[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
2001 TAX RETURN FILING SEASON
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 3, 2001
__________
Serial No. 107-13
__________
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JERRY WELLER, Illinois MICHAEL R. McNULTY, New York
KENNY C. HULSHOF, Missouri JOHN LEWIS, Georgia
SCOTT McINNIS, Colorado KAREN L. THURMAN, Florida
MARK FOLEY, Florida EARL POMEROY, North Dakota
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of March 27, 2001, announcing the hearing............... 2
WITNESSES
Internal Revenue Service:
Hon. Charles O. Rossotti, Commissioner....................... 5
Nina E. Olson, National Taxpayer Advocate.................... 42
U.S. Department of the Treasury, Hon. David C. Williams,
Inspector General for Tax Administration....................... 52
U.S. General Accounting Office, James R. White, Director, Tax
Issues, accompanied by Randolph C. Hite, Director, Information
Technology Systems Issues, and Robert F. Dacey, Director,
Information Security Issues.................................... 55
H&R Block, Mark A. Ernst......................................... 77
National Association of Enrolled Agents, Claudia Hill............ 82
SUBMISSION FOR THE RECORD
American Institute of Certified Public Accountants............... 92
2001 TAX RETURN FILING SEASON
----------
TUESDAY, APRIL 3, 2001
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:08 p.m., in
room 1100 Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
March 27, 2001
No. OV-3
Houghton Announces Hearing on 2001 Tax Return Filing Season
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on the 2001 tax return filing season.
The hearing will take place on Tuesday, April 3, 2001, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 2:00 p.m.
Oral testimony at this hearing will be from invited witnesses only.
Witnesses will include Internal Revenue Service (IRS) Commissioner
Charles Rossotti, the National Taxpayer Advocate Nina Olson, and
representatives from the U.S. General Accounting Office, the U.S.
Department of the Treasury Inspector General for Tax Administration,
and tax practitioner groups. However, any individual or organization
not scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
The 2001 tax return filing season refers to the period from January
1st to April 15th (April 16th this year in most of the
United States) when U.S. taxpayers will file over 130 million tax
returns, including 42.3 million e-filed returns (a projected 9.6
percent increase over the 2000 filing season). During this period the
IRS is expected to issue over 96.8 million tax refunds, answer 62
million telephone calls from taxpayers asking for assistance, and its
homepage will receive 2 billion hits.
In announcing the hearing, Chairman Houghton stated: ``Customer
Service. This was the promise of the new IRS after the Restructuring
and Reform Act of 1998. This hearing gives us the opportunity to ensure
that the IRS is living up to its promise by processing taxpayer
questions, returns, and refunds as efficiently as possible. I am
looking forward to the Commissioner's testimony.''
FOCUS OF THE HEARING:
The Subcommittee will review the progress in customer service
offered by the IRS in the 2001 tax filing season, including progress in
the customer communications system, electronic filing, and systems
modernization.
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and hearing date noted on a label, by the close of business, Tuesday,
April 17, 2001, to Allison Giles, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building, by close of business the day before the hearing.
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The above restrictions and limitations apply only to material
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Note: All Committee advisories and news releases are available on
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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.
Chairman Houghton. Ladies and gentlemen, thank you very
much for being here. The hearing will now come to order. It is
good to see you, Commissioner. Thanks very much for your
presence here. You may have one of the most difficult jobs in
the city. I believe, though, that you have run the agency
admirably, and I know the service is not where you want it to
be yet, but you have made great strides and I am sure you have
high hopes.
Let me say just a few words about customer service.
Customer service means many things, among them are courtesy,
efficiency, and, most importantly, fairness. The relationship
between the IRS and the ordinary citizen, because of the nature
of the function, sometimes can be potentially difficult, but if
each time the taxpayers reach out to the IRS or the IRS reaches
out to them and they are treated with these three objectives in
mind, the IRS will be able to increase its trust in the eyes of
the American public. So we will discuss many topics today and
ask many questions, but the underlying theme will remain the
same: courtesy, efficiency and fairness.
One more thought. No one can understate the importance of
security. Taxpayers must feel that the information on their tax
returns is safe. This information must be secure from both
internal browsing and external break-ins. And I know,
Commissioner, that you have made security a focal point. So I
thank you for coming today. And the rest of the witnesses, I
thank you also and I look forward to your ideas. I am pleased
to yield to our ranking democrat, my friend, Mr. Coyne.
[The opening statement of Chairman Houghton follows:]
Opening Statement of the Hon. Amo Houghton, M.C., New York, and
Chairman, Subcommittee on Oversight
Good afternoon. It is good to see you Commissioner. You may have
one of the most difficult jobs in this city. Because nobody
particularly likes to interact with the IRS, it is all that more
important that when they must, the service they receive be the best
possible. I believe that you have run this agency admirably. I know
service is not where you want it to be yet, but you have made great
strides.
I want to say a few words about customer service. Customer service
means three things to me: (1) courtesy, (2) efficiency, and most
importantly (3) fairness. If each time a taxpayer reaches out to the
IRS, or the IRS reaches out to him, heaven forbid, he is treated with
these three objectives in mind, the IRS will improve its image and
increase its trust in the eyes of the American public. We will discuss
many topics today and ask many questions. The underlying theme will
remain the same: courtesy, efficiency, and fairness.
Thank you Commissioner for coming today and to the rest of the
witnesses. I look forward to hearing your ideas.
I want to add one more thought. I cannot understate the importance
of security. Taxpayers must feel that the information on their tax
returns is safe. This information must be secure from both internal
browsing and external break-ins. I know, Commissioner, that you have
made security a focal point, but do not let your guard down. If you do,
you risk the trust of the taxpayers.
I am pleased to yield to our ranking Democrat, Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. I, too, would like to
welcome Commissioner Rossotti. With less than 2 weeks before
Monday, April 16th, it is timely that this Oversight Committee
of Ways and Means review how the 2001 tax return filing season
is progressing. Reports are that all systems are up and running
and that this filing season may be one of the best ever. The
commissioner is doing an excellent job in reorganizing and
modernizing the IRS and should be commended for the work that
he has completed already.
The tax return filing season is a huge and complicated
operation. Taxpayers will file over 130 million tax returns
this year, including 42 million e-filed returns. IRS employees
will issue nearly 97 million tax refund checks, answer over 60
million telephone calls from taxpayers, and serve nearly 6
million taxpayers at IRS walk-insites. Inevitably, some
problems will occur, hopefully with the expert oversight and advice of
those testifying before us here today, these situations can be quickly
addressed. I am pleased that for the first time this Subcommittee will
have the opportunity to hear from the new IRS Taxpayer Advocate, and
from the Treasury Inspector General for Tax Administration. Thank you,
Mr. Chairman.
[The opening statement of Mr. Coyne follows:]
Opening Statement of the Hon. William J. Coyne, M.C., Pennsylvania
With less than two weeks left before Monday, April 16th, it is
timely that the Ways and Means Oversight Subcommittee review how the
2001 tax return filing season is progressing.
Reports are that all systems are up and running and that this
filing season may be one of the best ever. The Commissioner is doing an
excellent job in both reorganizing and modernizing the IRS and should
be commended.
The tax return filing season is a huge and complicated operation.
Taxpayers will file over 130 million tax returns this year, including
42 million e-filed returns. IRS employees will issue nearly 97 million
tax refund checks, answer over 60 million telephone calls from
taxpayers, and serve nearly six million taxpayers at IRS ``walk-in''
sites.
Inevitably, some problems will occur. Hopefully, with the expert
oversight and advice of those testifying before us today, these
situations can be quickly addressed.
I am pleased that, for the first time, the Subcommittee will have
the opportunity to hear from the new IRS Taxpayer Advocate and from the
Treasury Inspector General for Tax Administration.
I also want to personally welcome the IRS Commissioner and the
other witnesses appearing before us today.
Chairman Houghton. Thank you very much, Mr. Coyne. I would
just like to say that we have several new Members. They may
show up at any point: Mark Foley, Sam Johnson and also Earl
Pomeroy. Karen Thurman, who was not a member last time, but was
in the previous Congress, will be here also. So now, Mr.
Commissioner, you are on. Do want to turn that microphone on?
STATEMENT OF HON. CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
REVENUE SERVICE
Mr. Rossotti. Is that better? Last year when I came before
you, I said we had a clear direction for the IRS and had taken
some important steps to improve the IRS. Now, for the first
time, I can tell you that we have a real plan, a strategic plan
that lays out how we will build on that foundation we have laid
to make the IRS everything the American public has a right to
expect it to be.
On January 30, 2001, the IRS Oversight Board approved the
IRS strategic plan. It follows closely the letter and spirit of
the Restructuring Act and reflects the new and modernized IRS.
The strategic plan shows how the IRS can dramatically improve
service to taxpayers, ensure fairness and compliance with our
tax laws, and moreover, meet all of these goals while
continuing to shrink in size relative to the economy. The
biggest challenge presented by this plan is that we have to
continue to administer the world's largest and most complex tax
system, while simultaneously reengineering and improving how
the agency works at its most basic level.
In other words, we must operate effectively and modernize
at the same time. Our entire plan is based on this dual
approach: strategies to improve performance over the next 2
years, while modernizing the agency in the longer term. In
connection with our mission and goals, we have developed 10
strategies and for each of these, for 2001 and 2002, have
defined specific priorities and responsibilities for carrying
them out. For example, in the 2001 filing season, we are
demonstrating how we can build on our positive trends in both
meeting taxpayer needs, one of our strategies, and broadening
the use of electronic interactions, one of our other key
strategies.
On the electronic front, so far this filing season, our
online filing for home computers is up about 37 percent
compared to last year. It has already reached a total volume of
about 5 million in that category, which is what we had last
year. In total, we expect to receive about 40 million returns
electronically this year. There are some specific reasons for
this. For example, in this filing season we have added 23 forms
and schedules that can be filed electronically. Next year, in
2002, there will be 38 more, which will bring, essentially, all
forms and all schedules into the electronic filing program.
I am also pleased to report that our website has received
about 1.3 billion hits this fiscal year. In addition to the
page hits, we have had about 103 million downloads. These are
mostly forms the people get. That's almost twice as many--in
fact, it is twice as many as last year--and as I like to say
that is a lot of trips to the post office that people do not
have to make.
We have also recently announced a new feature where
taxpayers who need an extension to file of course, all
taxpayers are entitled to an automatic extension till August
15th can now do that with a simple phone call, no paper, and
they also get a confirmation. Another thing that we are
piloting that has a lot of exciting potential for the small-
business community and for practitioners, is our Internet-based
system for businesses to file and pay Federal payroll taxes
online. This is called EFTPS online. It allows taxpayers to
enroll once in the system and then to securely make Federal tax
payments, and also check their payment history over the
Internet. Using this system, they will also be able to schedule
future payments through the Internet, and cancel payments if
necessary.
Let me also stress that during the past year we completed a
comprehensive set of changes and upgrades to strengthen our
security for the electronic filed returns. With respect to
taxpayers who needed assistance from us during the filing
season, we have made steady progress in providing telephone
service, which is our single most important channel. Busy
signals use to be a major problem. A few years ago there were
400 million busy signals, which is more than there are people
in the United States. Busy signals have been reduced to a
minimal level on the order of four percent. At least people can
now get through on the line. With respect to total calls
answered, we have had answered, so far this filing season,
about 51 million calls through March 23rd, which is about a 14
percent total increase.
With respect to taxpayers who actually want to talk to a
live customer service representative, so far this filing
season, about 66 percent of taxpayers have gotten through,
compared to about 62 percent last year at this time. These are
all upward trends. On the other hand, certainly this level of
service is not up to the long-term goal, which is comparable to
perhaps 90 percent in the private sector. We still have a ways
to go.
Moving to our longer-term modernization program, I think we
have made progress on our three key change initiatives for
modernization. In response to RRA 98, the new customer focused
organization structure is in place now and largely implemented.
There is a top management team, as well as a field organization
in place for each of the four operating divisions and our
functional units. We have also approved a set of balanced
measures to measure the performance of this neworganization,
and most of these measures will be in place, fully deployed, through
most of the organization by the end of this fiscal year.
