no way any of us dealing
with personnel can. But you can try to convey to them and let
them know what you're wanting to try to do. I think some of
that's been kind of falling into place out there.
I know there's things that we'll go through and have many
other problems that we'll have coming before us. But I want to
say, I appreciate your attitude very much.
Mr. Rossotti. Thank you very much, Mr. Watkins.
Mr. Houghton. Thanks, Mr. Watkins.
Ms. Dunn.
Ms. Dunn. Thank you very much, Mr. Chairman.
Commissioner Rossotti, can you give us an update on the
status of the oversight board? Are they being appointed, and as
you move toward working with them, are you sacrificing anything
right now in long range policy planning because they're not all
in place?
Mr. Rossotti. Well, of course, the oversight board is
something that is not handled by me, it's handled by the
Treasury and the White House. So I don't have too much detail
to be able to provide on that. But some of the names have been
provided to the Senate Finance Committee. There are still, I
believe it's two or three, that still need to be provided.
So that's basically all I know about the status of the
nominations.
But I will say this. What we're trying to do is put in
place from one of the key things that was in the legislation,
and you noted it, is to work with the board on strategic
planning and budgeting. That's another area where a lot of work
is needed in the IRS, to really improve where we are. We in all
honesty don't really have what I would consider to be viable
strategic planning and budgeting process in place.
And I think if we had the oversight board in place, they'd
be wanting to know where it was. So in some ways I count myself
lucky that I feel like I'm one step ahead of the sheriff here
in trying to get this process in place, so that we'll have
something that I think any board that I've ever worked with
would expect.
We are making some progress on that in the sense that
internally we're getting ready, we're defining what we mean by
a strategic planning and budgeting process. We're putting some
staff in place, hiring some people. And I think very
importantly, these performance measures and the organization
structure are necessary because without having a clear set of
goals, and without having people to carry it out, you really
can't put a strategic plan and process in place.
So I think what we are doing internally is doing what I
would anticipate our board, when it does come into place, would
want us to have, based on my experience. So that when they do
come in, we will at least be able to talk to them in some
intelligent way about. Even though we don't have it all in
place, where it's going to be. That's what we're attempting to
do to get ready.
From my personal point of view, I'm looking forward to
having this board appointed and working with a set of people
that I hope will provide good oversight for us, but be good
people to work with in terms of helping us make sure we're on
the right direction and supporting us where we need support.
Ms. Dunn. Good. Mr. Chairman, maybe we could put a note in
the record that it's time to start nipping at heels of folks
who should be appointing this oversight board. Because I'm sure
that as Commissioner Rossotti has said, that it would be useful
as a support group for him as he moves ahead in public policy
planning in the IRS.
I'm also interested, Commissioner, in the Office of the
Taxpayer Advocate and the continuing increase in independence
from the IRS. How is that moving right now? Have these budget
cuts done damage to that? I certainly hope we'll be able to get
those dollars back in the conference. Could you just give us an
update on the Taxpayer Advocates' independence?
Mr. Rossotti. In our whole reorganization, one of the first
areas that we wanted to reorganize was in fact the Taxpayer
Advocate, both because it was important and because of certain
provisions in the bill. So we are actually on an accelerated
schedule in implementing the Taxpayer Advocates new
organization.
As a matter of fact, by the end of this fiscal year, which
is only a few months from now, we should have that new
organization pretty much in place. The essence of it is of
course, first of all, we recruited an outside person to be the
National Taxpayer Advocate. The new organization structure will
parallel, it will not be as it has been previously, where most
of the people who do that work were part of the compliance
functions in the IRS. Instead, it will be an independent
parallel structure nationwide. There will be taxpayer advocates
in every State and an area-wide set of advocate organizations.
What we are doing is actually doing an internal competition
for every single job, or almost every single job, in the
Taxpayer Advocate, which is around 2,000 people when it is all
done. In other words, all the way down the management chain
we've reposted these jobs, we've had internal competition, and
we've now selected most of the new management structure and
we're now selecting the frontline employees.
You might be interested to know that we have gotten about
an eight to one, an eight to one response of people wanting to
get into the Taxpayer Advocate's office. I can assure you,
that's a very, very big change over where we were. It's really
quite remarkable.
Now, we haven't selected them all yet. But by the end of
this year, this fiscal year, we will have those individuals
selected. We will have basically this taxpayer advocate
organization all the way up and down the line in place.
There are issues that we're still working out over
precisely what their authorities are, since they are now an
independent, within the IRS but a parallel structure, precisely
how they relate to the other parts of the IRS, including the
Appeals Office, which gets a little complex. But we're working
on those kinds of problems, and I'm very satisfied, I think you
may have next Mr. Ovison, who is the National Taxpayer
Advocate. He's taking a very strong leadership role in
establishing this organization with the support of others.
So actually, of all the pieces of our organizational
puzzle, the one that will be in place absolutely first will be
the Taxpayer Advocate organization.
Ms. Dunn. Sounds good. Good news. Thank you. Thank you, Mr.
Chairman.
Mr. Houghton. OK, thank you.
Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman.
Commissioner, as you know, there was a recent report by the
Electronic Tax Administration Advisory Committee established by
the legislation this Subcommittee worked on. We're going to
hear later from the chair of that Committee.
Among their recommendations in their report that we're
going to look at today is that there ought to be a single
strategic plan that integrates the multiple plans. And I would
use as an example their own strategic plan for electronic tax
modernization, that you all are working through the
modernization blueprint, of course.
Also proceeding, of course, is the reorganization,
modernization of the IRS along the lines of taxpayers. This
recommendation to have a single strategic plan seems to make an
awful lot of sense. I would think from the private sector
experience you have that would be the way you would want to go.
And yet you don't have one.
Can you tell me what kind of progress you are making in
achieving a single strategic plan for all these multiple plans?
Mr. Rossotti. Well, as I was just talking to Congresswoman
Dunn, in all candor, the IRS today does not have a good process
for doing what I would consider strategic planning. We have a
process for doing some specific kinds of planning, which is
very important, and some budgeting. But pulling the whole thing
together, it really is not in place.
And it's not a simple thing to do with our organization,
being the scale it is. So that is one of the key processes
we're working on. I would not say that we will have a complete
strategic plan with all components in place, in all honesty,
probably for a couple of years.
But that doesn't mean there isn't anything we're doing. One
of the key priorities that is most immediately needed is the
plan for the technology aspect, and we can work on this because
we now know the direction we're going in terms of organization.
By the end of this calendar year we will have the first
version of the technology, what we call business systems plan,
in place, which will lay out for at least the next 3 to 5 years
what the overall plan is for the major pieces of the systems
work we're going to do. In that plan, it will include as I
think, what is the ETAAC's view of what it should be, the
essential integration of electronic tax administration systems
aspect into the basic systems that we use throughout the
agency, as opposed to being as it is now, basically just an
add-on at the front end.
That will be an important step. But there are a lot more
steps we need to do, as was indicated in their report, to
integrate not just the business systems and the technology, but
all of the other promotional activities and the way we outreach
to taxpayers, the way we do compliance, basically building that
into the whole way we do business. That's going to take a
little bit longer, and really depends to some level on getting
some of these new organizational structures in place.
Mr. Portman. I guess it generally sounds as though you're
speaking in support of the recommendations that are coming out
of ETAAC. I would ask, if you have concerns about the
recommendations, if you would forward those to the
Subcommittee, so the staff is aware of that, and the members
are aware of it.
Let me just make a comment, rather than ask a question. I
was going to ask a question, but I think I know what your
answer is going to be. If the oversight board were in place, I
would assume the oversight board would play a very important
role in the strategic plan. You said earlier in response to Ms.
Dunn that a viable strategic planning process and budgeting
process is not in place yet, or a viable strategic plan or
long-term budget plan. And that in many ways, that is better
that the board's not in place yet in some senses, because you'd
like to get ahead of the sheriff, as you said.
I would just beg to differ, and I think this board can
provide you with the kind of support you need to develop those
plans. As you know, better than I, the kind of people who we're
looking for on this board are precisely people who can help
develop the strategic plan and a budgeting plan and bring
together, as this ETAAC report tells us today, the multiple
plans on the information side.
I am very concerned, actually shocked, that the
administration, more than 6 months after it was required under
the law, that this Subcommittee began the process of enacting,
has yet to send the names forward in a formal way. You're
right, some names have been floated. There are now I guess
three missing, because one apparently has been dropped out.
But I would again make a very strong statement that needs
to be a part of the record, and we've been nipping at the
heels, not for 6 months, but for a year. And I think the record
will show at least 9 months of correspondence with the White
House and with the Treasury Department. I know that you share
that concern.
But I would only feel constrained to comment, because of
your responses to Ms. Dunn, that I think at least it was the
intent of this Congress, based on the Commission's report,
based on the legislation, clearly based on the report language,
that this group was meant to help you do precisely what you are
trying to do now. If you don't get these people in on the
ground level now, as you're undergoing all these major changes
at the IRS, and again, I commend you for your efforts in that
regard, I think it will be a great loss to the taxpayer.
Because I think given the realities of the IRS, the difficulty
making these changes, the long-term viability of these reforms
will be at risk.
Mr. Rossotti. I just want to clarify. In responding, I was
being a little bit facetious, which is always a little risky.
Basically my point was saying that we are trying to put in
place what I anticipate the board would want us to put in place
if they were here. I didn't really mean that we wouldn't
benefit by not having them.
But what we're trying to do is not wait until they get
here, but try and see if we can anticipate what I think a good
oversight board would want to have in the way of a strategic
planning process, so that when they do get here, we'll at least
be somewhat ahead of the game, rather than just waiting for
them to come.
Mr. Portman. That's commendable, and you're doing the best
you can in a bad situation. I just wouldn't want to leave the
record stating that somehow the board is not necessary, because
the plan is in place, the board should be part of the planning
process. I thank the Chair for his indulgence, and
Commissioner, thank you for your great testimony today.
Mr. Houghton. Mr. Hulshof, did you have any questions?
Mr. Hulshof. No.
Mr. Houghton. Could you give us sort of a feel when this
board is going to be there? I know you've got some inputs into
this, but you know, we keep talking about this thing as if it
isn't happening.
Mr. Rossotti. Did you say when?
Mr. Houghton. Yes.
Mr. Rossotti. Well, it depends on when the remaining
nominees are put forward. I have some insight into it. I know
that there are two individuals that are being vetted, going
through a vetting process. When that's completed, I think they
will be forwarded. But I don't have any insight as to when that
would be completed.
Mr. Houghton. Because it's a little ridiculous, we keep
talking about this thing, and it really doesn't take place.
That was one of the cornerstones of the report.
Well, Commissioner, thank you very much. Mr. Coyne has
talked about the 10 deadly sins, and I mentioned the three
life-giving assets, which are people, money and attitude. We've
got to work together on all of these. Thank you so much for the
job you're doing. You're a great credit to all of us. And we'll
have the next panel. Thank you, sir.
Mr. Rossotti. Thank you, Mr. Chairman.
Mr. Houghton. I'd like to call Mr. Charles Lacijan, who is
Chairman of the Electronic Tax Administration Advisory
Committee and Senior Policy Advisor of the Implementation
Group. Mr. Lacijan is here with his lovely wife. Welcome, thank
you very much, and any time you'd like to begin your testimony
would be fine.
STATEMENT OF CHARLES A. LACIJAN, SENIOR TECHNICAL ADVISOR,
IMPLEMENTATION GROUP, AND CHAIRMAN, ELECTRONIC TAX
ADMINISTRATION ADVISORY COMMITTEE
Mr. Lacijan. Thank you. Good morning, Mr. Chairman, Ranking
Member Coyne, Members of the Subcommittee. My name is Chuck
Lacijan, I'm the senior technical advisor to the Implementation
Group, a Washington, DC., consulting firm. But since September
1998, I've also served as chairman of the Electronic Tax
Administration Advisory Committee, also known as ETAAC. It's my
pleasure to testify before you today in that capacity.
I have submitted a written statement that I ask be entered
into the record, which I now intend to summarize.
Let me preface my remarks by saying that electronic filing
is a very important part of a modern IRS. The IRS restructuring
commission, which was so ably chaired by Congressman Portman,
fully recognized this fact. The inclusion of title II,
electronic filing, into the IRS Restructuring and Reform Act,
is due in large part to the leadership shown by this
Subcommittee, which also clearly recognized the importance of
electronic filing. In fact, in September, 1997, the
Subcommittee had an entire hearing dedicated just to that
subject.
In electronic interaction with taxpayers, it has the
potential to improve the IRS' ability to provide taxpayers with
the type of customer service that they receive from other
modern financial institutions and have come to expect.
Electronic filing also introduces productivity gains into the
IRS, or productivity savings, that allows them to shift both
resources and focus from the labor intensive processing of
paper returns and shifting that to providing more customer
service.
Taxpayers also benefit directly because of the much lower
error rate associated with electronic filing. So for these
reasons, the Act established a policy that paperless filing
should be the preferred means of filing tax and information
returns and actually set a goal of 80 percent of those returns
that should be filed electronically by the year 2007.
Before I summarize the key findings of the ETAAC, I would
like to say a few words about the Committee members. The
strength of the ETAAC is its diverse membership, which covers a
broad spectrum of stakeholder interests. Although our members
are volunteers, they do work very hard at this. They take their
responsibilities to serve very seriously and I would say are
very thoughtful in their work.
And our report, was delivered to Congress on time, June 30,
and because we're a volunteer Committee, on budget as well--
zero.
I think ETAAC believes that IRS has made a very good start
in setting out a program to achieve its electronic filing
goals. My written statement does provide several examples of
that.
However, I think the question of most importance to the
Subcommittee is not whether IRS has made a good start, but
whether it will make a good finish. ETAAC believes that the IRS
can achieve the goal, but it does need to implement a broader
set of initiatives than is currently planned.
Although the IRS has established a separate group
responsible for electronic tax administration within it, this
goal is much too sweeping in scope to be achieved by a single
group within the IRS. The goal must be an agency-wide priority,
with the proper resources behind it. Continual progress
evaluation and updating of the plan is absolutely essential.
Now, the Act also requires the IRS to receive
electronically by 2003 all information and tax returns that are
prepared electronically. ETAAC believes that this is an
excellent strategy and an
extremely important goal. But it requires that all paid
preparers who almost universally use computers to prepare their
tax returns, would actually file all their computer generated
returns electronically by 2003. This would be very difficult to
achieve. It would actually require a paradigm shift in the
thinking of most preparers.
However, this level of acceptance by paid preparers must be
achieved by 2007 if the IRS is to reach the 80-percent goal.
Let me quickly summarize a few strategic challenges that
face the IRS. First, they must create new processes and
incentives that deliver value for all taxpayer segments,
individual, small business, large business and tax-exempt
organizations. They must integrate agency-wide strategic plans
including some of the ones that were mentioned earlier, the
strategy for growth, the modernization blueprint, the
reorganization, modernization, into one cohesive strategic plan
that serves the entire Service.
They have to develop the technology infrastructure to
receive electronically all forms from all types of returns from
all taxpayers. A strategy for growth indicates the IRS must
position itself to take full advantage of the public's growing
use of the Internet. We believe this is essential.
ETAAC also believes the IRS has opportunities to expand its
business partnerships with external stakeholders, the taxpaying
public, and businesses. In the view of ETAAC, businesses should
interact with a modern IRS much like they interact with other
businesses.
And let me quickly finish by identifying what ETAAC
believes that Congress should do to assist the IRS. First, we
believe they should maintain high visibility on these
electronic filing goals in its oversight efforts. Second, they
should evaluate new legislative action where it is recommended
by the IRS or by ETAAC. And third, Congress should appropriate
the necessary funds for electronic tax administration and
related technology infrastructure initiatives.
That concludes my testimony, and I will be glad to answer
any questions you may have.
[The prepared statement follows:]
Statement of Charles A. Lacijan, Senior Technical Advisor,
Implementation Group, and Chairman, Electronic Tax Administration
Advisory Committee
Mr. Chairman, Ranking Member Coyne, and Members of the
Subcommittee, my name is Chuck Lacijan, and I am the Senior
Technical Advisor for The Implementation Group, a Washington,
D.C. consulting firm. Since September 1998 I have also served
as the chairman of the Electronic Tax Administration Advisory
Committee (ETAAC), and am testifying in this capacity before
you today.
Two members of the Ways and Means Committee, former
Oversight Subcommittee Chairwoman Nancy Johnson and
Representative Rob Portman, nominated me for the ETAAC. I
worked with both these Representatives while working electronic
filing issues on the staff of the National Commission on
Restructuring the Internal Revenue Service (IRS). It is with
great pleasure and a sense of honor that I testify today.
The IRS Restructuring and Reform Act of 1998 set a new
direction for the IRS in many areas, including electronic
filing. Title II of the Act establishes a Congressional policy
that paperless filing should be the preferred and most
convenient means of filing Federal tax and information returns,
and sets a goal for the IRS of having at least 80 percent of
these returns filed electronically by the year 2007. The Act
expects that the IRS will achieve this goal by cooperating with
the private sector and encouraging competition, and further
requires that the IRS establish a private sector advisory
committee to assist it in meeting these goals.
The inclusion of Title II, Electronic Filing, in the Act is
due in large part to the leadership shown by the Oversight
Subcommittee, which recognized the importance of electronic
filing and other electronic tax administration services.
Electronic filing has the potential to improve the IRS' ability
to provide taxpayers with customer service on a par with other
modern financial institutions with which many taxpayers
interact. It also introduces productivity savings to the IRS
that allows it to shift resources away from the labor intensive
processing of paper returns into customer service. Taxpayers
benefit directly also, as electronic filing has a much lower
error rate than paper filing.
The IRS Restructuring and Reform Act establishes two
missions for the ETAAC. Our first mission is to help the IRS
meet its electronic filing goals by providing it with private
sector input. Our second mission is to provide Congress with an
annual report that describes IRS' progress in meeting its
electronic filing goals, the status of its strategic plans, any
legislative changes necessary to assist the IRS in meeting the
goals, and the effects of electronic filing on small businesses
and the self-employed.
To provide the most comprehensive advice to the IRS, the
ETAAC membership covers a broad spectrum of stakeholder
interests, including:
tax preparers, including some who operate small
businesses
tax preparation software companies serving both
individual and business filers
payroll services
the financial community
big business
the academic community
state government
A list of the ETAAC members is attached to a copy of this
statement.
The ETAAC has worked with the IRS since its establishment
in September 1998. Our priorities for this year included the
following activity:
reviewing the IRS' strategic plan, A Strategy for
Growth, and assessing the ability of this plan to meet IRS'
electronic filing goals
working with the IRS to develop an annual calendar
for strategic planing and evaluation
identifying the strategic challenges facing the
IRS
developing our report to Congress
Our report documents the advice the ETAAC has provided the
IRS and identifies the major challenges, risks, and
opportunities facing the IRS, as well as recommendations for
further action.
The ETAAC believes the IRS has made a good start in setting
out a program to achieve the electronic filing goals
established by Congress. Examples of progress include:
Release of a strategic plan, A Strategy for
Growth, in December 1998, which described IRS' approach for
achieving its electronic tax administration goals.
An increase of 19 percent in electronic filing
during the 1999 tax filing season.
Initiation of programs in 1999 designed to
increase the attractiveness of electronic filing and the
development of plans for additional initiatives for 2000 and
future years.
I believe the question of most interest to the subcommittee
is not whether the IRS has made a good start, but whether it
will meet the 80 percent electronic filing goal in 2007. The
ETAAC believes the IRS can achieve the goal, but it needs to
implement a broader set of initiatives than is currently
planned. In fact, the IRS strategic plan, A Strategy for
Growth, estimates that the initiatives described in it will
result in up to 70 million electronic returns being filed
electronically in 2007, far short of the goal. Clearly,
although the IRS has made a good start, the broadest possible
set of new initiatives must be considered, including those that
require legislative action.
Reaching the electronic tax administration goals in 2007
will require a sustained effort throughout the service to
implement A Strategy for Growth. Although the IRS has
established a separate group responsible for electronic tax
administration, the goal of achieving 80 percent electronic
filing by 2007 is too sweeping in scope to be achieved by a
single group within the IRS. The goal will only be achieved by
placing responsibility for achieving these goals on each
business unit as well as the ETA group. The plan established in
A Strategy for Growth must be an agency-wide priority with
application of the necessary resources throughout the agency.
Continual progress evaluation and updating of the plan, with
input from each of the business units, is essential.
In addition to the 80 percent goal for 2007, the IRS
Restructuring and Reform Act of 1998 requires the IRS to plan
that, to the extent practicable, all information and tax
returns prepared electronically should be filed electronically
by the 2003 tax filing season. The ETAAC believes this to be an
excellent strategy and an extremely important goal, but
achieving this goal requires that paid tax preparers, who
almost universally prepare returns using computers, file all
their computer-prepared returns electronically by 2003.
Achieving this level of acceptance from paid preparers in four
years is a very difficult challenge, and requires a paradigm
shift in the thinking of many paid preparers. However, this
level of acceptance from paid preparers must be achieved by
2007 if the IRS is to reach the 80 percent goal.
Making this paradigm shift a reality requires that paid
preparers see electronic filing as a means of making their
businesses more efficient and allows them to offer additional
services that paper preparers cannot offer. Every return would
have to be capable of being received electronically, and
signature barriers eliminated. While the IRS is moving to make
electronic filing more attractive to paid preparers, the ETAAC
believes additional initiatives are needed. The IRS must make
electronic filing so attractive to paid preparers that they
couldn't be competitive without offering this service to their
clients.
A similar reasoning applies to taxpayers who prepare their
own returns. If the IRS can capture 95 percent of the paid
preparer market in 2007, then it must receive electronically
approximately 65 percent of self-prepared returns to meet the
80 percent goal.