These kinds of changes are very important in enabling us to
tailor our services to taxpayer needs, as well as to focus our
compliance programs where they will do the most good. For
example, we recently rolled out a specialized part of our
website for the small-business, self-employed community. In
addition, for the large-business community, we have initiated
two issue resolution programs that are reducing the amount of
time it takes for large businesses to resolve tax issues with
us.
The third piece of modernization has to do with business
systems modernization, our technology program. This program
officially kicked off almost exactly 21 months ago, and we
believe that we have made solid progress, although we have to
acknowledge, this is an extremely difficult program. But in
three key areas we have made progress. One is developing an
agencywide vision and architecture, the second is building our
program management capacity, and the third is delivering on
some specific initial projects.
With respect to the overall architecture, which is the road
map of the future for modernizing our systems, we approved the
enterprise architecture document earlier this year. Our
management capability, which include such things as use of our
lifecycle management methodology, has improved, although it
still needs maturing.
With respect to our first two projects, we will be
delivering our first two projects shortly after the filing
season in the next couple of months. One is a project which
will enable us to build on the progress on phone service and
improve it further, and the other is some better tools for our
examiners that will be examining corporate income tax returns.
Mr. Chairman, in spite of the progress that I have noted,
it is clear that we are still not reaching the level in quality
of service, that we think taxpayers deserve, nor, in fact, are
we collecting all the taxes that are due efficiently. We have a
lot to do.
I can cite some of the things that still need improvement.
I mentioned the phone service. It has significantly improved,
but it is still not on the level of what taxpayers receive in
the private sector. Because of our antiquated computer systems,
even when taxpayers do get through to us, we sometimes cannot
provide them with updated information on their accounts, which
in turn, results in frustration from both the taxpayer and the
IRS employees who want to help them.
As a matter of fact, if I looked across all of our business
processes, most of them operate too slowly or inaccurately or
inefficiently. Many of our notices, which we send 100 million
to taxpayers, are still confusing, and it is not just because
of the writing. It is because we do not always have the right
data to put on those notices.
We are on the path of achieving the goal of 80 percent
electronic filing by 2007, which is a part of RRA. However, it
is going to be difficult to continue at a pace rapid enough to
reach this goal. Finally, with respect to our financial
statements, we are very pleased we received, for the first
time, a clean opinion on all of our financial statements from
GAO. But, they also noted that we continue to have significant
material weaknesses in our financial management, and many of
those weaknesses cannot be corrected except through business
systems modernization.
On the compliance side, we are also very concerned about
the continued drop in audit and collection activity. I think
the risks of these declines are not simply the dollar value of
the taxes which are left uncollected. The greatest risk to me
is that the average taxpayer, who honestly pays taxes, could
lose confidence if the IRS fails to act effectively and
efficiently to collect what is due from those who may not pay
what they owe.
I think the effect of the decrease in examination coverage
is especially important with respect to fairness. Because it is
relatively easy for the IRS to verify most of the income of
average, lower or a middle income taxpayers, but it is much
harder, and often requires an examination, to verify the income
of higher income and certainly corporate taxpayers. I think I
testified earlier that the drop in this coverage was caused by
several factors, one of which is the long-term decline in
staffing. Other factors include the need to assign compliance
staff to customer service duties during the filing season, as
well as some added responsibilities imposed by RRA.
Finally, let me just note, with respect to the
modernization program, and I am speaking of business systems
modernization, that we are at a critical juncture. We are
really starting to get into serious implementation of this
program, which will require more funds. I am pleased to say
that the modernization blueprint, which was outlined by the
President in the budget blueprint earlier this year, did note
they were going to include $397 million in investments for the
ITIA fund to modernize IRS' computer systems.
In conclusion, Mr. Chairman, I think we are on the right
track, but that track is long and it is going to take a lot of
sustained effort to get all the way around to where our
strategic plan says we need to be. With then continued support
of your Committee and the other Committees of Congress, we are
confident, however, that we can achieve what we set out to do
in our plan and make the IRS what it needs to be for the
American people. Thank you.
[The prepared statement of Commissioner Rossotti follows:]
Statement of the Hon. Charles O. Rossotti, Commissioner, Internal
Revenue Service
Mr. Chairman and Distinguished Members of the Subcommittee, I am
pleased to discuss the IRS' 2001 tax filing season, our FY 2002 budget
request and the initiatives we are undertaking on behalf of America's
taxpayers.
INTRODUCTION: A PLAN FOR TODAY AND THE FUTURE
Mr. Chairman, last year when I came before you, I said we had a
clear direction and had taken some important steps to improve the IRS.
Now, for the first time I can tell you that we have a real plan that
lays out how we will build on the foundation we have laid to make the
IRS everything the American public has a right to expect it to be.
On January 30, 2001, the IRS Oversight Board approved the IRS
Strategic Plan. It follows closely the letter and spirit of the IRS
Restructuring and Reform Act of 1998 (RRA 98) and reflects the new and
modernized IRS. The strategic plan shows how the IRS can dramatically
improve service to taxpayers and ensure fairness and compliance with
our tax laws. Moreover, the Agency will meet these goals while
continuing to shrink in size relative to the economy.
The greatest challenge presented by the IRS strategic plan is that
we must continue to administer the world's largest and most complex tax
system while simultaneously reengineering and improving how the Agency
works at its most basic level. In other words, we must operate
effectively and modernize at the same time.
Mr. Chairman, I want to emphasize the importance of this two-
pronged, or dual approach of strategies to improve performance over the
next two years while modernizing the Agency in the longer term. Let me
illustrate how this approach is now working. In conjunction with our
mission and goals, we developed 10 major strategies. For each of these
strategies, operational priorities and improvement projects for FY 2001
and 2002 were defined and responsibilities assigned for carrying them
out. Some of our major strategies include:
Meet the Needs of Taxpayers. Each year, the IRS has millions
of interactions with taxpayers who need information or
assistance to file their returns or pay what they owe. The
taxpayer should always receive quality service from the IRS
that is helpful based on his/her particular situation and need.
Taken together, the fundamental changes underway in all aspects
of our operations will provide taxpayers accurate and prompt
information to assist them in filing, paying, and resolving
issues in a time and manner convenient for them. In the short-
term, we will implement this strategy through actions such as
expanding phone-hours, adding more convenient locations and
providing additional assistors during peak hours.
Reduce taxpayer burden. One of the themes underlying improved
IRS's business practices is to shift from addressing taxpayer
problems well after returns are filed to addressing them early
in the process, and in fact preventing problems wherever
possible. Over the next two years, we will make substantial
progress to reduce taxpayer burden although much more will be
possible through our longer-term business system modernization
efforts. Increasing our partnerships with states and
practitioners will be a major part of this strategy. In the
short-term, we can make improvements, such as expanding our
Voluntary Compliance Agreement Program and providing specific
information over the Internet to taxpayers groups. The new IRS
``Small Business Self-Employed Community'' web page is an
excellent example of this strategy.
Broaden the use of electronic interactions. Electronically-
filed returns improve service for taxpayers and boost
productivity by reducing errors, speeding refunds, and reducing
labor costs. We will enhance technology to allow filing of a
full range of returns, eliminate requirements for separate
signature documents, tailor marketing and education programs to
attract taxpayers and practitioners with varying needs, and
broaden the number of payment options. Customer education and
assistance programs provided through the IRS web site, such as
the distribution of forms and publications and answers to tax
law questions, are growing rapidly. We are making excellent
short-term progress on this strategy. Examples include the
elimination of paper signatures for e-filed returns and
dramatically increasing the number of forms that can be filed
electronically.
Address key areas of non-compliance. Research indicates that
there are major non-compliance problem areas. These include
abusive tax shelters and trusts as vehicles for managing assets
and for wealth transference. Unpaid employment and withholding
taxes by businesses have also increased and overpayment of
refunds due to erroneous return claims is high. We will make
progress in combating key areas of noncompliance over the next
two years as demonstrated by our recent actions on illegal
offshore trust programs. In 2002, the IRS will change its
processing procedures and begin processing and matching K-1s
(schedules filed by partnerships, trusts and S-corporations to
provide information on income/losses distributed by business
entities, to individual partners, beneficiaries and
shareholders).
Stabilize traditional non-compliance areas. Regardless of how
successful we are in preventing taxpayer errors, intervention
through examination and collection actions and investigations
is necessary when noncompliance or non-payment is found or
suspected to be occurring. Since we have limited resources, it
is essential that we apply these resources where they will be
of most value. More focused and rapid intervention can
enormously improve the effectiveness and efficiency of our
activities, while improved case management tools can improve
the quality and speed of cases and ensure that taxpayer rights
are observed. The recent funding of the STABLE (Staffing Tax
Administration for Balance and Equity) initiative is key to the
IRS stemming and turning around the decline in collection and
exam activities.
These major compliance improvements will require, however, a
fundamental redesign of our most complex business processes.
They are also very dependent on new technology from our
Business Systems Modernization program (BSM). Therefore, our
strategy is to stabilize and improve traditional compliance
programs in the near term, while working through BSM for long-
term and fundamental improvements.
Over the past year, the IRS also made steady progress on three key
modernization programs. In response to RRA 98, the new customer-focused
organization is currently being implemented, and a top management team
is in place for each of the four Operating Divisions and functional
units. We also approved balanced measures for much of the new
organization and have slated approval of measure for the remaining
organizational units for the current fiscal year. Both of these
programs should start delivering benefits now.
The third piece of modernization, the Business Systems
Modernization program (BSM) is off to an excellent start. The
Enterprise Architecture plan, which is the roadmap for modernizing the
Agency's business systems and supporting information technology
networks, was approved earlier this year. BSM is just beginning to
deliver tangible improvements; it will deliver a growing number of
benefits with each succeeding year for the remainder of the decade.
Each of these programs is discussed in detail later in the testimony.
Mr. Chairman, I want to stress that this dual approach will require
sustained support from the Congress and the public, as the change will
take time and will inevitably include setbacks along the way. It will
also require investments, especially for business systems
modernization, and adequate funding for current operations, such as
customer service and compliance.
PROGRESS MADE: INITIAL SUCCESSES UPON WHICH TO BUILD
Mr. Chairman, I would like to discuss some of the progress the IRS
has made over the past year, particularly as it relates to how we are
making it easier for all taxpayers to file their returns and pay their
taxes and how we are ensuring the fairness of our tax administration
system.
checkbox initiative
Beginning this filing season, Paid Return Preparers can use the
Third Party Authorization Checkbox on all Form 1040 Series returns with
the exception of TeleFile. This checkbox indicates the taxpayer's
desire to allow the IRS to discuss the tax return and attachments with
the preparer while the return is being processed. This provides for a
significant reduction in paperwork for millions of taxpayers. It also
addresses a problem with which we have been grappling for years.
Including a checkbox on the family of 1040 returns is a direct
response to requests from our external stakeholders, such as the South
Florida Citizen Advocacy Panel (CAP), National Society of Accountants,
National Association of Tax Practitioners and National Association of
Enrolled Agents.
The checkbox designation should enable practitioners quickly to
resolve questions concerning the processing of the taxpayer's return.
It should also reduce the number of contacts necessary to resolve
processing questions and eliminate the need for the submission of
paperwork for a Power of Attorney, which is not required to resolve
simple problems with a taxpayer's account. Our initiative also
addresses the practitioner groups' concern that this designee not be
afforded post-assessment correspondence or representation.
Mr. Chairman, the IRS calculates that taxpayers will save an
estimated 75,000 hours initially by not having to prepare a third party
authorization disclosure form (Form 8821). Additional time will be
saved because processing issues will be resolved immediately, thereby
eliminating unnecessary post-filing contacts. However, we recognize
that the net burden reduction, as currently calculated, will be
somewhat smaller because there will be an increase in burden for
reading and understanding Forms 1040 instructions for the new checkbox
authority.
We further expect over a million taxpayers to use the checkbox
feature in lieu of filing Form 2848 (Power of Attorney and Declaration
of Representative). Therefore, taxpayers will save an estimated 1.9
million hours initially by not having to prepare Form 2848. Once again,
the net burden reduction will be less because we must assume there will
be an increase in the burden for reading Forms 1040 instructions and
understanding the new checkbox authority.