The ETAAC has identified in its annual report a number of
strategic challenges the IRS faces in seeking to reach its
electronic filing goals. The ETAAC has categorized these
challenges into the following three groups:
Business challenges
Creating new processes and incentives for
electronic tax administration that deliver value to all
taxpayer segments (individuals, small businesses, large
corporations, and tax-exempt organizations).
Developing a strategy that provides strong
incentives to all professional tax practitioners to enroll as
Electronic Return Originators.
Convincing taxpayers and professional tax
preparers, through communications and marketing, that e-filing
should be the filing method of choice.
Internal Management Challenges
Transitioning to a customer-centric organization
providing taxpayers with customer-segmented, tailored, and
responsive products and services while concurrently
transitioning to electronic services and systems and
maintaining legacy systems that support paper filing.
Integrating multiple agency-wide strategic plans,
including A Strategy for Growth, the Modernization Blueprint,
and the organizational modernization plan, into one cohesive
business and strategic plan for the Service.
Ensuring adequate resources are committed to the
implementation of electronic tax administration projects and
initiatives.
Holding the executives of each new operating
division accountable for achieving the electronic tax
administration goals for the taxpayer segment assigned to the
division.
Technology Challenges
Implementing the necessary technology
infrastructure to support the IRS electronic tax administration
business goals, including security, privacy, database, and
communications systems.
Developing and maintaining the ability to receive
electronically all the forms from all types of returns from all
filers.
Developing a scaleable technology architecture
that will support the growing volumes associated with achieving
the electronic tax administration business goals.
A Strategy for Growth indicates that the IRS must position
itself to take full advantage of the public's growing
acceptance and use of the Internet. The ETAAC strongly endorses
the formulation of an Internet strategy.
The ETAAC believes the IRS has opportunities to expand its
business partnerships with professional preparers, large
transmitters, software providers, payroll and tax processors,
and state taxing agencies, as well as expand its relationship
with the taxpaying public and businesses.
The ETAAC recommends the IRS take the following actions to
meet its strategic challenges:
Ensure all initiatives identified in A Strategy
for Growth are incorporated within overall IRS strategic
planning efforts. If the IRS cannot establish an overall
strategic plan and planning process quickly, the IRS may not
achieve its electronic tax administration goals.
Apply the necessary resources to accomplish the
initiatives described in A Strategy for Growth and create and
implement an integrated strategic plan.
Align electronic tax administration customer
segments with the four business units now being established by
the IRS organizational modernization plan.
Develop a strategy to encourage every professional
tax practitioner to file electronically. Professional tax
practitioners include tax attorneys, Certified Public
Accountants (CPAs), Enrolled Agents (EAs), and unlicensed tax
preparers.
Implement a strategic management process that is
based on continual progress evaluation against established
milestones, with provision for identifying new projects and
corrective action. Because of the importance of identifying new
projects, the ETAAC has assisted the IRS in identifying such a
plan.
Focus IT modernization on electronic transmission
of information and engagement of the private sector for
solutions rather than improvement of paper processes.
Make electronic tax administration initiatives a
high priority in the IRS IT modernization so they are
synchronized with major IRS modernization blueprints rather
than competing for attention in later years. It is imperative
that IRS electronic tax administration projects be integrated
into the IRS modernization blueprint at an early stage.
Advertise taxpayer and preparer benefits for e-
filing more aggressively. Effectively deliver and enhance such
benefits to create taxpayer awareness and trust in e-filing.
Continue to assign authentication, security, and
privacy initiatives a high priority and continue to move
forward quickly in this area. The 1999 tax filing season PIN
and digital signature projects are major steps forward.
Use A Strategy for Growth to articulate how
partnerships with the private sector and governmental partners,
such as states, can be facilitated and supported.
The ETAAC believes that Congress can assist IRS meet its
electronic filing goals. Congress can do this by maintaining
high visibility on these goals in its oversight efforts,
evaluating new legislative action where recommended by the IRS
or the ETAAC, and by appropriating the necessary funds for
electronic tax administration and related technology
infrastructure initiatives.
That concludes my testimony. I will be glad to answer any
questions you may have.
ETAAC Members
------------------------------------------------------------------------
Name Title
------------------------------------------------------------------------
Fran Bartlett............................. President & CEO, Federal
Liaison Services, Inc.
Michael P. Boyle.......................... Chief Tax Counsel & General
Auditor, Microsoft Corp.
Margaret Drescher......................... National Advisor, Chair
National Technology
Committee, AARP.
Keith T. Dusenbery........................ Professor of Accounting and
Information Systems,
Johnson State College.
Edward B. Feinstein....................... AVP, Electronic Commerce,
H&R Block Tax Services.
Connie L. Grimes.......................... President, Grimes Income
Tax, Inc.
Mary B. Harris............................ Jackson Hewitt Tax Service,
franchise owner in
Arkansas
Yvonne D. Kirkendall...................... Co-owner, W. R. Kirkendall,
EA.
Charles A. Lacijan........................ Sr. Technical Advisor, The
Implementation Group.
Frank L. Lanza............................ Director, Processing
Services, California
Franchise Tax Board.
Robert O. Lewis........................... President, Tax Back, Inc.
Susan W. Martin........................... Professor of Accounting &
Taxation, Grand Valley
State University.
Issac A. Nooe, III........................ Administrator, Information
Resources Management
Division, South Carolina
DOR.
Bette Rice................................ Director, Enterprise
Technology Services,
Merrill Lynch.
Elizabeth M. Seymour...................... Vice President, Wachovia
Bank, N.A.
William C. Shepard........................ VP & General Manager,
Professional Products
Group, Intuit, Inc.
John A. Stauffer.......................... Sr. VP of Product Planning,
Ceridian Corporation/
Ceridian Tax Service.
------------------------------------------------------------------------
Mr. Houghton. Thank you very much, Mr. Lacijan.
Mr. Coyne.
Mr. Coyne. How are you?
Mr. Lacijan. Good morning, it's a pleasure to see you
again, sir.
Mr. Coyne. One of the major IRS reforms involves
elimination of the barriers to electronic filing to be sure.
Which barriers to expanding that base still exist and still
need to be eliminated?
Mr. Lacijan. I think there are several. When I think of
barriers, I like to think of individual segments of the
taxpayer population and think of barriers that might exist for
different segments. So over 50 percent of tax returns are done
by paid preparers. So let me address that first.
Several things still impede paid preparers. First, one of
the biggest complaints they have is that the IRS doesn't accept
electronically all forms and all schedules. The IRS
counterpoint to that is that, the volumes we don't accept are
very low. However, the preparers, I think, come back with the
argument that, well, we're running a business, we want to have
a single method of doing tax filing in our office. We want a
single pipeline.
So we don't want to, in the middle of a busy tax filing
season, have to make a lot of decisions about, we can file this
electronically, we can't file electronically. They would like a
single way to do it so they can streamline their businesses and
make them more efficient.
Another barrier is the signature. IRS paperless, electronic
filing has not been entirely paperless in the past. There's
form 8453, a signature form, which still must be mailed in. A
barrier that this presents to taxpayers, or tax preparers, a
taxpayer will come in early in the season, drop off all his
records, and the tax preparer will take those records, fill out
the taxpayer's return, normally using a computer. Then he would
take the paper, if it's a paper return, he would send it to the
taxpayer, and say, ``If you approve this, sign it and mail it
in.'' So the taxpayer, the client, only makes one visit to the
office.
With electronic filing, the taxpayer has to make a second
visit to the office to sign the return and have the spouse sign
the return. So it takes up more time for the preparer,
especially in the middle of tax filing season. So they would
much prefer to have a one visit model instead of a two visit
model.
So I think those are a few of the barriers. It does cost
them extra money, because they have to pay their external
transmitters to file electronically. That would be another
example.
Let me shift to another taxpayer segment where I still
think we have a problem. One of the advantages of electronic
filing is that if you're a refund taxpayer, you get your refund
in 2 weeks instead of 6 weeks. So you have an acceleration of
funds by 4 weeks.
If you're a balance due taxpayer, which constitutes about
30 percent of the tax-paying public, you don't have the
advantage of a rapid refund. In fact, filing electronically
actually separates you from your money more quickly than if you
were paying by check. There's always been a lot of concern that
electronic filing does not present to the balance due taxpayer
the advantages that it presents to the refund taxpayer.
Mr. Coyne. At the bottom of page 2 in your testimony, you
say clearly, although the IRS has made a good start with
electronic filing, the broadest possible set of new initiatives
must be considered.
Mr. Lacijan. Yes.
Mr. Coyne. Including those that require legislative action.
Would you just touch on a few that you think require
legislative action?
Mr. Lacijan. Certainly. Let me give a few examples. It
depends on how far out of the box you want to think. But
basically, things that have been brought up in the past would
be tax credits filing electronically. This could be an
expensive item. If you gave people a $5 tax credit for filing
electronically, 100 million returns end up costing you a half a
billion dollars.
On the other hand, if you think of it as a reduction of
taxes for people who help their government by filing
electronically, maybe in that perspective it's not so
expensive.
The IRS Restructuring Commission actually recommended due
date extensions for electronic filing. Really that would
require legislative action.
Likewise, instead of a due date extension, if there was a
warehousing of payments so if people who filed and paid
electronically would at least get the same type of float that
paper filers do, that would require a legislative extension,
legislative action. And if we wanted to introduce new
legislation, or to change the signature requirement around to
allow IRS to waive the signature requirement, that actually has
been done in the IRS Restructuring Act, but apparently the IRS
has not taken advantage of that. It's possible that even more
legislative action could be taken in that area.
Mr. Coyne. Thank you very much.
Mr. Houghton. Thank you. Mr. Portman.
Mr. Portman. Mr. Lacijan, thank you for your service as
Chair of this important Committee and your ongoing interest in
the IRS. I thought you might have had enough after being on the
commission staff, and working at this diligently for about a
year and a half. But apparently you haven't, and I'm very happy
that you continue to focus on this so much and spend so much of
your time on it.
There's nobody I know of who has a better grasp of this and
has a more objective approach to it. So we are lucky to have
you, we being the taxpayers of the United States.
As you know, I feel that we could have done more in the
legislation, and I wish the IRS were doing more even with what
we did legislate in this area. I don't want to get into a lot
of issues where we can't make progress this morning. But if you
could just briefly tell us what your recommendation would be,
either personally or representing the Committee in your role as
Chairman, with regard to time extensions.
As you know, I believe that is something that could provide
an incentive to electronic filers. The 80 percent goal is going
to be tough to reach. I think by having a 19-percent increase
in electronic filing, we have made a first good step. But every
additional percentage beyond that 19 percent is going to be
harder and harder to achieve, I would think.
And finally, to get that marginal increase at the end is
going to be, I would imagine, tougher than any of us had
anticipated. So if you could comment briefly on whether you
think that's a specific issue where we could make some progress
through legislation and the IRS implementation.
Mr. Lacijan. I think there are several issues surrounding
this. We did some analysis during the Restructuring Commission,
which you may recall, looking at when people file. Basically,
there's a group of refund taxpayers who tend to file early,
February, March, because they want to get their refund quickly.
Electronic filing is very appealing to this group.