The burden reduction that will result from the checkbox initiative
is even greater when one considers the 8 million notices related to
math errors and return preparation that were issued in 2000. Twenty-
seven percent of these notices were related to returns prepared by paid
preparers. The IRS estimates that taxpayers will save approximately 779
thousand hours by referring notices to their designees rather than
responding to the IRS in writing or by telephone. Similarly, we
estimate that taxpayers will save more than a million hours related to
correspondence by allowing IRS to resolve issues by contacting their
designees.
redesigned notices
As part of its continued effort to improve its correspondence to
taxpayers, the IRS began sending out six redesigned notices, including
those dealing with math errors, balance due, overpayments and offsets.
The new notices should: (1) reduce the number of times taxpayers need
to contact the IRS; (2) be easier to understand; and (3) facilitate
resolution of inquiries. The combined yearly volume of these six
notices is about 10.5 million.
Following RRA 98's directions, the new notices also contain more
information, including: (1) the formula for how the IRS computes the
penalty or interest; (2) the section of law from which the penalty or
interest is based; and (3) a table that details account information
under each penalty or interest section to specific periods that the
charges apply. Members of the Citizen's Advocacy Panel reviewed the
notices before we released them in October 2000.
Despite extensive testing, some of the first notices sent out were
missing information. The IRS has since corrected errors in the
programming for these notices and mailed explanations to taxpayers as
appropriate.
We are continuing our redesign efforts on 23 additional notices. We
plan to release four of the notices in 2002 and the remaining 19 in
2003.
change of address
Due to a licensing agreement between the IRS and the U.S. Postal
Service, taxpayers who move after filing their tax returns should
receive future correspondence from the IRS on a more timely basis.
Under this arrangement, the IRS will use the Postal Service's
National Change of Address (NCOA) database to update the addresses in
its own Master File of taxpayer data. This address updating process
should also provide quicker resolution of undelivered refund problems.
The IRS will check the names and old addresses in the NCOA weekly
update files against the names and addresses in the IRS database. Where
there is an exact match, the IRS will update its file with the
taxpayer's new address. According to the Postal Service, there are
about 800,000 address changes each week.
In addition to helping IRS get refunds to taxpayers, this new
program will permit the IRS to make earlier contacts with them to
resolve issues such as delivery of a returned refund, possible
unreported income, examination of a return, or collection of unpaid
tax. The delay in delivery that can result from a letter going to an
old address, then being forwarded, may cause a taxpayer's reply and a
subsequent IRS letter to cross in the mail. Unraveling such situations
can be time-consuming and frustrating for both the taxpayer and the
IRS.
stabilization of compliance activities
Earlier this year, Congress approved the staffing plan for the
STABLE (Staffing Tax Administration for Balance and Equity) initiative.
The funding was included in the Fiscal 2001 Appropriations bills.
The STABLE staffing plan reflects the new modernized IRS and
represents a careful judgment as to how these additional resources,
together with our internal management improvements, can best be used to
improve our service to taxpayers and compliance effectiveness.
The two principles that guided the budget request were, first,
allocate incremental resources directly to staffing front line
positions. Second, these additional resources will provide a balanced
improvement between service and compliance programs. With the increased
staffing levels, we expect the IRS to be able to slightly increase
levels of service and to stabilize the level of exam and collection
activity while complying with the taxpayer rights provisions of the
RRA.
Our overarching goal is to achieve the greatest possible
improvements in both taxpayer service and compliance efforts by
determining how best to use the STABLE resources in conjunction with
the base FY 2001 budget request. We believe that STABLE achieves this
goal.
In our reorganization effort over the last two years, we have
carefully studied the use of nearly every position in the IRS. One of
the key findings in this analysis is that the use of compliance
personnel such as revenue agents and revenue officers on ``details'' to
taxpayer service duties during the filing season is not efficient. This
practice, while necessary as a short term solution to inadequate
service, takes highly trained and high graded personnel away from
important exam and collection casework during a substantial part of the
year, causing reduced levels of productivity and delays in completing
cases.
Another key finding of the study is that the IRS provided very
minimal levels of activity in assisting taxpayers to understand their
tax obligations and avoid mistakes in filing, especially in the small
business areas. Many stakeholders groups have stressed that this
problem causes errors later in the process, which are expensive for
both taxpayers and the IRS.
In our new structure, instead of increasing the number of expensive
and scarce compliance personnel, we have provided for additional
positions in taxpayer service and education. A significant portion of
the STABLE resources will be used to fill these positions. By hiring
staff to perform these service and educational functions, we can avoid
the need to use more expensive compliance personnel on details during
the filing season, thus allowing us to accomplish two objectives
efficiently: increase our level of taxpayer education and taxpayer
service and increase the number of staff years actually applied to exam
and collection casework.
With this approach to the STABLE staffing, together with our
reorganization and technology improvements, we expect to show
measurable improvements in our key programs in FY 2001. Because of the
time required to hire and train people, we will not achieve the full
impact until FY 2002. Some of the improvements we expect in key areas
in FY 2001 are:
Increase the level of service on our toll free
telephone service from approximately 59.1 percent in FY 2000 to
approximately 63.4 percent in FY 2001, while also improving our
quality measures.
Reverse the downtrend of the last five years in
compliance, increasing the number of overdue accounts closed by
our telephone and field collectors by 8.6 percent.
Increasing the number of exams of individuals
conducted in person by about 6.2 percent, while also improving
quality.
In examination, we will focus on the areas with the greatest risk
of underreporting of income. For example, the number of exams of higher
income individuals and corporations will increase more rapidly than the
average.
This additional staffing will allow us more quickly to resolve
innocent spouse claims, offers in compromise cases and collection due
process cases we completed--key taxpayer rights included in RRA 98. We
will also increase our commitment to pre-filing assistance to taxpayers
through communication and education programs and pre-filing agreement
programs. These areas are of particular importance and concern for the
small business community.
Targeting Our Resources
We must promote fairness by combating key areas of non-compliance.
To this end, the IRS must apply its limited resources where they will
be of the most value. Some of the special problem compliance areas
include: underreporting, non-filing and abuse of trusts and
passthroughs; abusive corporate tax shelters; accumulations of unpaid
trust fund taxes; and erroneous refund claims.
Abusive corporate tax shelters continue to be an important
compliance initiative for the IRS. From the information that IRS and
Treasury receives from a variety of internal and external sources, we
know that there are a significant number of transactions that have no
legitimate business or economic purpose other than reducing taxes.
These abusive corporate tax shelters could seriously undermine the
tax system if all corporations believe they must engage in these
transactions to keep up with the competition.
We have a coordinated effort with Treasury to deal with this
problem and our Office of Tax Shelter Analysis (OTSA) plays an
important role in it. The IRS does not want to impede normal tax
planning, and through the OTSA, we have available a means to separate
the real problems from quite legitimate transactions. In addition, a
``Tax Shelter Hotline'' and our commitment to issue more guidance in
this area will help us respond to abusive transactions on a more timely
basis.
Promoters of abusive tax shelters are also using offshore tax
entities in their tax schemes to unlawfully reduce or eliminate taxes.
Last month, in the largest IRS enforcement action ever taken, law
enforcement authorities in multiple states executed over three dozen
search warrants and made four arrests as part of a series of
investigations of alleged illegal offshore trust programs involving the
diversion of millions of dollars of income for hundreds of clients.
I want once again to express my appreciation for the fine work done
by our Criminal Investigation Division, the United States Attorneys
offices in Boston and San Francisco, the Tax Division of the Department
of Justice, and the Costa Rican law enforcement authorities. Last
week's historic enforcement activities send an unmistakable signal
about IRS' commitment to pursue investigations of promoters and their
clients who would try to move money off-shore to evade taxes.
It further represents the IRS' continuing efforts to combat tax
compliance problems caused by those who promote and participate in the
use of trusts and offshore schemes designed to evade U.S. taxes.
Frauds Alerts: Buyer Beware
In February 2001, The Internal Revenue Service issued a nationwide
alert to taxpayers, warning them not to fall victim to a number of tax
scams that are being promoted. These schemes take several shapes,
ranging from promises of special tax refunds to illegal ways of
``untaxing'' yourself. Taxpayers were told that they could report
suspected tax fraud to the IRS by calling 1-800-829-0433.
One of these illegal tax schemes involves telling employers that
they do not have to withhold federal income tax or employment taxes
from the wages paid to their employees. Using a bogus interpretation of
the Tax Code, the con artists are selling the unsuspecting and the
unscrupulous a phony and illegal scheme that in the long run will cost
these employers a huge tax bill that can include stiff penalties and
jail time.
In addition to this warning, the IRS devoted a special consumer
alert to this problem. We told working men and women that if they have
concerns that their employer is failing to withhold these taxes to call
our toll-free number at 1-800-829-1040. We are also asking our
stakeholder groups to help us get the word out about this problem.
Taxpayers can get more information on how the IRS is combating this
bogus withholding scheme by going to our web site at www.irs and
clicking on the ``Small Business and Self Employed Community'' page.
From there, taxpayers can click on ``tax schemes'' and get all the
necessary information. Taxpayers can also link to the IRS' Criminal
Investigation home page and get a very detailed description of its
employment tax enforcement program, including a breakdown of cases and
a number of significant convictions of those who thought they could get
away with evading their tax responsibilities.
I want to stress that IRS Criminal Investigation works closely with
all parts of the Agency to investigate and refer for prosecution
individuals and companies who have willfully failed to file or pay
employment taxes. In the past three years, 127 individuals were sent to
federal prison, a halfway house or home detention on employment tax
issues. Nearly 86 percent of those sentenced for evading employment
taxes served an average of 17 months in confinement and were ordered to
make restitution to the government for the taxes evaded plus interest
and penalties.
Revenue Protection Strategy
The IRS revenue protection efforts in 2001 will again identify and
look at certain tax returns before issuing refunds. In addition to
identifying questionable refunds, the IRS will continue its emphasis on
improving compliance with the Earned Income Tax Credit (EITC)
provisions of the Internal Revenue Code, including the use of our
dependent database to identify questionable issues relating to
incorrect claims on dependent exemptions, filing status and EITC
credits.
The Earned Income Tax Credit Preparer Outreach Program will also
continue. As part of this program, IRS revenue agents will visit tax
professionals nationwide prior to January 2001, to provide individual
assistance and to answer any questions about EITC. Some of the visits
will also include a review of files to determine if due diligence
requirements for the preparation of EITC have been met.
2001 filing season
The IRS is delivering a very successful filing season as it
continues to meet the mandates that Congress set forth in RRA 98 and
the challenges of modernization.
By continually managing this change and risk in an orderly and
integrated fashion, I am pleased to report that as we approach the home
stretch, the 2001 tax filing season has been smooth and almost error
free. The 2001 filing season continues to demonstrate how we can build
on positive trends in service to taxpayers, especially as our major
technology and organizational initiatives take effect.
Projected net collections for FY 2001 will exceed the $1.9 trillion
collected last year. During FY 2001, we also project to receive 215.4
million returns, including over 130.3 million individual returns, and
expect to issue over 96.8 million individual refunds. As of March 9,
2001, the average dollar amount per refund is up over 5 percent over
last year, and the average refund is $1,823.
Electronic Tax Administration
Mr. Chairman, RRA 98 mandated that at least 80 percent of returns
be filed electronically by 2007. Reaching this and the other Electronic
Tax Administration (ETA) goals is an enormous challenge, but well worth
the effort.
The IRS' overarching goal is to conduct most of its internal and
external transactions by electronic means. To meet this objective, we
must make it not only technologically possible, but also attractive to
the public to make a permanent change from paper to electronic means.
Indeed, a robust ETA system helps form the foundation of a modernized
IRS. It is key to easing taxpayer burden and can provide multiple
benefits to taxpayers, practitioners and our tax administration system.
Let me also stress that during the past year, the IRS completed a
sweeping set of changes and upgrades to add an extra layer of
protection for the millions of taxpayers using the e-file program. We
have strengthened our system's security and we will remain vigilant to
keep our e-filing processes the safest possible.
The 2001 filing season statistics continue to demonstrate that an
increasing number of taxpayers are taking the advantage of these
initiatives and filing taxes electronically. Through March 15, 2001,
over 29.3 millionindividual taxpayers filed using one of the three e-
file options; a 10 percent increase over the same period last year.
Nearly 21.7 million taxpayers e-filed their returns
electronically through an IRS-authorized Electronic Return Originator
(ERO), an 11.2 percent increase over the same period last year.
Approximately 4.2 million taxpayers filed their tax
returns on-line via their home computer through a third party
transmitter, On-line filing is running 37 percent ahead of last year
and as of March 15, is already approaching the 2000 total volume of 5
million.
Almost 3.5 million taxpayers filed their returns over the
telephone using the award wining TeleFile system. Oklahoma and Georgia
joined Kentucky and Indiana in the Federal/State TeleFile option.
Overall, 11 million taxpayers chose to file both their
federal and state tax returns simultaneously in a single electronic
transmission. This year, 35 states and the District of Columbia are
participating in the program.
Mr. Chairman, let me also note that paper and electronic return
preparation and filing are also offered through IRS local offices as
well as Volunteer Income Tax Assistance (VITA) and Tax Counseling for
the Elderly (TCE) sites. Taxpayers who cannot afford either to pay a
professional tax preparer or buy a personal computer and tax software
may also go to local IRS offices to have their returns prepared. The
tax software we use in our offices is competitively procured in the
open market. Through this method, the IRS both electronically prepares
and files simpler returns for lower-income taxpayers at their request.
New in ETA for the 2001 Filing Season
In order to improve our ETA program and ease taxpayer burden, the
IRS listened to taxpayers, industry and practitioners. We heard that we
must make electronic filing more attractive and remove barriers. Let me
briefly discuss our efforts this filing season to meet these concerns.
First, the IRS is working to address the frustration that taxpayers
and practitioners experience when they find they cannot file some forms
electronically. For the 2001 filing season, we added 23 additional
forms to the 1040-e-file program. These include Form 2106-EZ for un-
reimbursed employee business expenses; the Form 2688 application for
additional extension of time to file; and Form 8379 for injured spouse
claims.
We plan to roll out the remaining 38 forms and schedules for the
2002 filing season. This means we will open e-file eligibility to 99.1
percent of all taxpayers, potentially adding 3.8 million new e-filers
to the growing rolls. Equally important, it means that preparers will
be able to go essentially 100 percent electronic for all of their
customers by 2002.
Second, the IRS is making electronic filing paperless by
eliminating the requirement for a separate paper document with the e-
file return. In 2000, the IRS successfully tested the use of a Personal
Identification Number (PIN) code as the taxpayer's signature,
eliminating the need to file the paperjurat. This year's program
extended the option to taxpayers nationwide, with some exceptions, and
permits them to select a PIN, and then file electronically without any
paper. So far, 4 million taxpayers have chosen this option.
Third, this filing season, more electronic payments options have
been made available to taxpayers, such as accepting debit payments
through TeleFile and accepting credit cards for Forms 1040ES, estimated
tax payments, and Forms 4868, extensions of time to file. As of March
10th, 22,718 payments averaging $3,177 were made via credit card and
another 24,064 payments averaging $1,026 were made by Automated
Clearing House (ACH) Direct Debit where taxpayers can authorize either
their checking or savings account to be debited.
Fourth, our e-Services project under BSM will help us conduct most
transactions with taxpayers and their representatives in an electronic
format. By 2002, the e-Services' goals are to: (1) provide the
capability to register new electronic return originators over the
Internet; (2) permit delivery of transcripts to authorized parties
electronically; and (3) allow third parties who are required to provide
certain forms 1099 and information returns to check the taxpayer
identification numbers for accuracy before submission.
Fifth, contributing to this year's successful e-filing season is
IRS' new marketing campaign, ``40 Million People Already Know e-file is
the Way to Go.'' In conjunction with its advertising agency, and as
authorized by RRA 98, the IRS developed a fully integrated campaign
with TV, radio and print advertising. As the e-file program matures,
our data- and market-driven marketing campaign is shifting away from
merely promoting awareness of e-file to emphasizing its value, such as
saving taxpayers time.
ETA Also Easing Business Taxpayer Burden in 2001
A strong ETA program must embrace the needs and expectations of all
taxpayers, including business taxpayers. In 2001, the IRS continues to
make progress serving the electronic tax administration needs of this
important sector.
For example, beginning last April, employers could file their Form
941 on line, saving time and paperwork. And for the first time,
companies and payroll service provider will be able to file both the
Quarterly 941 and Annual 940 (Employer's Annual Federal Unemployment
Tax Record) electronically. A direct debit payment was also made
available through Form 941 TeleFile
Another major ETA initiative eases the information-reporting burden
for employers. Providers of certain information statements, including
W-2s, now have the option of giving taxpayers the information
electronically, instead of on paper.
These new rules were a direct response to requests we received from
lenders, educational institutions, employers and stakeholders who
wanted the option to deliver these statements in an electronic format.
Under the new option, providers will save the cost of processing,
printing and mailing paper statements. And recipients will receive the
information faster and more efficiently without the worry of mailing
delays or lost statements.
The Electronic Federal Tax Payment System (EFTPS) also continues to
be a runaway success. In 2000, EFTPS topped all of its 1999 numbers for
new enrollments, dollars and transactions. It processed more than 63
million federal tax payments--a 14 percent increase over the previous
year year. And EFTPS also received a staggering $1.5 trillion--a 15
percent increase over the previous year. Payroll companies, tax
practitioners and financial institutions have been instrumental in
helping us grow this program and the use of electronic payments.
Why has EFTPS been so successful? Over the years, EFTPS has
delivered a high level of service and accuracy. It consistently exceeds
industry standards, and delivers a 99.9 percent accuracy rate for
payments appropriately applied.
We developed the system with a focus on being able to handle
significant volume with accuracy, integrating checks and balances to
make sure information is correct and verified at each step of the
process. EFTPS delivers a level of precision that can be compared to
stringent banking and financial transaction standards for accuracy.
This year, we are conducting an exciting new pilot program to test
our new Internet-based application for businesses to pay federal taxes
on line. This new feature, EFTPS-OnLine, allows businesses to enroll in
the system, securely make federal tax payments and check their
electronic payment history over the Internet. Using EFTPS-OnLine,
businesses will be able to schedule future payments through the
Internet and cancel payments if necessary. They will also have access
to on-line help and ``how-to'' pages with step-by-step instructions.
One of our primary EFTPS priorities is security and it continues
with our new Internet feature. EFTPS-OnLine uses the strongest
available security and encryption technology to ensure taxpayer privacy
and protection. After evaluating the pilot results, we plan to make
EFTPS-OnLine available to all business taxpayers and to individuals
taxpayers who are required to make estimated quarterly payments.
There are currently more than 3 million taxpayers enrolled in EFTPS
and with the addition of the new Internet feature, we expect that
number to continue to grow.
Web-Based Help
The Internet continues to offer exciting new opportunities for
easing taxpayer burden and improving service. The IRS web site, the
Digital Daily (www.irs.gov), has already received almost 1.3 billion
hits this fiscal year. According to the ``Lycos 50'', since almost the
beginning of the year, the IRS has consistently ranked among the top 10
user searches. As of March 21, 2000, it came in as Number 6.
Anyone with Internet access can receive: tax forms, instructions,
and publications; the latest tax information and tax law changes; tax
tables and rate schedules; and hypertext versions of all taxpayer
information publications, including the very popular Publication 17,
``Your Federal Income Tax''; all TeleTax topics; answers to the most
frequently asked tax questions; a library of tax regulations; and the
weekly Internal Revenue Bulletin that contains all the latest revenue
rulings, revenue procedures, notices, announcements, proposed
regulations and final regulations. However, to ensure that taxpayer
privacy is protected, our web site will not provide or receive
individual taxpayer data until adequate safeguards are in place.
Since coming on line in January 1996, taxpayers have downloaded
over 412.9 million forms, publications and products. Through February
2001, there have been over 103 million downloads as compared to 51.5
million for the same period in 2000--an increase of almost 100 percent.
The IRS web site also has a W-4 Calculator in its ``Tax Info for
You'' section. In addition, the expanded use of online customer service
technologies provides greater taxpayer access to IRS' help while on the
Digital Daily.
Earlier this year, the IRS launched its new user-friendly ``Small
Business and Self-Employed Community'' web page that can be accessed
from our web site. It was developed by our Small Business/Self-Employed
Operating Division specifically to benefit the millions of small
business owners, the self-employed and start-up businesses who often
confront more complex tax issues than taxpayers who have their taxes
withheld by an employer.
This convenient ``one-stop shopping'' for assistance can provide
most, if not all, of the immediate products and services that a small
businessperson needs, such as a section on common problems, a calendar
of important tax deadlines, helpful tax hints, forms and publications
and a direct link to stakeholder sites, such as the National
Association of Home Builders and the National Restaurant Association.
I mention these two associations because for the first time ever,
the IRS is providing industry-specific tax information for the
construction and restaurant industries. For example, if a food server
wants to know the deadline for reporting tips, he or she can go to our
site and in two clicks, learn that Form 4070 should be filled out and
turned into the employer by February 12th.
In the near future, we will add more of these targeted areas to the
web site, such as for the automotive and oil and gas industries. We
will also add a Smart Q&A Wizard that will make it easier for taxpayers
to search our growing database of frequently asked questions and get
the information they need.
The IRS web site will continue to evolve and improve in design,
content and features. The biggest leap in the future will be from its
current state as an information source to include a transactional-based
portal.
CD-ROMs
The Federal Tax Forms CD-ROM contains more than 600 tax forms and
instructions for the current tax year, anarchive of forms and
instructions dating back to 1992 and some 3,000 pages of topic-oriented
tax information. Users can electronically search, view-on-screen, or
print any of the items contained on the CDs. The two-issue subscription
is conveniently available through the Digital Daily for $21. If ordered
by fax, mail, or telephone, the cost is $26 (includes postage and
handling).
In conjunction with the Small Business Administration, the IRS also
produced the latest edition of the joint small business CD-ROM, ``Small
Business Resource Guide: What You Need to Know About Taxes and Other
Topics.'' It has consistently received highly favorable reviews from
small businesses and external stakeholders. The Year 2001 version of
the CD-ROM is being made available free of charge, one-per-customer, by
calling our toll-free number at 1-800-TAX-FORM. It can also be ordered
on the IRS web site.
The CD-ROM provides an array of helpful information for business
operators, including actions to take before going into business and tax
filing and reporting responsibilities when starting, expanding, closing
and selling a business. In addition, it includes all of the business
tax forms, publications and instructions for e-filing. The CD-ROM also
allows users with Internet access to link to other helpful federal and
state web sites.
Telephone Assistance
Throughout the 2001 filing season, the IRS will provide telephone
assistance 24 hours a day/7 days a week at 1-800-829-1040. After April
16, we continue to offer around-the-clock service for refund and
account callers, and service will be available for tax law assistance
Monday through Saturday from 7:00 AM until 11 PM.
For the filing season through March 9, approximately 65 percent of
the taxpayers who wanted to talk to a customer service representative
got through, compared to 61.7 percent last year at this time. In
addition, 10.5 million of taxpayers used our automated services to get
information such as refund status, an increase of 132 percent since
last year, and the trend has been upward. In the last four weeks, the
level of service averaged 68.9 percent. The upward trend in phone
service is encouraging and shows that our investments in training,
management and technology are beginning to pay dividends. However, I
concur with Treasury Secretary O'Neill's characterization of IRS's
current level of phone service as ``unacceptable.'' We still have along
way to go before we can be satisfied with the quality of our phone
service.
The IRS will continue to implement many process and systems
enhancements to improve both the convenience and the quality of
telephone communications. These changes are major, affecting
approximately 14,000-15,000 employees in more than 20 locations around
the country. With the benefit of new call routing technology and new
software planning tools, we are realigning the work assignments and
training of many of these assistors so that the employees will have the
right specialized training and knowledge to answer taxpayers inquiries
efficiently and accurately. We will make increasing use of the
technology to direct taxpayer call more accurately to the right
assistor, and enable taxpayers in many cases to make uses of ``self-
service'' applications, either through the phone or the Internet.
As these changes take place, the average complexity of calls
answered by the Customer Service Representatives (CSRs) will continue
to increase as: more of the simpler calls are routed to automated
services; alternative language services are expanded; and CSRs handle
topics previously referred to compliance personnel.
During FY 2001, the IRS will introduce and test a new series of
measures consistent with industry standards to improve monitoring of
the delivery of the service experience and utilization of resources.
The current measurement system will be maintained concurrent with this
new effort through 2002 to allow IRS to solicit external expertise to
validate and assess the new measures and develop an implementation
plan. IRS will solicit external expertise to validate and assess the
new measures and develop an implementation plan.