There's also a group of balance due taxpayers who tend to
wait until the very end, April 15. They put their check in the
mail along with their return, and because of the flood of,
there's virtually 20 million returns that come in the last
week. So their return and their check goes up to the local
service center. It might sit in a van for a couple of days, it
gets opened eventually. By the time the IRS gets around to
cashing that check, it probably doesn't hit their account until
maybe the 1st of May.
So people want to take advantage of that float.
Mr. Portman. That's the warehousing of tax payments you
talked about earlier.
Mr. Lacijan. People who file on paper get an automatic
warehousing of 2 weeks, because it's literally in the truck or
in the service center and doesn't hit their accounts. Then you
have a third group of people who I would call the
procrastinators, who are probably the best example of this. I
once saw a cartoon during the Restructuring Commission, it
showed this harried executive getting on a plane. And it says,
Harry is flying to the West Coast so he can have three more
hours to file his tax return.
So we have about 10 million refund taxpayers who also file
during the last week of April, which doesn't make economic
sense, but it's somewhat human nature that people put things
off. So if you look at especially those last two groups, these
are people who would like to take the extra time, the balance
due people obviously have a rational reason for filing late,
because they want to get another extension, and the
procrastinators, clearly, they're just too harried.
One of the things we find is, if you talk to paid
preparers, they are responding to their clients' needs. If
clients would come to their preparers and say, look, we don't
want to file until the 30th, we'll gladly file electronically
just to get that extra 2 weeks, I think there would be a lot of
demand that would enter from the client side of the preparer
segment saying, we want to file electronically just to take
advantage of those 2 weeks.
Now, I would like to address the economic issues associated
with that for a second. Because if you do, if you allow either
a time extension of two or 4 weeks, which is what the
Commission recommended, for the balance due taxpayers, you
would lose two to 4 weeks of float, of that money. However, if
you consider the equivalent for paper, they're already getting
2 weeks of float, so the IRS actually is incentivizing them in
a way to stay in paper.
Also, we have already accelerated the refunds for 70
percent of taxpayers by cutting down their refund from 6 weeks
to 2 weeks. So no one has really ever costed that out in terms
of the extra service we're giving taxpayers. I say we should at
least give balance due taxpayers the same type of break we're
giving the refund taxpayers.
Mr. Portman. But the other point you made, of course, was
the net cost to the Federal Government would probably be lower,
based on the analysis that you and others did at the
Commission, because of the savings to the government of not
having all those costs, overhead, labor costs and so on, and
error costs that are incurred in paper returns as opposed to
electronic filing.
Mr. Lacijan. That is correct. Also, if people file
electronically and they pay electronically, that does reduce a
lot of the processing costs associated with the payment as
well, not just the filing.
Mr. Portman. Well, I hope that as you try to reach your
goal of 80 percent, you will continue to encourage us, nip at
our heels here in Congress, try to get us to move forward with
new initiatives to meet what is a very ambitious but very
important goal for the taxpayer. Thanks, Chuck.
Mr. Lacijan. One thing I've discovered during the ETAAC
meetings is that our members are definitely not bashful.
Mr. Houghton. Thank you very much. Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Mr. Lacijan, welcome.
Earlier this morning I had the opportunity to address a group
of Washington interns. I had one bright, energetic young fellow
who actually is doing an internship right now with the Internal
Revenue Service.
During the question and answer session, we talked about
electronic filing. He posed the hypothetical that maybe we
should provide some financial incentive to taxpayers, through a
tax deduction or tax credit. I think he's got a bright future
on the Ways and Means Committee ahead of him. I think he's from
your district, Mr. Portman, so you may want to inquire.
Earlier this Committee had a hearing on simplification, and
it was on the Chairman's idea. I had a constituent who was
sitting where you are, a tax practitioner. The essence of his
testimony was that taxpayers really don't have an intimate
knowledge of their financial affairs, and thus, many more paid
preparers are being brought into the loop.
What can the Service do, the IRS do, to make it more
attractive for paid preparers? I notice on Table 1, Page 3,
that there is an increase, at least a projected increase and an
actual change of positive increase as far as practitioners. But
what can be done to encourage paid preparers to utilize
electronic filing?
Mr. Lacijan. I think ultimately to attract paid preparers,
and I really believe that if we're going to reach the goal in
2007, the IRS needs virtually every paid preparer to file
electronically. That's a big hurdle to overcome. But I think
that's actually what it's going to take.
What that means is the IRS will have to make it so
attractive to paid preparers that it really provides them such
a competitive edge over the paper preparer that there's no
choice, they have to do it.
Now, let me talk about some of the things that might
motivate that. And I think that some recent research has
indicated, it's not necessarily just money. It wouldn't
necessarily be reimbursing the paid preparer like $2 or $3 per
every electronically filed return they sent in. It has more to
do possibly with services they could offer their clients that
paper preparers could not.
Some of the things that have been considered here are
electronic power of attorney. If paid preparers could have
electronic power of attorney, they could intercept some of the
notices or deal with IRS directly on their client's behalf much
more easily. That would be very attractive to paid preparers.
Another item might be access to account information. If
paid preparers with the appropriate power of attorney could
actually access an IRS account for their clients, and this is
especially true in the business world, because you know, as
individuals we pay once a year and we file, but businesses pay
many more taxes, withholding, they have 941s, 942s, their own
corporate tax. So if they could, sometimes things are more
likely to go awry in terms of payments being misapplied over
different periods.
So if a tax preparer could actually access the client's
account electronically on his own and find out where his client
stood, I think that would be another very attractive service
for tax preparers. We can't know too much about how the tax
preparers do their businesses and what makes their businesses
more efficient. Those are the types of things, I think, that
would make it far more attractive.
Let me touch on one other item. The IRS calls this third
party rules. But right now, there are a number of different
types of preparers. One would be a circular 230 preparer. These
are tax professionals, they are either accountants, CPAs,
they're lawyers or they're enrolled agents. They have licenses,
they have standards of conduct, they have what they call
continuing professional education, or CPE, requirements. They
are regulated, CPAs and lawyers, they all have a different way
of getting their license, but they're all basically regulated.
Then we have a process called electronic return originator.
These are people who have been licensed or approved by the IRS
to file electronically. They also have an application and
approval process they go through.
Then there's another group, people who just file on paper.
That could be virtually anybody. I could go home and hang out a
shingle, as could you when you retire, and offer tax preparer
services. These people don't go through the suitability checks
that EROs go through or the licensing checks that the circular
230 preparers go through.
So one of the concerns of ETAAC, and this is mentioned in
our report, is that the IRS is sending out a clear, but
somewhat unintentional message, that if you really want to
avoid standards, stick to the world of paper. We think this is
something that deserves some scrutiny. It's been pointed out to
me that it takes 1,000 hours of training before someone is
license as a barber. But yet we allow anybody to do tax
returns.
No one has suffered financially that I'm aware from a bad
haircut. Yet anybody can do a tax return.
Mr. Hulshof. Thank you, Mr. Lacijan. Thank you, Mr.
Chairman.
Mr. Houghton. Thank you very much. Thanks, Mr. Lacijan,
certainly appreciate your testimony. It's wonderful to have you
here.
Mr. Lacijan. It's a pleasure to be here.
Mr. Houghton. All right, thank you.
Now we're going to hear from Mr. James R. White, Director
of Tax Policy and Administration Issues in the General
government Division of the U.S. General Accounting Office.
STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX POLICY AND
ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S.
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY RANDOLPH C. HITE,
ASSOCIATE DIRECTOR, GOVERNMENTWIDE AND DEFENSE INFORMATION
SYSTEMS, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION
Mr. White. Mr. Chairman and Members of the Subcommittee,
I'm very pleased to be here today on the anniversary of the IRS
Restructuring and Reform Act to discuss management challenges
that IRS faces as it modernizes. Accompanying me is Randy Hite,
Associate Director responsible for our work on IRS' information
systems.
In passing the Restructuring Act, Congress signaled its
strong concern that IRS had been over-emphasizing revenue
production at the expense of service and fairness to taxpayers.
In that spirit, Commissioner Rossotti has provided a compelling
vision of a new IRS, one that provides top quality service to
taxpayers.
The Commissioner has more than a vision, however. In
addition to a new mission statement and strategic goals, he has
outlined and begun to implement a modernization strategy that
includes reorganizing IRS, new business practices, new
accountability, new performance measures and new technology. If
successfully implemented the modernization strategy could
fundamentally change IRS' culture to one that embraces taxpayer
service as a core value.
Given the magnitude of what is planned, it should surprise
no one that IRS, an agency with a long history of stovepipe
management and a culture driven by enforcement statistics, will
be challenged to accomplish its ambitious agenda. Three areas
of challenge stand out.
First, implementing such a comprehensive strategy while
continuing the business of day to day tax administration will
push IRS managers and staff to their limits. While challenging,
we agree with the Commissioner that a comprehensive approach is
proper. Simply reorganizing IRS, for example, without
concurrent changes to work process and information systems,
will do little to improve the quality of service to taxpayers.
Second, if it is to deliver better service, IRS must deal
with several challenges in how it develops and manages its
human capital. For example, performance measures can create
strong incentives to change behavior. But IRS has yet to
develop one of its measures of organizational performance, the
taxpayer compliance rate. Without this, IRS has said that:
Informed decisions on strategies to encourage voluntary
compliance . . . will be impossible, and the historic tendency
to fall back on enforcement revenue as a measure of performance
may reoccur.
Another human capital challenge involves IRS' employee
evaluation system. In ongoing work for this Subcommittee, we
found that the current evaluation system does not support the
new IRS mission, and some IRS managers seem confused about the
distinction between good customer relations and revenue
collection. For example, one manager in commenting favorably on
an employee's customer relations skills wrote, ``The agent
always seeks to obtain full payment of the deficiency,
penalties and interest.''
While collecting outstanding tax liabilities is important,
this is not what is meant by customer relations. It may be
years before IRS has a new evaluation system fully in place.
Fortunately, our ongoing work also shows there are
opportunities in the interim to better utilize the existing
evaluation system to support improved taxpayer service.
One more human capital challenge is ensuring that IRS
managers from frontline supervisors through the senior
executive corps have the skills they need to lead and manage
the new IRS. Our work has shown that basic management tools are
not always routinely used. To illustrate, when we reviewed 19
of IRS' customer service improvement initiatives that had
progressed beyond the planning phase, we found many were
missing basic management information such as completion dates
and performance measures. To their credit, IRS executives have
been responsive to our findings. But we believe generating and
using such basic management information needs to become
routine.
The third area of challenge I want to discuss is
information systems modernization. The challenges include
completing the modernization blueprint, establishing the
capability to build and acquire modern systems, and investing
in small, low-risk increments. The key to effectively
addressing these challenges is to ensure that longstanding
modernization management and technical weaknesses are corrected
before IRS invests large sums of modernization funds.
There is some good news. Last month we reported that IRS
has initiated appropriate first steps to address these
weaknesses. While IRS is on the right track, these first steps
will not fully implement our past recommendations or eliminate
systems modernization weaknesses. IRS leadership says it
understands and is committed to fully implementing our
recommendations.
Mr. Chairman, that concludes my statement. We would be
happy to answer 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: I am pleased
to be here today on the 1-year anniversary of the Internal
Revenue Service (IRS) Restructuring and Reform Act of 1998
(Restructuring Act) \1\ to discuss management challenges that
IRS faces in modernizing its organization and reforming its
culture. As my testimony underscores, the challenges that the
agency faces in implementing these reforms are no less
significant than the value of the improvements that could be
achieved.
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\1\ P.L. 105-206 (July 22, 1998).
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Depending on the outcome of IRS' efforts, enactment of the
Restructuring Act may prove to be a significant turning point
in the history of IRS. Its passage signaled Congress' strong
concern that IRS had been overemphasizing revenue production
and compliance at the expense of fairness and service to
taxpayers. It also mandated changes to improve the situation.
Among other things, the Restructuring Act required IRS to (1)
adopt a new mission statement to place greater importance on
serving the public and meeting taxpayer needs, (2) develop and
implement a reorganization plan to include the establishment of
new operating units serving particular groups of taxpayers
having similar needs, (3) conduct training programs to ensure
that managers and frontline employees are schooled in the
importance of customer service and have the skills to provide
it, and (4) carry out numerous specific actions to enhance
taxpayers' rights.
Commissioner Rossotti has embraced the spirit of the
Restructuring Act and provided a compelling vision of what he
wants IRS to become--a fully modernized agency providing top-
quality service to taxpayers. The Commissioner has more than a
vision, however. In addition to a new mission statement and
supporting strategic goals,\2\ he has also outlined and begun
to implement a modernization strategy that includes five
interdependent components--what IRS has dubbed its ``five
levers of change.'' The five components are (1) revamped
business practices, (2) organizational restructuring, (3)
management roles with clear responsibility, (4) balanced
measures of performance, and (5) new technology. If
successfully implemented, the modernization strategy could
fundamentally change IRS' culture to one that embraces customer
service as a core organizational value.
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\2\ IRS' new mission statement reads, ``Provide America's taxpayers
top quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.'' IRS' supporting strategic goals are to (1) provide
top quality service to each taxpayer, (2) provide service to all
taxpayers by applying the law with integrity and fairness, and (3)
increase productivity by providing a quality work environment for its
employees.
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Given the reforms that are planned, it should surprise no
one that IRS--an agency with a long history of stovepipe
management and a culture driven by enforcement statistics--will
be challenged to accomplish so ambitious an agenda. IRS has a
poor track record for implementation, and many of its past
efforts would be considered modest in comparison to the current
modernization.
My statement today is based on our past work and our
ongoing reviews of IRS' reorganization process, its performance
management system, and systems modernization efforts. My
statement makes the following points.
We agree with the Commissioner that the various
components of IRS' modernization must be implemented in an
integrated fashion. Simply restructuring the organization, for
example, without concurrent revisions to work processes and
related information systems, will do little to improve the
quality of service being provided to taxpayers. However,
successfully implementing such a comprehensive modernization
strategy, while continuing the business of day-to-day tax
administration, will push IRS managers and staff to their
limits. Particularly important will be the capacity of middle
managers to lead and manage comprehensive change.
No matter how much IRS changes its organization,
work processes, and information systems, its ability to
fundamentally change the way it interacts with taxpayers hinges
on its ability to ensure that employees demonstrate the desired
attitudes and behaviors. A results-oriented approach to
managing human capital has the potential to deliver such a
result. To fully realize this potential, IRS must finish
developing key organizational performance measures, deal with
an employee evaluation process that is not currently aligned
with IRS' new mission, and develop and deliver a comprehensive
training program for both frontline staff and middle managers.
IRS continues to face formidable system
modernization challenges. They include (1) completing the
modernization blueprint that IRS issued in May 1997 to define,
direct, and control future modernization efforts; (2)
establishing the management and engineering capability to build
and acquire modernized systems; and (3) investing in small,
low-risk, cost-effective modernization increments. The key to
effectively addressing these challenges is to ensure that long-
standing modernization management and technical weaknesses are
corrected before IRS invests large sums of modernization funds.
IRS recently initiated appropriate first steps to address these
weaknesses via its initial modernization expenditure plan that
represents the first step in a long-term, multi-increment
modernization.
Ability to Manage and Integrate the Interdependent Change Efforts Is
Critical to IRS' Success
One great strength of IRS' modernization strategy is its
comprehensive approach to change. If implemented in an
integrated manner, the five levers of change can fundamentally
alter the way IRS interacts with taxpayers. However, this
comprehensive approach also presents a major challenge for IRS.
Effectively implementing such a broad and complex set of
interdependent changes will strain IRS managers and staff.
Having to do so while continuing to operate the existing tax
administration process will strain them even further.
The Commissioner believes, and we agree, that to effect
real change, IRS must address all five components of its change
strategy concurrently because the components are
interdependent. Simply restructuring IRS, without concurrent
changes in processes for interacting with taxpayers and in the
measures that are used to assess those interactions, will have
little impact on service to taxpayers. Similarly, it makes
little sense to design new work processes without providing
employees with the tools they need to effectively implement the
new processes. For example, IRS cannot provide top-quality
service to taxpayers who have questions about their accounts
unless employees can quickly access a modern information system
that contains accurate and up-to-date information on taxpayers'
accounts.
Undertaking all of the work associated with business and
systems modernization while continuing to process returns,
maintain taxpayer accounts, and enforce the tax law will push
IRS managers and staff to their limits. Accordingly, the
Commissioner and his senior executives are attempting, among
other things, to set priorities and adjust time frames. For
example, in light of the provision in the Restructuring Act
that specified a goal of having 80 percent of all returns filed
electronically by 2007, the Commissioner adjusted the
sequencing of information system development efforts by
accelerating electronic filing elements.
For IRS modernization to succeed, however, middle managers
will also have to play a role. Because of the magnitude of the
proposed changes, these managers will have to take
responsibility for developing many of the details of change
initiatives and pushing the initiatives down through the
organization. Particularly important is the capacity of middle
managers to lead and manage comprehensive change. I will talk
more about management capacity later.
IRS will also have tough choices to make in balancing
``stay-in-business'' needs with long-term improvements. For
example, IRS will have to evaluate the trade-offs between
changing existing information systems to support or enhance
current operations and waiting for the new business processes
and systems to be rolled out.
Based on over a decade of work, we believe that a results-
oriented, performance-based approach to management can provide
IRS with the tools it needs to meet the formidable challenges
inherent in its comprehensive approach to change. We are
heartened by the fact that the modernization strategy outlined
by the Commissioner is consistent with such an approach. As
noted earlier, reorganizing IRS alone will not fundamentally
change the way IRS interacts with taxpayers. Indeed, our case
studies of leading organizations using performance and
accountability management principles found that the
organizations had varied structures, but similar results-
oriented management strategies.\3\ By integrating results-
oriented management into the day-to-day activities and culture
of the organization and holding managers accountable for doing
the same, IRS can help avoid the danger of its reforms becoming
hollow, paper-filled exercises. Among other things, results-
oriented management includes (1) building, maintaining, and
marshaling the knowledge, skills, and abilities of employees
(i.e., human capital) and (2) developing and effectively using
information systems to achieve program results. As discussed in
the next two sections, results-oriented management of its
resources, both human capital and information systems, poses
significant challenges for IRS.
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\3\ Numerous reports in recent years have discussed results-
oriented management principles and implementation of the Government
Performance and Results Act (P.L.103-62) by federal agencies. A major
report addressing these issues was Effectively Implementing the
Government Performance and Results Act (GAO/GGD-96-118, June 1996).
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Managing for Performance Poses Significant Human Capital Challenges
New business processes, organizational structure, and
technology--alone or together--will not significantly improve
service to taxpayers without corresponding improvements in how
IRS manages and develops its human capital. A results-oriented
approach to managing human capital--an approach that aligns
employee performance management and training with IRS' new
mission statement, strategic goals, and performance measures--
has the potential to deliver such improvements. However, to
realize the potential, IRS needs to overcome three challenges.
First, a key organizational performance measure, the rate of
taxpayer compliance with the tax laws, has not been developed.
Second, a new employee appraisal system aligned with the
organizational measures is years away from complete
implementation. And third, training that addresses the needs of
different employee groups, such as middle managers, has not
been developed.
Performance Measures
Performance measures can create powerful incentives to
achieve the cultural and behavioral changes that will be needed
for IRS to effectively perform its new mission. IRS has begun
implementing a new set of organizational performance measures
that are to balance customer satisfaction, employee
satisfaction, and business results. However, some measures have
yet to be developed.
Developing a business results measure of taxpayer
compliance \4\ that can be balanced with customer satisfaction
will be particularly important. As IRS has stated, in the
absence of such compliance measures, ``informed decisions on
strategies to encourage voluntary compliance . . . will be
impossible, and the historic tendency to fall back on
enforcement revenue as a measure of performance may reoccur.''
\5\ In a hearing held by this Subcommittee almost 2 years ago,
we highlighted our concerns about overreliance on enforcement
revenue as a measure of performance.\6\ We concluded that such
overreliance could create undesirable incentives for IRS
auditors to recommend taxes that would be unlikely to withstand
a taxpayer challenge, imposing an unfair and unnecessary burden
on some taxpayers.
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\4\ Taxpayer compliance is the extent to which taxpayers file
required returns, correctly determine their tax liability, and pay the
taxes they owe.
\5\ Modernizing America's Tax Agency (IRS Publication 3349, Feb.
1999, pp. 44-45).
\6\ Tax Administration: Taxpayer Rights and Burdens During Audits
of Their Tax Returns (GAO/T-GGD-97-186, Sept. 26, 1997).
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In the past, IRS measured compliance through its Taxpayer
Compliance Measurement Program (TCMP). Studies done under that
program involved detailed audits of a statistically valid
sample of tax returns. IRS discontinued these studies because
of concerns about the additional burden placed on the taxpayers
who were the subjects of the detailed audits. Since then, IRS
has not identified a viable substitute for TCMP studies to
assess overall compliance.
Without a measure of taxpayer compliance, IRS cannot
balance business results with customer satisfaction. Further,
taxpayer compliance studies have been used to help IRS target
audits on the most noncompliant taxpayers. Consequently, the
lack of current compliance data could actually decrease service
to taxpayers. IRS is concerned that increasingly out-of-date
information on compliance will result in more and more
compliant taxpayers being hit with unnecessary audits. For both
these reasons, we believe that IRS needs a strategy for
ensuring the availability of statistically valid compliance
data, while limiting the burden that collecting such data
imposes on taxpayers.
Employee Evaluation Process
Because IRS' current employee evaluation process is not
aligned with its new mission and does not support the culture
that IRS hopes to create, it must be revised. Last year, we
reported that 75 percent of IRS' revenue agents, tax auditors,
and revenue officers believed that tax enforcement results
affected their evaluations--despite an IRS policy prohibiting
the use of such results in evaluating employee performance.\7\
Our ongoing review of the two most recent evaluations received
by these employees bears out such perceptions. In examining a
random sample of their evaluations, we found a strong emphasis
on compliance compared to customer service. Moreover, when
supervisors made comments on customer service, they sometimes
seemed to equate good customer relations with success in
obtaining full payment in every case. To illustrate, when
discussing customer relations skills, one manager wrote in an
employee's evaluation:
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\7\ IRS Personnel Administration: Use of Enforcement Statistics in
Employee Evaluations (GAO/GGD-99-11, Nov. 30, 1998).