Earlier this year, the IRS also inaugurated its San Patricio,
Puerto Rico call site. Now that the center is fully operational, it
will be able to take the majority of the Spanish-speaking traffic. Our
Spanish-speaking customer service representatives in the States will
still play a critical role, but creating this center will allow us to
make the best use of all of our bilingual assistors. By staffing this
call site, we have made real progress in reducing the current deficit
of Spanish speaking customer service representatives..
Forms By Fax and Phone
Taxpayers can receive more than 150 frequently used tax forms 7
days a week, 24-hours-a-day from IRS TaxFax. Taxpayers can request up
to three items per-call. Taxpayers use their fax machine to dial the
service at 703-368-9694. The only cost to the taxpayer is the cost of
the call. Taxpayers can also request forms and publications by calling
1-800-TAX-FORM.
Recorded Tax Information
TeleTax has 148 topics available 24 hours a day using a Touch-tone
phone. Taxpayers can call (toll-free) 1-800-829-4477 to hear recorded
information on tax subjects such as earned income credit, child care/
elderly credit, and dependents or other topics, such as electronic
filing, which form to use, or what to do if you cannot pay your taxes.
As of March 9, 2001, over 2.6 million have taken advantage of the
service so far this filing season. Nearly 2.97 million taxpayers used
TeleTax for the comparable period last year.
Automated Refund Information
In FY 2000, more than 13.79 million taxpayers used the Automated
Refund Information system on TeleTax to check on the issuance of their
refund checks. As of March 9, 2001, the number stands at over 23.8
million--up 73 percent from last year. Taxpayers may call 1-800-829-
4477 to check on their refund status Monday through Friday from 7 AM to
11:00 PM if using a touch-tone phone, or 7:30 AM to 5:30 PM for rotary
or pulse service.
Taxpayer Assistance Centers
While many taxpayers prefer to use the telephone and the Internet
to communicate with the IRS, our modernization studies and experience
with the highly successful ``Problem Solving Days'' showed that some
taxpayers need to meet in person with IRS representatives to get the
assistance they need.
For those taxpayers who prefer to visit an IRS office, walk-in
service is available at more than 400 locations nationwide. At many
sites, walk-in service will be offered on 12 Saturdays between January
27 and April 14. So far this filing season, we have served over 3.37
million taxpayers at all Taxpayer Assistance Centers--a 4.54 percent
decrease from last year.
The Saturday Service sites were selected based on their weekend
accessibility, year-round operational status, and high traffic volume.
They include non-traditional locations, such as shopping malls,
community centers and post offices.
With the help of the additional personnel provided for by the
STABLE initiative, we are broadening the services available in our
local offices so that taxpayers who wish to come in person will be able
to resolve most tax account issues. We have defined a new job category
called Tax Resolution Representatives. These employees will have the
training and authority to provide ``one-stop service'' for a broad
range of issues ranging from answering tax questions to resolving
payment problems.
We also believe that by energizing the VITA return preparation
program and co-locating these activities at the Taxpayer Assistance
Centers, the IRS will be able to focus on simple account and collection
issues. In 2001, the Stakeholder Partnership, Education and
Communications (SPEC) branch of our Wage and Investment Operating
Division will work with more than 17,000 volunteer sites across the
country to assist an estimated 4.6 million taxpayers. We will also work
to better track the impact and benefits of the volunteer program.
SERIOUS CHALLENGES REMAIN
Mr. Chairman, in spite of the progress the IRS has made since the
enactment of RRA 98, it is clear that we are still not providing the
level and quality of service that taxpayers deserve, nor are we
collecting the taxes due efficiently.
As previously discussed, the level of phone service--while
improving--is still unacceptable and not on a level with what taxpayers
receive in the private sector. We cannot provide taxpayers with up-to-
date information on their accounts, resulting in enormous frustration
for both taxpayers and the IRS employees who want to help them. In
fact, nearly all of our business processes operate too slowly,
inaccurately and inefficiently. Many of our notices are still confusing
and poorly written. Achieving the 80 percent electronic filing goal by
2007 will be very difficult.
The IRS is also deeply concerned about the continued drop in audit
and collection activity. In fact, the GAO testified before the Senate
Finance Committee in February 2000 that the current level of IRS
enforcement activity is too low. Clearly, the declines we have
witnessed in the past few years must stop or the fairness and
effectiveness of our tax system will be undermined. The risks of these
declines are not simply the dollar value of the taxes left uncollected.
The greatest risk is that the average taxpayer who honestly pays taxes
loses confidence if the IRS fails to act effectively and efficiently to
collect from those who do not pay what they owe.
To help address these problems, the President's budget includes
follow-on funding for the STABLE initiative, begun earlier this year.
These funds will complete the hiring of almost 4,000 staff and will
enable the IRS to address the declines in audits and the drop in
customer service that have occurred over the past several years.
Mr. Chairman, the drop in exam and collection activity in FY 2000
was caused by several factors, including the long-term decline in
staffing, the need to assign compliance staff to customer service
duties during the filing season, and added RRA 98 responsibilities.
Between FY 1992 and 2000, the Agency's workforce fell by 17 percent
while the number of tax returns filed (including supplemental
documents, such as Forms 1040X, 4868, 2688, 1120X and 7004) increased
13 percent to 230 million. RRA 98 also created very significant
additional resource demands on the IRS Exam and Collection staffs.
Expanded programs, such as the innocent spouse provisions, offers in
compromise and due process in collection required more that 4,200 IRS
staff annually for administration. Other provisions, such as the
requirements for notifications of third parties, tacked on more time to
complete each exam and collection case. More than 30 additional steps
have been added to the completion of an exam.
RRA 98 also had some very profound indirect impacts on IRS
operations. Two provisions, in particular, have greatly affected the
time required to conduct many activities. They are: Section 1203,
commonly known as the ``ten deadly sins'' provision, and Section 1204,
which broadly prohibited use of enforcement statistics in setting goals
or making personnel evaluations at any level in the IRS.
Section 1203 caused a great deal of concern, caution, and
hesitation among front-line employees and their managers with respect
to taking enforcement action. And Section 1204, prohibiting use of
enforcement statistics, caused a great deal of confusion and hesitation
among managers to use any quantitative data to evaluate operations or
to direct employees with respect to matters of time and efficiency. The
effect of Section 1204 has been magnified by the extensive number of
investigations and disciplinary actions of managers that was undertaken
in 1998 and 1999 for misuse of statistics. In addition, uncertainty
over the reorganization, which flattened the organization and
eliminated management layers, caused some temporary loss of focus. The
effect of all these factors was to increase the time it takes to
complete cases, reducing the number of cases completed per FTE by 20 to
30 percent.
In its March 2001 financial audit of the IRS' Fiscal Year 2000
Financial Statements, the GAO pointed out the continued problem with
the IRS' management of unpaid tax assessments. The GAO found that the
IRS' ``inability to actively pursue significant amounts in outstanding
taxes owed to the federal government continue to hinder IRS's ability
to effectively manage unpaid assessments.''
The GAO report pointed to a much larger and fundamental weakness
that threatens the IRS' mission: the pressing need to overhaul IRS'
systems and processes. The IRS core data systems that record taxpayers'
tax accounts are fundamentally deficient. The IRS will never be able to
perform its mission without replacing these systems. The solution to
these problems is not simply to do more of everything in the way it has
always been done. Instead the solution is to modernize the IRS to do
things more efficiently and effectively.
Replacing virtually the entire technology infrastructure in the
next 10 years, while also delivering short-term service improvements
demanded by taxpayers, employees, and the Congress, remains an enormous
challenge fraught with risk. But we have no choice; we must move ahead
for the good of America's taxpayers and the good of our Nation. The
President's budget includes close to $400 million in investments to
modernize the IRS' outdated computer systems. This multi-year project
will provide the IRS with the modern tools needed both to deliver first
class customer service to America's taxpayers and to ensure that
compliance programs are administered efficiently.
Mr. Chairman, there have also been some questions as to whether the
``audit rate'' as publicly reported by the IRS understates the ability
of the IRS to verify the accuracy of individual tax returns. Simply
focusing on the audit rate does substantially understate the IRS'
capacity to find errors in returns, especially in certain kinds of
returns. In my many press interviews in the past few years in which
this topic has come up, I have consistently made this point, often
citing our computer matching program as an example of a technique that
the IRS uses in addition to traditional audits.
With the use of document matching and other return verification
techniques for more that will eventually be enabled by new technology,
it is my view that there is no need to return to the levels of
individual audit coverage that existed even five years ago, which was
three times the FY 2000 level. The IRS strategic plan and budget
proposals as presented to the IRS Oversight Board do not call for this
approach. However, our strategic plan sets forth an approach in the
short run to stabilize our level of traditional compliance activities,
such as individual audits, at or slightly above current levels and to
focus them on the areas where they are most required. In the long run,
we will rely on our business systems modernization program to increase
the effectiveness and efficiency of these activities.
The IRS has for many years relied on a range of techniques to
verify certain items on tax returns. Each of these techniques is
appropriate for particular classes or types of potential errors. With
respect to Information Returns Processing, or document matching as it
has often been called, this technique is very effective for verifying
income items reported by third parties, including wages, interest,
dividends and miscellaneous payments. It can also be used to verify
gross sales of assets, but cannot be used to verify the gain or loss on
such sales since we have no third-party reporting on the cost basis of
assets. It is also of limited value in verifying some deductions, such
as mortgage interest.
Document matching is not useful for verifying business income, gain
or loss on asset sales, or most itemized deductions. We estimate that
the total personal income that cannot be verified by document matching
represented about $1.2 trillion in FY 1998, or 19.7% of total reported
personal income. An important role of audits is to verify these major
categories of income and deductions.
The significance of verifying income and deduction items through
audits is illustrated by the fact that the average in-person audit of
an individual return results in an assessment of approximately $9,540,
while the average assessment from a document matching case is $1,506.
In FY 2000, the IRS closed 277,212 in-person audits of individual
returns and assessed $2.4 billion from this program; in the document
matching program in FY 2000, the IRS closed 1,353,545 cases and
assessed $2.1 billion.
With respect the question of why document matching cases are not
considered audits, the technical reason is that Section 7605(b) of the
tax code generally limits the ability of the IRS to require a taxpayer
to submit books and records for inspection by the IRS more than once.
Since document matching cases do not require the taxpayer to submit
books and records to the IRS, a document matching case does not
preclude a subsequent audit. Revenue Procedure 94-68 specifically
defines IRS taxpayer contacts, including document matching, which are
not considered audits for the purpose of Section 7605(c). More
generally, it is my understanding that some years ago the IRS proposed
to change the definition of an audit to permit inclusion of the
document matching cases in the overall reported number of audits and
this proposal was criticized as possibly inflating IRS's statistics.
Notwithstanding these previous issues, all of IRS statistics,
including the number of document matching cases, are publicly reported
and it is our goal to make these reports as informative and meaningful
as possible.
TURNING THE CORNER
Although overcoming these weaknesses is an enormous challenge, the
IRS has achieved the first modernization milestones. If we continue to
build on these initial successes, taxpayers and our tax administration
system can begin to realize the benefits of modernization.
organizational modernization
Following RRA 98's directions, the IRS designed and has made
substantial progress in implementing a new organizational structure. It
closely resembles the private sector model of organizing around
customers with similar needs. The IRS created four customer-focused
operating divisions to best serve taxpayers: Wage and Investment, Small
Business and Self-Employed, Large and Mid-Size Business, and Tax Exempt
and Government Entities. There are also a number of functional units,
including Appeals, the Taxpayer Advocate Service, Criminal
Investigation, and Communication and Liaison.
The modernized IRS organization was officially inaugurated, or
``stood up'', on October 1, 2000 and a top management team is in place
for each of the operating divisions and business units. However, many
challenges and much hard work remain as the different parts of the new
organization are staffed and trained. The final stages of
implementation, including the redistribution of workload, will require
another two years through FY 2002.
In the short-term, the reorganization should be largely invisible
to taxpayers and tax practitioners. In the long-term, they will see the
positive changes that modernization is intended to produce. The new
organization will place a greater emphasis on pre-filing services and
early resolution of complex issues. More resources will be devoted to
pre-filing activities, such as education and outreach to help taxpayers
comply with the tax law and get their tax returns right the first time.
Post-filing activities will be geared to problem prevention with
targeted enforcement activities for non-compliance. Most importantly,
the focus and clear assignment of responsibility will result in faster
action to fix problems and improve the way that business is done.
business systems modernization program
The Problem
For an organization so critically dependent on technology, IRS'
systems are woefully obsolete and inefficient. The facts cannot be
disputed. The IRS is saddled with a collection of computer systems
developed over a 35-year period. The most important systems that
maintain all taxpayer records were developed in the 1960s and 1970s.
In an age of faster and more powerful computers, taxpayers are
shocked to hear that their most important personal financial data is
stored and updated once a week on magnetic tape. Our jury-rigged system
of computers poses other problems. As Money Magazine observed in its
April 2001 edition, ``overlaying new software onto old has created a
hodge-podge of data bases, many of which do not talk to one another.
Until our consolidation as part of the Y2K program, there were 147
mainframes and 8,700 software products.''
The effect of this obsolete technology on service to taxpayers and
productivity also cannot be disputed. As compared to what the private
sector can offer, the IRS' services are wholly unsatisfactory.
Many credit card companies and banks provide their customers with
real-time account information; their phone representatives can often
make adjustments on the spot. However, due to our archaic technology,
IRS employees often do not have access to current taxpayer account
information. Adjustments to a taxpayer's account may not take effect
for up to 16 days because of delays in updating files and data among
different systems cannot be synchronized. Payments and notices cross in
the mail, often generating more notices and frustration.
Indeed, the IRS has only a 40 percent rate for correctly resolving
an account problem over the phone the first time e.g., a payment is not
posted to a taxpayer's account or taxpayer does not understand why he
or she received a bill for an estimated penalty. Our overall account
quality is improving but in this filing season is still only 70 percent
While the IRS Web site has proven to be an extraordinarily valuable
source of information for taxpayers, we cannot yet use the Internet to
provide taxpayers information about their returns or their tax
accounts, or to exchange messages to resolve issues.
Inadequate technology and the concomitant lack of accurate data
also seriously hamper our ability to identify and collect unreported or
unpaid taxes. Individual audits are not started until 14-20 months
after a return is filed. When they are started, the information
available to our auditors is limited, extending the time to complete
the audits and increasing the burden on the taxpayer. Collection of
outstanding balances of individual and business taxes is extremely
slow, usually taking years rather than months as in the commercial
world.
The Opportunity
By taking full advantage of proven best business practices and new
technology, we can greatly improve performance on all three of our
strategic goals. The IRS can improve service to taxpayers and reduce
their burden. The IRS can improve compliance and its collection
activities, ensuring that the tax laws are fairly administered. And we
can do this with limited increases in staff resources. Taxpayers will
reap the benefits in a number of key areas, such as speed, access and
accuracy. Let me briefly illustrate how this works in each of these
three areas.
Nearly all taxpayers will be able to file and pay electronically,
regardless of the type of form or tax. Taxpayers filing electronically
and having correct returns would receive refunds in their bank accounts
within 2 to 3 days.
We will emulate the best business practice of providing service to
customers at times and through channels convenient to them, whether it
is by phone, letter or on-line.
The level of phone service would increase to 90 percent. (Level of
service measures the relative success rate of taxpayers who call the
IRS through toll-free services and wish to speak to an operator. It
excludes calls routed to automated systems.) We would expand web-based
services to include exchange of information and resolution of accounts
through the Internet. First time resolution of account inquires would
double from 40 to 80 percent. Taxpayers would receive consistent and
accurate answers to their questions regardless of the
communicationschannel they chose. IRS employees would also have access
to comprehensive taxpayer histories, thereby increasing the accuracy of
the information and the transactions contained in them.
We also will provide more ways for taxpayers to resolve some issues
by themselves, without requiring assistance from IRS staff. At the same
time as we create the ability for taxpayers to check on such things as
the status of their refunds and tax deposits through the automated
systems on the telephone or the Internet, some in-person service
requirements may be reduced. We are already beginning this process
through such exciting initiatives as the EFTPS (Electronic Federal Tax
Payment System) -OnLine program. It allows businesses to enroll in the
system, securely make federal tax payments and check their electronic
payment history over the Internet. And we have barely touched the full
potential of electronic tax administration
The effect on our compliance activities would also be profound.
Third party matching data would be made available earlier. Assembling
all available data about a taxpayer case for our employees will avoid
the need to get duplicate data from taxpayers. With the advent of many
new best private sector practices, such as risk-based compliance
techniques, the IRS also has the opportunity to allocate its compliance
resources more efficiently, both in specific cases and around patterns
of non-compliance. And when intervention is called for, we can use
analytically-based techniques to assist in determining the appropriate
action.
Most individual tax returns would be selected for audit within the
same year and those audits will be completed more rapidly. ``No
change'' determinations would be cut substantially.
The collection time for outstanding balances would be reduced to an
average of six months. Improved systems will allow us to identify much
more quickly which taxpayer accounts need attention from either
telephone or in-person collectors. They will provide much more complete
and accurate information to the collectors before they even deal with
the taxpayer, and computer tools will assist them in closing cases.
These changes will also greatly increase our ability to
``leverage'' staff and use them more effectively and efficiently, while
reducing the amount of time we take from taxpayers.
Our ability to ensure protection of taxpayer rights will be
increased by building into the computer tools used by our employees the
correct notifications and other protections prescribed by law.
The Solution
As I discussed in the introduction to my testimony, we are making
substantial progress on the short-term improvement projects that
support our major strategies. The other part of that dual approach is
the Business Systems Modernization (BSM) program. It was established to
take the IRS to the next level and make longer term, fundamental
changes to our business processes and practices while managing the
inherent risks of the process. Over the remainder of this decade, it
will deliver the major benefits to taxpayers and our tax administration
system that modernization and RRA 98 are all about. And that process
has already begun.
Earlier this fiscal year, the IRS Executive Steering Committee
approved the Enterprise Architecture. It is the roadmap for modernizing
the Agency's business systems and supporting information technology
networks. The Enterprise Architecture (Version 1.0) will guide the
agency's business and technology improvements in the coming years. The
approval of the architecture marks a major milestone in our progress
towards the goals of Business Systems Modernization and will enable us
to design and build new business and technology projects that will be
the backbone of the modernized IRS.
The IRS previously published a blueprint in 1997. It was the first
comprehensive view of modernized tax systems and guided the IRS in
efforts to update technology. The new Enterprise Architecture reflects
the lessons learned since 1997 and incorporates elements of the IRS
reorganization into the four new customer-oriented operating divisions.
It is an evolving document designed for constant use, with updates
scheduled for spring and fall 2001 and regular updates thereafter. This
new blueprint will ensure that IRS business systems' technology is
compatible. And it will enable IRS employees to do their jobs better
and provide taxpayers better service.
Because of the scale, complexity and risk of BSM, we can only carry
out the plan by defining manageable projects, which are subject to a
disciplined methodology. Each of these projects will be carried out
through a step-by-step ``enterprise life-cycle'' in which successively
greater amounts of detail are defined. The process requires that a
vision and strategy phase be completed as a first step, prior to
commencing tasks such as infrastructure development, information
systems delivery, or process-reengineering. The final milestone in the
cycle is an initial ``deployment'' of a project as an operational
system. The IRS' Enterprise Program Management Office manages this
process.
Also key to BSM's success, is the Tax Administration/Internal
Management Vision and Strategy Project. Through the project, we have
instituted a practice that ensures the Operating Division Commissioners
and staff develop and take ownership of a process and systems
modernization approach that is consistent and integrated with the
overall vision of the future IRS. The project's ultimate goal is to
create an enterprise-wide view of tax administration that is reflected
in BSM.
The Business Systems Modernization Organization (BSMO) has
nowidentified all the major initiatives for the next several years that
link directly to our major strategies. Moreover, BSMO defined the major
dependencies between and among projects and created a sequencing plan
for their initiation, development, and deployment. It has also
estimated the costs associated with each initiative and developed
multi-year spending estimates consistent with this program. It now has
a strategy for achieving the major goals of business systems
modernization. The following are some of the key projects we will be
working on during the next three years and beyond.
Deployment of the Customer Communications 2001
Project--The Customer Communications Project is the first
deployment of a business capability under the BSM effort. It is
now in final testing before deployment in the third fiscal
quarter. The IRS will greatly improve the efficiency and
effectiveness of IRS' Automated Call Distributors (ACDs) and
provide customer service levels on a par with the private
sector. Hardware and software improvements will be made to the
telephone system that is used to receive, route and answer more
than 150 million taxpayer telephone calls each year. At a later
date, Internet access capabilities will be added. This project
will deliver direct benefits by increasing the number of calls
that can be answered with available staff and will be a
critical foundation element for subsequent projects, since
virtually all major systems require communication with
taxpayers.
Development of the Customer Relationship Management
Exam (CRM Exam) Project--Development has already begun. Through
CRM, the IRS tackles some of the most complex tax calculations,
including carryback/ carryforward, the Alternative Minimum Tax,
and Foreign Tax Credit. This initiative will enhance the
revenue agent's capabilities, reduce exam time, produce
consistent results and reduce the burden on taxpayers who must
deal with the IRS on these complex tax issues.
Development of the Security and Technology
Infrastructure Releases (STIR)--The design for STIR was
approved and development was initiated. This project provides
the essential underlying security infrastructure for the
planned 2002 project deployments of the Customer Account Data
Engine (CADE), Customer Communications (2002), and e-Services
and Customer Account Management System. Development, testing
and first release are expected by October 2001.
The Customer Account Data Engine. (CADE) is the
cornerstone of the data infrastructure. It is designed to
provide a modern system for storing, managing, and accessing
records of taxpayeraccounts. CADE will create applications for
daily posting, settlement, maintenance, refunds processing, and issue
detection for taxpayer accounts and return data. The database and
applications developed by CADE will also enable the development of
subsequent modernized systems.
CADE is scheduled to be released in stages, beginning first
with simple tax returns being moved into the new CADE system,
followed by increasingly complex taxpayer returns. As more
taxpayer account information is moved into the new CADE system
through these staggered releases, other modernized applications
will be put in place to provide the interfaces necessary for
IRS employees, and affected taxpayers, to access and carry out
transactions. System development, testing and initial
deployment are expected to be completed by January 2002.
Development of the Enterprise Data Warehouse/
Custodial Accounting Project (EDW/CAP)--Today, the IRS has a
variety of dedicated research databases, and also uses its
operational databases for operations research/analysis. The
timeliness, consistency and standardization of the data in
these separate systems do not support integrated analysis and
corporate-wide decision making. The inconsistent and redundant
data in stovepipe systems can result in inconsistent management
and reporting data.
Through EDW/CAP project, the IRS will develop an integrated
enterprise data warehouse to support organizational data needs,
such as those that are critical to managing our new compliance
initiatives. For example, it will provide a single integrated
data repository of taxpayer account and payment/deposit
information, fully integrated with the general ledger. And it
will identify payment and deposit information at the point of
receipt. The operating divisions will be given access to
pertinent revenue, assessment, disbursement, and seized asset
information. In addition, it will provide the IRS with the
capability to maintain financial controls over the $2 trillion
of tax revenue received annually.
The e-Services project will support our ability to
meet the overall goal of conducting most transactions with
taxpayers and their representatives in electronic format, as
required by RRA 98. By 2002, the e-Services will: (1) provide
the capability to register new electronic return originators
over the Internet; (2) permit delivery of transcripts to
authorized parties electronically; and (3) allow third parties
who are required to provide certain forms 1099 and information
returns to check the taxpayer identification numbers for
accuracy before submission.
An important aspect of e-Services project is that it will be
one of the first projects to provide a practical and limited
application to define and test the design of our critical
security infrastructure for sending and receiving taxpayer data
internally and externally.
Customer Account Management (Individual Assistance
and Self-Assistance Operating Models). In today's environment,
taxpayers are often unable to receive timely and accurate
responses to requests and inquiries. These operating models
will provide improved technology and business processes that
will enable the IRS to: better manage customer service
functions; maintain and utilize customer data to improve
taxpayer interactions with the IRS; provide comprehensive
account and tax law assistance to taxpayers and practitioners;
and manage the case work flow of customer inquiries. There is a
separate release strategy for each of the operating models
based on the customer segment that benefits the most from the
new capabilities.