Over the last year, the Service is emphasizing that payments
be obtained at the conclusion of the examination. It can truly
be said that the agent has kept to this philosophy. The agent
always seeks to obtain full payment of the deficiency,
penalties, and interest. This shows a strong commitment to the
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Service programs.
IRS says that it recognizes the problems with the current
evaluation process and the important role that employees will
have in modernizing the agency. IRS expects to change the
evaluation process when it revamps its entire performance
management system.
Although IRS is on the right track, it will be years before
a new evaluation process is fully operational. IRS cannot
afford to wait that long. It is frontline employees--not their
supervisors or other IRS managers--who have the most direct and
potentially confrontational interactions with taxpayers.
Continued reliance on an evaluation process that fails to
adequately balance service to taxpayers with compliance
potentially could undermine the success of the entire
modernization effort. Although organizational structure and
systems are important, it is the attitudes and behaviors of
employees that will ultimately affect taxpayers.
Fortunately, there are opportunities for reinforcing the
importance of serving taxpayers within the current evaluation
process. During our ongoing review of the existing evaluation
process, we identified several features, such as narrative
comments and field visits, that supervisors do not use
systematically when evaluating their employees. These features
could be used to greater advantage to reinforce the importance
of customer service among enforcement employees. For example,
the narrative portion of an employee's written evaluation
provides supervisors with an opportunity to focus on employees'
customer service skills and contributions. Also, field visits
that are to be conducted as part of the employee evaluation
process could provide excellent vehicles for supervisors to
directly observe employee-taxpayer interactions and to provide
coaching and feedback to employees.
Training
Training has proven to be an important tool for agencies
that want to change their cultures. To have this kind of
impact, IRS' training will have to be comprehensive both in its
subject matter and in who receives it. Training will need to
(1) cover the new organizational structure, new business
processes, and new information systems; (2) cover performance
measures and the use of such measures to manage IRS; (3) be
provided to all employees from frontline staff to senior
managers; and (4) be aligned with the performance management
system and new mission. For training to have real impact, it
will have to be continuously reinforced in the day-to-day work
environment. IRS is still defining its modernization-related
training requirements and assessing its ability to deliver
those requirements, but the plans we've seen thus far address
all four of the issues outlined above. However, implementing
all of this will be neither cheap nor easy.
After reorganization, most frontline employees and their
immediate supervisors are to be in the same or similar jobs.
Job-specific training will be important, however, because IRS
is beginning to implement significant changes to its
organization, processes, and information systems. For example,
in lieu of hiring a large number of seasonal employees to
handle the return processing workload during the annual filing
season, IRS plans to increase the number of permanent employees
and expand their job responsibilities to include compliance
work that they can do after the filing season. Those employees
will have to be cross-trained so that they can handle both
their return processing and compliance responsibilities. Other
employees who will have to be cross-trained to handle the
responsibilities envisioned by IRS' plans include (1) managers
who are to supervise groups that include persons doing audit
work and persons doing collection work and (2) employees,
referred to as ``tax resolution representatives,'' who are to
provide an array of services, including certain audit and
collection services, to taxpayers visiting IRS walk-in sites.
This kind of cross-functional expertise is consistent with IRS'
efforts to provide top-quality customer service. It remains to
be seen whether employees can effectively fill these kinds of
cross-functional roles, but it is clear that training will be a
critical factor in their success. Another factor will be the
way training is reinforced outside the classroom, for example,
by supervisors acting as role models.
As I mentioned earlier, the changes envisioned at IRS are
so comprehensive that the agency's top leadership cannot work
below a very strategic level. Fundamentally changing the way
IRS interacts with taxpayers depends on the capacity of lower-
level managers, from frontline supervisors up through the
senior executive service, to do the detailed planning, leading,
and managing necessary for successful IRS modernization. These
lower level managers must be skilled in planning, performance
measurement, and the use of performance information in
decision-making. Our work has shown that ensuring that IRS has
the capacity it needs in this area will be a challenge.
For example, in January 1998, IRS established a central
Taxpayer Service and Treatment Improvement Program to oversee
implementation of numerous customer service improvement
initiatives that were on the books at that time. By January
1999, IRS had set priorities and assigned accountability for
their completion to specific executives. However, when we
reviewed 19 of the initiatives that had progressed past the
planning and design phase, we found that many were missing
basic management information such as completion dates and
performance measures.\8\ Such basic management information
should allow IRS to track progress toward goals and provide a
better basis for organizational and management decisions.
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\8\ IRS Customer Service: Management Strategy Shows Promise But
Could be Improved (GAO/GGD-99-88, May 5, 1999).
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To their credit, IRS executives have been responsive to our
findings and now have draft guidance for implementing our
recommendations. Our point today is that such guidance should
not have been necessary. Generating and using basic management
information needs to become routine for all levels of IRS
management.
IRS Continues to Face Formidable Systems Modernization Challenges
The challenges that IRS faces in modernizing its tax
systems are significant, and the stakes are high. IRS' well-
publicized, failed prior attempts to leverage information
technology in administering our nation's tax laws serve as an
alert to the significant challenges that lie ahead. The key to
effectively addressing these challenges is to ensure that long-
standing modernization management and technical weaknesses are
rectified before IRS begins investing large sums of money.
In 1995, we reported on the weaknesses that were the root
causes of IRS' past modernization problems, recommended ways to
correct them,\9\ and designated the modernization as a high-
risk or ``challenged'' federal program.\10\ Since then, we have
reviewed IRS' actions to address our recommendations and
strengthen its modernization capability, such as the
development of a modernization blueprint in May 1997, and we
have made additional recommendations in light of IRS'
actions.\11\
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\9\ Tax Systems Modernization: Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156, July
26, 1995).
\10\ High-Risk Series: An Overview (GAO/HR-95-1, Feb. 1995).
\11\ For example, see Tax Systems Modernization: Actions Underway
But IRS Has Not Yet Corrected Management and Technical Weaknesses (GAO/
AIMD-96-106, June 7, 1996) and Tax Systems Modernization: Blueprint Is
a Good Start But Not Yet Sufficiently Complete to Build or Acquire
Systems (GAO/AIMD/GGD-98-54, Feb. 24, 1998).
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The good news is that IRS' executive team, under the
direction of the Commissioner and Chief Information Officer,
have initiated appropriate first steps to begin addressing
system modernization management and technical weaknesses. Last
month, we reported on IRS' initial modernization expenditure
plan.\12\ We concluded that the initiatives defined in the plan
were consistent with our past recommendations for establishing
effective modernization management and engineering capabilities
and incrementally acquiring architecturally sound system
solutions to satisfy validated business needs. Additionally, we
found that the plan satisfied legislated conditions for systems
modernization.
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\12\ Tax Systems Modernization: Results of IRS' Initial Expenditure
Plan (GAO/AIMD/GGD-99-206, June 15, 1999).
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The initial expenditure plan defines modernization
initiatives for a 5-month period ending in October 1999 and
thus represents the first incremental step in a long-term,
multi-increment modernization process. Once implemented, this
initial expenditure plan alone will neither fully implement our
past recommendations nor eliminate the systems modernization
weaknesses and challenges that our recommendations are intended
to effectively mitigate. IRS leadership says that it
understands this and is committed to fully implementing our
recommendations and effectively addressing the many challenges
that lie ahead.
Our recommendations and the challenges still confronting
IRS fall into the following three groups, each of which is
discussed below: (1) completing the modernization blueprint;
(2) establishing project management and system/software
engineering capability; and (3) investing in small, low-risk,
cost-effective modernization increments. Until our
recommendations are fully implemented, we will continue to
designate IRS' tax systems modernization as a high-risk and
``challenged'' federal program.
Completing the Modernization Blueprint
In response to our 1995 recommendations,\13\ IRS issued, in
May 1997, its modernization blueprint, including about 3,600
high-level business requirements, a
target enterprise systems architecture that described in
general terms the future systems environment needed to satisfy
the business requirements, and a general sequencing plan for
transitioning from IRS' current systems environment to its
future systems environment. In September 1997 congressional
briefings and in a subsequent report,\14\ we concluded that the
blueprint provided a solid foundation from which to define the
level of detail and precision needed to effectively and
efficiently build a modernized system of interrelated systems.
At the same time, we noted that the blueprint was not yet
complete and did not provide enough detail for building or
acquiring architecturally compliant systems. Additionally,
because the blueprint was developed before the Restructuring
Act and the Commissioner's organizational modernization, we
reported in January 1999 that the blueprint needed to be
validated in light of these organizational and business process
changes.
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\13\ GAO/AIMD-95-156, July 26, 1995.
\14\ GAO/AIMD/GGD-98-54, Feb. 24, 1998.
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IRS has acknowledged these limitations and plans to
complete the blueprint. In fact, its initial expenditure plan
defines initiatives intended to validate business requirements
and provide missing architecture precision and detail for
ongoing system initiatives. Additionally, the initial
expenditure plan provides for a revised modernization
sequencing plan as well as the selection of enterprise
architectural standards in such areas as data base management,
security, communications, user interface, and client and server
platforms.
Completing the modernization blueprint poses a formidable
challenge for several reasons.
First, IRS' organizational and business
restructuring is ongoing, meaning that both completion of IRS'
enterprise systems architecture and revision of its sequencing
plan must be closely coupled with and validated against these
restructuring efforts. Doing so will not be easy and will
require an unprecedented integration of IRS' business and
systems organizational cultures. To do less presents the risk
that modernized systems will not effectively and efficiently
support IRS' core mission needs.
Second, IRS has a series of enterprise
architectural decisions that need to be made before investing
in modernized systems, beginning with architectural principles
(e.g., Will users be supported regardless of geographic
location? Will IRS' existing investment in mainframe technology
be preserved?), followed by logical architectural
characteristics (e.g., What data structure will facilitate
business process reengineering efforts? Should a geographic or
a business process ``tiered'' architecture be adopted?), and
culminating in how technology will be physically implemented
(e.g., What operating system, hardware platforms, and database
management system standard should be used?). The long-term
implications of these interrelated enterprise architectural
decisions are enormous. If properly made and effectively
implemented, these decisions can guide and constrain the
architectural makeup of a secure, interoperable, scalable, and
maintainable future systems environment. If not, IRS will
likely remain mired in its currently inefficient and
ineffective stovepiped systems environment.
Third, IRS must minimize the number of new system
development and acquisition projects that it undertakes until
it addresses the above key architectural decisions. Otherwise,
IRS will be forced to align certain system-unique architectures
with its ``to-be-completed'' enterprise architecture. A case in
point is IRS' ongoing Integrated Personnel System project,
which is part of a Treasury-wide effort that will use an Oracle
database management system running on a UNIX platform.\15\ Once
IRS' enterprise architectural decisions have been made, IRS
will have to integrate this personnel system with its systems
developed or acquired according to its enterprise architecture.
Depending on the extent of compatibility, this could mean that
IRS will have to incur the cost of additional hardware and
software associated with integrating the different products.
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\15\ A UNIX platform consists of UNIX operating system software
(originally developed at AT&T's Bell Laboratories and commercially
available from various companies) and compatible hardware, which
together support the operation of application software.
Developing Project Management and System/Software Engineering
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Capability
IRS has historically lacked disciplined and structured
processes for managing information technology (IT) projects and
internally developing software-intensive systems. In 1995, we
made recommendations to correct these weaknesses,\16\ and, in
response, IRS defined (as part of its 1997 blueprint) a systems
life cycle framework that described the ``cradle-to-grave''
processes for managing IT projects and building systems. At the
same time, IRS stated its intention to rely more on contractors
to build modernized systems, and thus become a system/software
acquirer rather than an in-house system/software developer as
it had been in the past. To this end, IRS also stated that it
planned to ``partner with'' a Prime Systems Integration
Services (PRIME) contractor in the acquisition and integration
of modernized systems.
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\16\ GAO/AIMD-95-156, July 26, 1995.
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In February 1998, we reported that although the systems
life cycle overview provided a reasonable framework, it was not
yet complete and did not provide the needed specificity to
adequately build modernized systems.\17\ For example, IRS did
not have detailed process definitions for any of the systems
life cycle phases. In addition, organizational roles and
authorities had not been adequately specified, making it
unclear who does what in each systems life cycle process and
phase. We also reported that IRS had not yet defined and
implemented the mature software processes, including software
acquisition processes, that would be essential for IRS to
effectively manage contractors under its strategy for
acquiring, rather than developing, software-intensive systems.
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\17\ GAO/AIMD/GGD-98-54, Feb. 24, 1998.
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IRS has since hired a PRIME contractor, and in association
with the PRIME, has initiatives under way that are intended to
establish the requisite management and engineering capability
needed to effectively modernize its systems. In particular,
IRS' initial expenditure plan provides for establishing
``enterprise life cycle'' or ELC management and engineering
processes. ELC is to be an adaptation of the PRIME contractor's
commercially available systems life cycle management approach
and associated tools, incorporating needs that are unique to
IRS, such as key life cycle decision points. IRS concluded that
adapting the PRIME contractor's commercially available
methodology to meet IRS' needs would be less costly and faster
than completing the systems life cycle contained in its 1997
blueprint. We reviewed the PRIME contractor's commercially
available methodology and found that it meets the requirements
specified in the blueprint's systems life cycle overview and is
consistent with the approaches that successful private and
public sector organizations use to manage large IT projects.
In addition, IRS' initial expenditure plan provides for
institutionalizing mature software/system acquisition
processes. That is, as part of the ELC, IRS intends to define
and implement software development and acquisition processes in
accordance with Software Engineering Institute capability
maturity model requirements.\18\ Among this maturity model's
requirements are disciplined and rigorous processes,
procedures, and practices for effectively acquiring software-
intensive systems through the use of contractors, including
processes concerning requirements development and management,
contractor solicitation and selection, contractor tracking and
oversight, and evaluation of contractor delivered products.
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\18\ This model was developed by the Software Engineering Institute
at Carnegie Mellon University to evaluate an organization's software
development or acquisition capability.
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Significant challenges still confront IRS in
institutionalizing project management and software/system
engineering rigor and discipline and thus putting in place the
capability needed to effectively modernize. For example, the
ELC processes, procedures, practices, handbooks, models,
methods, and tools need to be established, which means that the
contractor's commercially available methodology must first be
tailored to meet IRS' needs. Next, IRS has to implement the ELC
on its IT projects, which requires training IRS personnel on
how to use and apply the ELC. Further, IRS will need to
establish structures and processes to ensure that IT projects
comply with the ELC.
Compounding these challenges is IRS' simultaneous need to
ensure that it effectively manages the PRIME and other
contractors involved in each of the ongoing modernization
projects, pending completion and institutionalization of the
ELC. For example, we reported in June 1999 \19\ that IRS had
not yet defined the respective roles of the Service and its
modernization contractors. Consequently, IRS undertook an
effort to develop a Concept of Operations document that defines
the roles, responsibilities, authorities, structure, and rules
of engagement for the PRIME, IRS, and other IRS support
contractors. To ensure that this important task is completed
before modernization begins, we recommended in our June report
that IRS report on its progress in completing this task in its
next modernization expenditure plan.
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\19\ GAO/AIMD/GGD-99-206, June 15, 1999.
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Incrementally Investing in Modernized Systems
To minimize the risk of IRS investing in systems before our
recommendations were fully implemented, we have recommended
every year since June 1996 that Congress limit IRS' IT spending
to certain cost-effective categories, such as small, low-risk,
and cost-effective efforts that can be delivered in a
relatively short time frame.\20\ In IRS' fiscal year 1997,
1998, and 1999 appropriations, Congress limited IRS' IT
spending to efforts consistent with these categories.\21\ Such
an incremental approach to investing in modernized systems is
used by leading public and private sector organizations. In
addition, the Clinger-Cohen Act \22\ and Office of Management
and Budget (OMB) policy \23\ endorse this approach to funding
large system development investments. Using this approach,
organizations take large, complex modernization efforts and
break them into projects and subprojects that are narrow in
scope and brief in duration.\24\ This enables organizations to
determine whether a project delivers promised benefits within
cost and risk limitations and allows them to correct problems
before significant dollars are expended, which in turn
mitigates the risk of program failure.\25\
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\20\ GAO/AIMD-96-106, June 7, 1996.
\21\ P.L. 104-208, Sept. 30, 1996; P.L. 105-61, Oct. 10, 1997; and
P.L. 105-277, Oct. 21, 1998.
\22\ P.L. 104-106, Feb. 10, 1996.
\23\ Evaluating Information Technology Investments, A Practical
Guide (Executive Office of the President, OMB, Nov. 1995) and OMB
Memorandum M-97-02, Funding Information Systems Investments (Oct.
1996), referred to as the ``Raines Rules.''
\24\ GAO Executive Guide: Improving Mission Performance Through
Strategic Information Management and Technology, Learning From Leading
Organizations (GAO/AIMD-94-115, May 1994).
\25\ Assessing Risks and Returns: A Guide for Evaluating Federal
Agencies' IT Investment Decision-making (GAO/AIMD-10.1.13, Feb. 1997).
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Consistent with our recommendation for incremental
investment, IRS has adopted a modernization investment strategy
under which it is to first develop and implement the management
and engineering capability to build modernized systems and then
incrementally invest in manageable, discrete system initiatives
that are to be specified in its revised sequencing plan. IRS'
commitment to incremental investment management is the initial
step. The real challenge is translating commitment into
everyday practice. To do so, IRS must define structures and
processes for project selection, control, and evaluation that
specify, among other things, who is responsible and accountable
for making investment decisions, the criteria that will be used
to make decisions, the analysis and information upon which to
base decisions, and the tools and methods to be used in
performing the analysis and generating the information. IRS
will also need to ensure that these structures and processes
are institutionalized through training and enforcement.
Central to IRS' incremental investment management strategy
will be the need to break large system projects into a sequence
of incremental builds that is economically justified on the
basis of a compelling business case. Additionally, IRS will
need to track and monitor whether each increment is producing
promised benefits and meeting cost and schedule baselines and
ensure that this information is reliably reported to executive
decisionmakers. By doing so, organizations can address
variances from expectations incrementally, before significant
dollars are expended. To this end, we recommended in our June
1999 report \26\ on IRS' initial expenditure plan that IRS
fully disclose in future expenditure plans its progress against
incremental goals, deliverables, and benefit expectations. As
it has with each of our recommendations aimed at mitigating the
systems modernization challenges that it faces, IRS has agreed
to do so.
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\26\ GAO/AIMD/GGD-99-206, June 15, 1999.
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In summary, the modernization effort under way at IRS has
the potential to deliver improved service to taxpayers. IRS'
agenda, though, is both ambitious and high-risk. We have been
impressed by the Commissioner's leadership and commitment to
change as well as IRS' efforts to date. However, sustainable
improvement in service to taxpayers will depend on IRS'
managers successfully marshaling the agency's resources, both
human and systems, to deal with that challenging agenda.
Mr. Chairman, this concludes my prepared statement. I would
be happy to answer any questions you or other Members of the
Subcommittee might have.
Contact and Acknowledgments
For future contacts regarding this testimony, please
contact James R. White at (202) 512-9110. Individuals making
key contributions to this testimony included Randolph Hite,
David Attianese, Deborah Junod, Gary Mountjoy, Agnes Spruill,
and Lorne Dold.
Mr. Portman [presiding]. Thank you for your testimony.
Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Mr. White, the GAO and in recognizing the GAO's ongoing
oversight of the IRS, are there any additional taxpayer rights
that this Subcommittee should consider enacting into law?
Mr. White. The work we do at IRS, or much of the work we
do, involves looking at IRS controls to protect, among other
things, taxpayer rights. And as we do that work, for example,
in the audit process at IRS or the collections process at IRS,
we do make recommendations about how to improve those controls.
We have ongoing work on the seizures process at IRS, for
example. Part of that work was requested by this Subcommittee
and in that work, we may be making recommendations about
improving those controls.
Mr. Coyne. Does the GAO support the IRS budget as proposed
by President Clinton, that is $8.2 billion, and 97,800
employees for the fiscal year 2000?
Mr. White. We reported on the budget 3 months ago. At that
point, we said that the steps the Commissioner has outlined for
modernizing IRS are crucial if there's going to be fundamental
change in the way that IRS interacts with taxpayers. At that
time what we said about the modernization part of the request
was that we didn't have enough detail.
IRS is still very much in a planning stage. They've started
implementing, but there's still a lot of planning, a lot of
detailed planning that they're doing. So we didn't have a basis
for judging whether the specific amount of money was the right
amount, too much or too little.
Mr. Coyne. Do you care to comment on the number of
employees?
Mr. White. We know that changes in the plan will be
difficult to implement, but we're working on it.
Mr. Houghton [presiding]. Mr. Portman.
Mr. Portman. All right, thank you, Mr. White, Mr. Hite. You
provide for us a window on the IRS that we simply can't get
otherwise. Looking behind you I see a number of members of your
staff who have spent a lot of time on this, too. We appreciate
the expertise and experience you bring to it.
I have a lot of specific questions about your testimony,
but I have one general question for you. And that is whether
the General Accounting Office believes that the oversight board
that would otherwise be in place under the provisions of the
RRA that passed, again, this Subcommittee and the Congress,
would be making a difference in terms of the issues you
address.
Let me just list some of those issues. The middle
management challenges you talk about. The reorganization
challenges you talk about, the modernization effort. The issue
of compliance, to have some expertise on how do you get at the
question of measuring compliance and therefore changing your
systems to adjust to that and targeting better employee
performance, which is much more along the lines of the private
sector with these more qualitative measurements like taxpayer
service.