Tax Education (Direct and Indirect) Operating
Models. These models address improving business processes and
operational systems within the pre-filing business area (i.e.
before a return is filed). In the past, there has been minimal
investment in pre-filing activities, such as making educational
materials, information and forms more readily available. With
the organizational modernization, pre-filing activities will
become more prominent. The Tax Education Operating Models will
help taxpayers reduce or eliminate errors before they become
compliance problems by developing proactive and targeted
educational materials that are available 24/7 in various
formats from web-based products to published documents.
Utilizing third-party partnerships, the IRS will develop and
make available in plain language reliable educational
information, guidance and advice.
Individual Assistance Operating Model for Reporting
Compliance. The current compliance environment has produced a
number of problems, such as extended cycle times, reduced
coverage and decreased customer and employee satisfaction. This
project will have a significant impact on the present Reporting
Compliance operational environment by providing: (1) robust,
issue driven compliance planning that utilizes outcome-based
improvement to ensure fair and effective selection of cases;
(2) highly automated decision engines for risk-based case
selection, treatment assignment and resource allocation to
decrease cycle time; (3) electronic case files with pre-
identified issues to support productivity gains and increased
coverage; (4) case working tools, workflow management and
remote access to critical data; and (5) new technology and
processes to establish collectability, secure payments and
facilitate payment agreements at the closure of cases. The IRS
will deliver these new capabilities through four releases by
2006.
Filing and Payment Compliance Operating Model. This
is an end-to-end strategy to resolve collection issues quickly
and fairly. It augments, refines and replaces existing
processes and technology to enable the IRS to interact with
taxpayers in a seamless and efficient manner. Protection of
taxpayer rights at all times is an important component of this
strategy. Taxpayers who are able to resolve their cases with no
direct IRS contact are provided various self-correct options.
Field or Collection Call center staff will assist taxpayers who
need help to resolve their delinquent tax cases. They will have
access to real-time data to ensure that appropriate actions are
taken and taxpayer rights are protected. The operating model
will decrease cycle time to approximately six months. We will
deliver this operating model through four releases by 2007.
Establishing a Balanced Measurement System
All federal agencies must have appropriate quantitative performance
measures. They are required by the Government Performance and Results
Act (GPRA) and are essential to any large organization's proper
operation. An integral part of our overall modernization program is
establishing balanced performance measures that support and reinforce
the IRS' mission and strategic goals. However, because of past IRS
experience with measurements and RRA 98 requirements (Section 1204),
developing appropriate measures is an especially sensitive and
difficult task.
Critical to our efforts was establishing measurements based on what
we needed and wanted to measure, rather than using what is most easily
measured. Our balanced measurement system was designed to measure the
progress we are making to achieve our three strategic goals: (1)
service to each taxpayer; (2) service to all taxpayers and (3)
productivity through a quality work environment.
Also critical is ensuring that measures are aligned at all levels,
from the top of the organization to the front-line employee. This does
not mean that all of the organization's levels and components have
precisely the same measurements. Obviously, this would be impossible.
Rather, it means that the measures or evaluations are aimed at
encouraging the type of behavior that will advance the organization's
overall strategic goals, and do not encourage inappropriate behavior.
In developing measures for each organizational level, it is
important that each component of the balanced measurement system
reflect responsibility at that level. At the top of the organization,
management has control over strategies and allocation of resources.
However, at the mid-level, managers have less control over these
variables, but do exercise control over the effectiveness of training,
coaching and guidance of employees. And at the individual level, each
employee has control over his or her work and self-development.
In the balanced measures system being implemented, there will be
quantitative measurements keyed to each of the three strategic goals
(service to each taxpayer; service to all taxpayers and productivity
through a quality work environment) at both the strategic level and the
operational level. In general, quantitative measures will not be used
at the individual employee level.
In September 1999, we issued a Balanced Measures Regulation to
formally establish our new performance management system. The
publication of the regulation, which followed a public comment period,
set forth our structure for measuring organizational and employee
performance.
At the strategic level, our measures are designed to gauge overall
performance on accomplishing the mission and strategic goals. This
level is meaningful for the IRS as a whole, or for those parts of it
that are responsible for providing a full range of services to large
sets of taxpayers.
We began identifying specific strategic measures in FY 2000 and
will refine and finalize these measures in FY 2001. Experience has
shown that the development of good performance measures is an evolving
process that improves with time. Accordingly, we anticipate there may
be changes to the specific measures. We expect, however, that the
strategic intent behind these measures will remain firm.
At the operational management level, our measures are focused on
successfully executing our core business functions within the
organizational units. At this level, we derive the balanced measures of
organizational performance as follows: customer satisfaction, business
results and employee satisfaction. This can be easily contrasted with
measuring at the individual level.
All quantitative measurements assess organizational performance,
not individual performances. It is impossible to capture in any
quantitative measurement system all that is important in evaluating an
individual. As of January 2000, we redefined the system for setting and
measuring performance expectations for nearly all managers and
executives to align with the balanced measurement system.
For front-line employees, we do not use quantitative measurements
to evaluate performance, except in certain submissions processing
functions. In most cases, it is not practical to quantify the
performance of an individual employee in a meaningful and appropriate
way. Instead, we incorporate the desired activities and behavior
consistent with the strategic goals into the ``critical elements'' of
each employee's position description.
We began to implement the balanced measures system at the
operational level in 1999, starting with the three functions, Customer
Service, Examination, and Collection, that most directly affected large
numbers of taxpayers and employees. We implemented the operational
measures for these functions within the existing organizational
structure and have now transferred these measures to the new
organization.
Since that time, we approved additional balanced measures for Large
and Mid-Size Business, Tax Exempt and Government Entities, Taxpayer
Advocate Service, Information Systems, Criminal Investigation, Appeals,
and for additional Submission Processing and Customer Service product
lines within the Wage and Investment and Small Business/Self Employed
Operating Divisions. We have slated balanced measures for the remaining
organizational units for approval in fiscal year 2001. In the interim,
we are using 64 indicative measures and workload indicators in our
annual performance plan as we complete our measures development.
However, we still have work to do. We must agree on a final set of
Agency-wide strategic measures and then begin implementing a
comprehensive suite of strategic measures covering all taxpayer
segments. Most importantly, we must continue to learn how to use
balanced measures as a tool to achieve a high level of performance for
all three of our strategic goals.
Development of the balanced measurement system and, even more so,
learning the new ways of working will take years. By focusing our
attention on what is important for achieving our strategic goals, we
will stay on the right path and continue our progress.
clean financial opinion as reported by lawrence w. rogers, former irs
chief financial officer and currently, acting director for
administrative accounting, systems and policies
Mr. Chairman, due to the combined efforts of the IRS and the
General Accounting Office, I am pleased to report that the GAO rendered
an ``unqualified'' or clean opinion on the IRS' FY 2000 Financial
Statements. This includes both the Revenue and Administrative accounts.
The GAO's opinion means that the IRS properly accounted for $8.3
billion in appropriated funds; over $2 trillion in revenues collected;
and over $190 billion in refunds. In his message opening the FY 2000
Treasury Accountability Report, Secretary O'Neill stated that ``Good
stewardship of taxpayer resources is a responsibility I take very
seriously.'' At the IRS, we also want to ensure that every manager and
employee takes that responsibility seriously.
In fact, the success on the financial opinions can be greatly
attributed to the hard work and dedication of the IRS staff; the
significant improvements made to IRS' internal controls; and management
focus placed on the financial audits. I would also be remiss if I did
not recognize the hard work of our GAO auditors who provided us with
such excellent advice.
Congress, too, has played an important role in insuring that the
financial audit is an important factor when evaluating agency
performance. And we thank you for your strong, vigorous and continued
leadership in this area. In last year's appropriations hearings, the
Chairman of the House Appropriations Subcommittee on Treasury, Postal
Service, and General Government also stressed the importance of a clean
financial audit for IRS. Planning is already underway to insure that we
maintain the same level of commitment for the FY 2001 and all future
audits.
To achieve the clean financial opinion, the IRS made significant
improvements in several areas. Specifically, we:
Implemented reconciliation procedures for IRS fund
balances and ensured prompt review/reconciliation was
performed;
Revised our reporting and disclosure for the
statement of net cost to properly classify IRS programs;
Improved management of property and equipment (P&E)
inventories;
Improved our review and management of suspense
accounts;
Reduced the number of computer security weaknesses;
Addressed issues related to safeguarding taxpayer
data; and
Improved our ability to substantiate unpaid
assessments.
However, long-standing inadequacies in our financial reporting
systems must still be addressed through the broader efforts to
modernize the IRS' systems and organization as mandated by RRA 98. The
ultimate key to better financial management at the IRS is improved
technology. A complete description of our efforts and response to the
GAO report may be found in Appendix A.
BUDGET SUPPORT FOR MODERNIZATION
The IRS modernization program, and particularly, Business Systems
Modernization, is at a critical juncture. The President's budget
request funds two major initiatives that will greatly help the IRS.
First, the budget includes close to $400 million in investments to
modernize the IRS' outdated computer systems. This multi-year project
will provide the IRS with the modern tools needed both to deliver first
class customer service to America's taxpayers and to ensure that
compliance programs are administered efficiently.
Second, the President's budget also includes follow-on funding for
the STABLE initiative, begun in 2001. These funds will complete the
hiring of almost 4,000 staff and will enable the IRS to address the
declines in audits and the drop in customer service that have occurred
over the past several years. Further details on the President's request
on the IRS will be included in the formal budget transmission to occur
next week.
Mr. Chairman, in conclusion, I believe that the IRS is on the right
track. We have demonstrated both the ability to make some short-term
improvements in service, and more importantly, the ability to produce a
viable and cogent strategic plan that will guide our efforts to make
changes in the entire way we do business and provide service to
taxpayers. With your continued support and support of the American
people, I am convinced more than ever that we can succeed.
Appendix A--2001 Financial Audit
GAO Findings
The IRS believes that the GAO report is generally accurate and we
have submitted a number of specific comments that we believe expand
upon the information contained in the report, rather than challenge its
findings.
Management of Unpaid Tax Assessments
First, to address the issues related to Trust Fund Recovery Penalty
(TFRP) processing (e.g., delays in posting, related tax liabilities,
etc.) an IRS task group was established to review and recommend
necessary changes. This group developed programming requirements to
design an automated TFRP system that allows for systemic links. Phase I
initial programming has been completed. Phase II will be implemented in
FY 2002 to systematically accept downloads of data and cross-reference
payments received for assessments made.
Controls Over Refunds
The GAO observes that the IRS does not always review Earned Income
Tax Credit (EITC) claims in time to identify invalid claims. The IRS
believes that this observation should be placed in the proper context.
The IRS has succeeded in several of its initiatives to prevent
erroneous EITC refunds from being issued. Specifically, the IRS: (1)
used its dependent database to identify questionable issues relating to
EITC; (2) implemented the new legislation requiring re-certification
before the taxpayer can claim EITC on the current tax year due to
improperly claiming EITC in the previous year; (3) banned taxpayers
from claiming EITC for either two or ten years after the tax year where
there was a determination that the taxpayer's claim was due to
intentional disregard of the rules and regulations, or fraud; and (4)
implemented an automatic freeze on refunds where there is an open
examination.
The results of our efforts are clear. Since 1999, the IRS worked
over 55,000 re-certification cases. Our case reviews also resulted in
7,680 two-year bans and 62 ten-year bans for processing year 2000, and
337 two-year bans and two 10-year bans for processing year 2001 (as of
mid-February).
Property and Equipment (P&E)
The IRS agrees with most of the GAO's comments regarding Property
and Equipment. However, we do not believe that the report puts into
proper perspective the substantial progress IRS achieved during FY
2000. We believe it is important to highlight the fundamental changes
in the P&E management of IRS.
Prior to October 1999, there were multiple information systems
organizations in IRS besides the Chief Information Officer (CIO). This
was a major contributing factor to the lack of accountability and
commitment in maintaining an accurate and complete Information
Technology (IT) inventory, thus, resulting in the long-standing
property material weakness.
Today, the IRS has one information systems organization with total
responsibility for the IT inventory. Since October 1999, the
Information Systems organization has made significant progress in
improving how the inventory is managed and maintained.