And finally, of course, the information technology
challenge. As you know one of the specific expertises looked to
for members of the board is information technology. I just
wondered if you had any general thoughts on that, Mr. White.
Mr. White. I think the GAO's work supporting the Government
Performance and Results Act, for example, showed that the role
of external stakeholders is crucial in improving management at
all government agencies. I think the oversight board is a way
of providing that, is one way of providing external oversight.
The oversight that this Committee provides is obviously another
very important way to do that.
But the oversight board, the oversight that they would
provide, and especially in some of the areas that you
mentioned, such as developing performance measures, I think
that oversight in an area like that is very important.
Mr. Portman. I appreciate that response. I also understand
the importance of GPRA, and I know this Subcommittee would look
to the IRS to reference that. This is an important overall
Federal Government approach to better management. The oversight
board, as you know, goes well beyond GPRA in terms of providing
external stakeholders, because these board members would be, in
many senses, like a board of directors having direct
responsibility and therefore accountability and also continuity
because of the 5-year terms and then finally the expertise we
talked about earlier, bringing in information technology, and
customer service.
So I appreciate your response, and I agree with you. I
think if anything, this would be an interesting model for the
rest of government, if we can get it up and going. It would
expand what GPRA already provides.
I finally will say that as much as I have respect for this
Subcommittee and this Full Committee and our staff, the kind of
expertise we're talking about simply doesn't reside in
Congress. So we can't play that role. We can play a role. And
again, you give us a window on the IRS in other ways in terms
of analysis of how they're doing. But we can't, the GAO, nor
this Subcommittee, provide what we're looking for.
But I'll get off that and just briefly touch on your issues
with regard to the current modernization effort, the effort to
reorganize along taxpayer lines, I know two of the heads have
now been named and the Commissioner is moving ahead with that.
Can you give me what you think they're not doing right, and I
think generally speaking, you're inclined to think they are
moving in the right direction, but what are some of your
concerns about the reorganization?
Mr. White. I don't know if concerns is the right word, but
certainly there are challenges facing the reorganization as
they go ahead. I think one challenge is developing a complete
set of organizational performance measures. What's key to the
sort of organization that the Commissioner has planned or that
IRS has planned is that it's comprehensive and consistent.
They have a new mission statement, they have strategic
level goals, but the measures that they put in place to measure
performance need to be consistent with those strategic goals
and the mission statement. And finally at the level of
individual employees, the evaluation system at that level has
to be consistent with the organizational performance measures
as well as the mission. That also still has to be put in place.
And as I indicated in my oral statement, there seems to be
some confusion on the part of IRS supervisors on what things
like customer relations actually means. So it's important that
they get this into place.
Mr. Portman. According to the Commissioner this morning,
they are moving to implement those, I guess we'd call it,
overall organizational standards and performance measurements
and so on. Are you satisfied that they understand the concern
that you raise and that that's being put in place, or do you
think there still is a lack of appreciation for the problem?
Mr. White. They clearly understand the issues. The
Commissioner has made these things priorities. He talked about
his five levers of change, for example, these are part of his
five levers of change. So he's clearly made it a priority.
At the same time, doing this is going to be hard.
Developing a measure of taxpayer compliance, for example, is
not an easy thing to do. It's going to take time. Revising the
employee evaluation system is going to take time.
We have ongoing work, as I said, that shows there are some
steps they can take in the interim with the existing evaluation
system to reinforce the shift toward a more service-oriented
IRS.
Mr. Portman. For instance, the Commissioner noted that he
already has fair and equitable treatment of taxpayers as one of
the evaluations that's in everybody's file. So they're doing
some things even in the interim basis.
Mr. White. Following up on that also, we've found in our
work that the narrative portion of the evaluations, for
example, is under-utilized. That's an opportunity right now
that could be better utilized to reinforce good customer
service. Similarly, field visits, to actually watch revenue
officers in action as they deal with taxpayers, would be
another thing that they could do right now.
Mr. Portman. Thank you, Mr. White. Thanks, Mr. Chairman.
Mr. Houghton. Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman.
Mr. White, on page 10 where you discuss in your statement
completing the modernization blueprint, and I know in response
to GAO's recommendations, I think back in 1995, the IRS began
their blueprint, which of course was before the Restructuring
Act. But what I want to talk about is, in your statement, you
say that the Service's initial modernization efforts is a good
step, but that it will not fully correct past modernization
weaknesses.
Now, what I want to know is why is that, and especially why
is there difficulty in implementing GAO's recommendations in
this regard?
Mr. White. Your question is about the information systems
at IRS, and I'll let Mr. Hite address that.
Mr. Hulshof. Mr. Hite, welcome.
Mr. Hite. Thank you.
My point would be that the nature of our recommendations
dealing with the modernization were a multi-year series of
steps that would have to be taken. For example, definition of a
blueprint and implementation of a blueprint is something that's
going to occur over many, many years. I think Mr. Rossotti
mentioned that organizational modernization is a 10-year
endeavor. Modernization of systems is, in fact, something
that's going to go along that same time line.
The steps that you take initially in defining blueprint
content have been taken. They were actually initiated under the
predecessor CIO's blueprint document in 1997. Now, when we
looked at that blueprint in terms of the technical architecture
and the sequencing plan for moving to that future systems
environment that you want to get to, so that you have the
information to effectively administer the tax system, that is
going to take a number of years.
What Mr. Rossotti has done thus far in terms of his steps
is to put together the initial steps to complete some of the
missing specificity that is associated with that technical
architecture and that sequencing plan and the initial
expenditure plan that IRS put forth to the Appropriations
Committees in asking for that $35 million over the period
ending in October of this year is designed to complete those
tasks, so that in fact you have architectural definition and a
strategic business systems plan that shows how you're going to
transition over time, many years, to that target systems
environment.
Mr. Hulshof. I appreciate that. Mr. Chairman, that's all I
have. Thank you.
Mr. Houghton. Thanks very much.
I'd like to ask you a question. I'm so interested in the
people functions here. Are you really saying that the plans and
the vision of Mr. Rossotti are good? There are some blips, but
they're good, but they just haven't gotten down into the
organization?
Mr. White. We are saying that the plans are good. I think
the plans are comprehensive, they're consistent. Obviously,
implementation is crucial. And in order to implement them, one
of the things we're saying is that top leadership, no matter
how good it is, and IRS now has very good top leadership, but
top leadership alone cannot implement this kind of
comprehensive change in an organization as large as IRS. It's
going to have to be implemented in a very real way by managers
below the Commissioner.
So those managers are going to have to be able to develop
the details of the plans, to lead at their level of the
organization a change in attitudes and a change in behavior,
and develop things like the employee evaluation system, to
reinforce improved customer service.
Mr. Houghton. Well, I guess the thing that I'm reaching for
is the practical impact in the organization. Because you've
alluded in many ways, for example, on page 6 of your testimony,
you said the employee evaluation process is not aligned with
this new mission, does not support the culture the IRS hopes to
create. Now, you know, that's not a particularly helpful sign
for the IRS, and yet at the same time, are they moving in the
right direction? Have they got people ultimately when they get
these two things aligned, to do the job which is required?
That's the sense I don't get.
Mr. White. They understand the need for alignment. The
Commissioner has talked repeatedly about the importance of
alignment, that how employees are evaluated must be consistent
with the mission of the agency and with the strategic goals and
with the organizational performance measures. So at that level,
that's understood. They are beginning the process of trying to
develop a new employee evaluation system.
And as I said, in the interim, there are some things they
can do better with the existing system to reinforce improved
customer service.
Mr. Houghton. Have you talked to the Commissioner about
your report?
Mr. White. Yes, we have.
Mr. Houghton. What is his reaction, and what are some of
the more important issues you have discussed?
Mr. White. We have an entrance conference with IRS
officials on every report we do. He was so interested in this
that he participated in the entrance conference on this report.
So that shows the level of his involvement in this.
He clearly understands the importance of this. He also
recognized that it's going to take some time to develop this.
Mr. Houghton. How many reports have you done on the IRS?
Mr. White. On this particular issue?
Mr. Houghton. No, just in general. Are you in constant
contact with them, or is it just periodic?
Mr. White. We are in constant contact. We will issue 35 to
45 reports a year on IRS. So we're in constant contact with
them.
And I do want to say that under the new Commissioner, the
cooperation I think that we've gotten from IRS is at a
different level than it's been in the past.
Mr. Houghton. If the Commissioner were to ask you for one
significant suggestion out of all the things you've touched on,
what would it be?
Mr. White. I think to continue with the integrated approach
that he has underway. It's difficult to do, to do this kind of
change in the comprehensive way that he's trying to do it. But
I think it's crucial to do that. For example, systems
modernization has to be done in an integrated way with the
business-side changes that they want to make. You can't do one
independent of the other. It has to be done in an integrated
way. That makes it more difficult. That's a part of the
challenge they face here. But that's the right way to do this.
Mr. Houghton. One final question. Do you feel that the
concept of customer orientation, rather than internal
mechanics, is getting through? This is something he has
stressed.
Mr. White. I absolutely do. There is no doubt. The issue is
whether you drive that down through the organization. And
that's where implementation again becomes important, it's where
training becomes important. It's where performance measures are
important, because they reinforce the training. All of this has
to be mutually reinforcing and consistent.
And driving it down through the organization also shows,
again demonstrates the importance of managers below the level
of the Commissioner being engaged in leading this effort.
Mr. Houghton. Well, I have no further questions. Mr. Coyne,
do you?
Mr. Coyne. I just want to follow up on your concept about--
it's fine for the top leadership to be involved and be on top
of things, but it's really going to take lower level managers
to implement them. Could you put a number on those managers
that you're referring to, within the IRS?
Mr. White. I can't put a number on it right here. I can get
back to you on that.
What I'm talking about, though, are people from frontline
supervisors all the way up through the senior executive service
at IRS. All of those people, their roles will be somewhat
different, but they all will have to take real responsibility
for making this kind of change in direction work.
Mr. Coyne. Thank you.
Mr. Hulshof. Mr. Chairman, one follow-up question. Mr.
White, then what is it about the Service's current
modernization efforts that leads GAO to believe that the
chances of success are any better than in the past?
Mr. White. There are several things. One is it's
comprehensive. They aren't doing information systems alone.
They're trying to do information systems, their process for
interacting with taxpayers at the same time, reorganization,
all of this is being done simultaneously.
Something else, it's consistent from a level of the mission
statement down through employee evaluations. They're trying to
get to a point where that is all aligned and staff and managers
throughout the organization therefore are getting a consistent
message about what the goals of the organization are.
In addition to that, I would repeat again what I said about
the leadership of the IRS. That leadership that the
Commissioner is providing is clearly helpful.
Mr. Hulshof. Thank you.
Mr. Houghton. OK, thank you very much. Mr. White, we
certainly appreciate your being with us. Thank you for your
contribution.
Mr. White. Thank you.
Mr. Houghton. We are adjourned.
[Whereupon, at 10:53 a.m., the hearing was adjourned, to
reconvene at the call of the Chair.]