To implement the GAO recommendation that ``systems and controls be
in place for FY 2000,'' the IRS devoted P&E employee resources to
undertake and accomplish the task. The IRS had already established the
Financial and Management Controls Executive Steering Committee (FMC
ESC). It is chaired by IRS Deputy Commissioner Bob Wenzel and is the
major coordination point in the IRS for improving financial management
systems. The FMC ESC established the Property Subcommittee, consisting
of executives of the offices of the CIO, Chief Financial Officer (CFO),
and Procurement. This Subcommittee met weekly and made decisions to
ensure systems and controls for P&E were developed and functioning for
FY 2000 and the future. This Subcommittee will continue to function
until all property issues are resolved.
The IRS also established the Asset Management Modernization Project
Office whose full time job is to implement industry ``best practices''
and deploy new automation tools. A complete discussion of these and
other improvement projects can be found in our response letter.
In summary, we believe that through the major automation and
process improvements I have outlined, the IRS significantly reduced the
long-standing material weaknesses identified by GAO. With continued
executive support and dedicated staff resources, the momentum attained
to date can be sustained, and the underlying deficiencies in IRS'
property management eliminated.
Manual Tax Receipts and Taxpayer Information
On October 30, 2000, the IRS established a Subcommittee on Security
under the FMC ESC. The Subcommittee provides an agency-wide senior
executive forum to address, and to make decisions on, security policies
and priorities. It focuses on efficiently and effectively implementing
and communicating these policies and priorities throughout the IRS. The
Director of the Office of Security is the Chair of the Subcommittee.
Computer Security
Recognizing the critical need to enforce federal law and
regulations concerning privacy and non-disclosure of confidential tax
information, the IRS created the Office of Security to establish and
enforce standards and policies for all major security programs
including, but not limited to, physical security, data security, and
systems security. The OS provides the IRS with a proactive, independent
security group that is directlyresponsible for the adequacy and
consistency of security over all IRS' operations.
Our security approach is consistent with GAO's September 1996
report, Information Security: Opportunities for Improved OMB Oversight
of Agency Practices, which noted that, ``Such a program can provide
senior officials a means of managing information security risks and the
related costs rather than just reacting to individual incidents.''
Using a security framework, we are setting priorities for resources
and we are measuring and demonstrating success in improving the overall
security posture of the IRS. We are also taking a proactive approach by
conducting security reviews at the computing centers and campuses. Our
Office of Security works closely with local and Headquarters management
to develop solutions, monitor implementation, and conduct on-going
reviews to ensure weaknesses do not recur.
Revenue Reporting and Distribution
In its report, GAO notes that there are continued weaknesses in
fundamental internal controls. To address this issue, the IRS
implemented procedural changes to ensure expedited processing of
million-dollar returns. We also provided procedures to monitor timely
posting of returns and to identify taxpayers who had not yet filed
their returns. This will ensure processing prior to the end of the
certification period.
The GAO also noted there was a delay in posting to the Highway
Trust Fund and the Airport and Airway Trust Fund in the amounts of $346
and $34 million, respectively. There are three reasons why amounts
received in a quarter are certified in a subsequent quarter: (1) late
filed returns; (2) processing delays (lack of documentation, etc); and
(3) subsequent activities. In the above cases, we needed additional
documentation and returns were filed late. It should be noted that
there is no penalty for late filing provided the taxpayer has submitted
his or her payment on time.
IRS' Structuring of Installment Agreements and Compliance With the
Internal Revenue Code
The IRS has made considerable improvements on the structuring of
installment agreements. In FY 1999, twenty percent of the unpaid cases
examined were non-compliant with the Code. In FY 2000, the non-
compliant percentage dropped to two percent. To ensure that agreements
are compliant, the IRS issued guidance to its employees. We are also
developing training on processing new installment agreements.
Furthermore, the IRS is revising its guidelines to reemphasize the
necessity of ensuring that installment agreements cover all outstanding
taxes. If this cannot be accomplished, the case will then be handled in
accordance with Offer-in-Compromise procedures. The IRS will also
continue to monitor and enforce the guidelines on installment
agreements.
Federal Tax Liens
The GAO has noted significant improvement in the IRS' processing of
federal tax liens. To better refine the processing of liens, the IRS:
(1) issued guidance to its employees and provided additional training;
(2) instituted monitoring and enforcement of the processing guidelines
for liens; and (3) centralized the control of the federal tax lien
process to one site. Previously, the process had been decentralized to
each of the 33 IRS districts.
Long-Term Efforts
A major concern shared by the IRS and taxpayers is privacy and
security, both internal and external. Let me restate the IRS'
commitment to recognizing taxpayer privacy to the maximum extent
possible in all Service initiatives. Given the vulnerability of modern
electronic information systems to cyber attacks, hacking, and natural
disaster, we are focusing resources on risk management processes,
secure messaging and authentication, physical security, cyber attack
response capability and disaster recovery measures.
The IRS will make substantial progress in improving its stewardship
of assets over the next two years, although much more will be possible
through our longer-term business system modernization efforts. The
following are some of the ways we will implement this strategy.
Privacy
The IRS will incorporate privacy protection principles into all of
its programs and policies. We will enhance the privacy impact
assessment methodology, applying it to all stages of a system's
development and requiring it as a part of a system's certification.
Security
The IRS will establish a Critical Infrastructure Plan to ensure
that information systems critical to the financial security of the
United States survive. The IRS will also continue to work with the
computing centers to enhance their physical security to Level V, the
Department of Justice's highest physical security designation. In
addition, we will assist service and computing centers in conducting
integrated disaster recovery exercises. Furthermore, the IRS will
review the state of its security and focus on providing solutions to
identified vulnerabilities and completing security certifications of
sensitive systems. The IRS will bring the Computer Security Incidence
Response Center to full operational capability and will provide
oversight of selected IRS program areas to ensure practices are
consistent with policy and guidance.
Property Management (IT)
The IRS will enhance and enforce policies and procedures to ensure
accountability for use of information technology (IT) property. There
will also be a transition from the current internally developed IT
property tracking system (Integrated Network and Operations Management
System--INOMS) to a Commercial Off-the-Shelf (COTS) solution. The IRS
will connect the IT asset system with the non-IT property management so
there is one comprehensive property system throughout the IRS.
Financial Systems
The IRS will implement a Joint Financial Management Improvement
Program (JFMIP) approved financial management system. We will select a
COTS product that best satisfies our internal management needs through
an enterprise resource-planning product. Our first phase of
implementation will be replacement of the core financial system, with
planned future implementation of other internal management modules.
Strategic Plan
The Strategic Plan stresses that the IRS must demonstrate effective
stewardship of the assets and information entrusted to it by improving
our internal processes for information management, financial
management, and asset management.
Conclusion
To summarize, the Internal Revenue Service is committed to
improving financial management. We view all of these actions as
necessary to build upon current processes and systems to provide the
best financial information possible that meets statutory and policy
requirements. Additionally, it must be stressed that the long-term
solution to many of the issues identified through the audit process can
only be addressed by the design and implementation of new or enhanced
automated systems that will be developed over the next several years.
Chairman Houghton. All right. Thanks very much. Before we
go to the questions, I would like to introduce our newest
Member, Earl Pomeroy, who is a very distinguished man for many
reasons, one of which is he is my neighbor down the hall here.
Anyway, Earl, and also Karen Thurman, who was on this Committee
two Congresses ago, not last Congress, and now again. Thanks
very much, Karen, forbeing here.
I would just like to ask a question and then I will turn it
over to Mr. Coyne, and we will go back and forth here. You have
talked about this electronic filing and I think it was you that
put out this goal of 80 percent filing electronically by the
year 2007; is that right or was that before you?
Mr. Rossotti. Well, it was included in the Restructuring
Act. I think the origin of it might have been the Presidential
commission that studied the IRS, but in any case, it was
included in the Restructuring Act as a goal.
Chairman Houghton. Tell us a little bit about that. Is that
going to be a stretch? How does it look? What are the
incentives? Just give us a feel for it.
Mr. Rossotti. It is definitely going to be a stretch in
terms of timing. We actually have to average 20 percent-a-year
growth between now and 2007 approximately to get there. We did
hit 20 percent this year. We may be slightly under 20 percent
this coming year. I think the important thing, and I think some
or the other folks who are going to testify later will say
this, is that it will not happen automatically. It will not
happen just because it is currently going up at 20 percent. We
have to take some aggressive steps and we are.
I mentioned in my testimony, one of the key things was the
ability to file all forms and returns electroncially. Right
now, you cannot file all returns because there are certain
schedules and forms that are not accepted. That particularly
affects practitioners, because 55 percent of the returns are
prepared by practitioners and many of them tell us they do not
want to file some of their returns electronically and some of
them on paper. That is one obstacle we are trying to remove.
Another issue was that electronic filing was not entirely
paperless. You had to file a separate form with your signature
document. We came up with a strategy this year that eliminated
that requirement. You could supply us with a self-selected
identification number and two pieces of information from your
prior-year return. That has had some startup issues, especially
with some of the practitioners, but nevertheless we think it
will work with some fine-tuning and that will eliminate that
issue.
Another issue has to do with practitioners having
sufficient incentive just to change the way they do business.
In our modernization program, one of the things we are going to
be doing in an early implementation, we expect by 2002, is to
provide some additional services to some practitioners who work
with us electronically. This will include not just filing the
returns, but being able to communicate with us, for example, to
get transcripts of tax returns and eventually to settle their
accounts. This will essentially provide a broader reason for
people to do business electronically with us.
Then, finally, there is the marketing and promotional
activities, like any product. You have to promote it and we are
continuing to do that. We have a lot of things that we have to
do. I have only mentioned a few of them. It will not happen
automatically.
On the other hand, the trends in favor of us are just
cultural. The newer generation of people, like my two children,
they are around 30 years old and I do not know that they have
ever bought a postage stamp. I think they do everything by e-
mail and computers. They are the kind of generation that is
going to automatically generate an interest in things
electronic.
Chairman Houghton. Thanks very much. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. Commissioner, welcome
and thank you for your testimony. Is there a difference between
the level of funding for 2000 between what the chairman of the
oversight board would like and what the IRS has submitted to
the administration?
Mr. Rossotti. Well, I am afraid the administration has not
submitted its budget yet, so I do not think I can really go
into what the President's budget is going to be until it is
submitted.
Mr. Coyne. But as far as your request to the administration
for funding from the IRS, is there a difference between yours
and what Mr. Levitan would like?
Mr. Rossotti. Well, Mr. Coyne, I think we ought to wait a
little until we see the President's budget. I think Mr.
Levitan, in their public meeting, had made some comments about
what they perceive to be the differences between their view on
certain items and what they believe the administration was
going to have. I think I would be best advised to wait until
the President's budget is submitted before commenting on the
budget, other than mentioning that they did say in the
blueprint they would include $397 million for the modernization
fund.
Mr. Coyne. It has been reported that over the last several
years audit and collection levels at the service has declined.
Could you point out to us here today what the major areas of
noncompliance have been?
Mr. Rossotti. Well, of course, one of the things is we have
not had for a long time, a very good up-to-date, accurate
assessment of how the compliance levels have trended. We are
relying on some old estimates. I think, as we noted in our
strategic plan, there are really problem areas of noncompliance
across the spectrum. There is going to be, in fact, a hearing
at the Senate Finance Committee this week on one area, which
are the sort of organized tax avoidance schemes, such as these
abusive trusts and devices such as that, which are sold to
taxpayers, alleging that they can avoid taxes, and we think--we
do not know what the numbers are, but there could be many
billions of dollars of taxes that are not paid on that kind of
scheme.
There are significant problems that we have in collecting
employment taxes. We are behind in some areas because of the
inventories that have a build up of collections. We have, as
you know, in some cases, refunds that get through that should
not get through, both based on the earned-income tax credit as
well as other refunds. At the other extreme in the corporate
area, we have had some major initiatives recently in the last
year to deal with abusive corporate tax shelters, which are a
different kind of tax shelter. They are kind of technical
devices. So if you really look across the board, there are wide
ranges of areas of noncompliance, and we are trying to be very
focused with the limited resources we have on each of those.
Mr. Coyne. Later on today, the Treasury's Inspector
General, Mr. Williams, is going to testify, and I quote from
his testimony, that ``over a 4-day period during this current
filing season, their auditors made 368 random test calls to the
IRS' toll-free number, and were unable to gain access 37
percent of the time. When successful in getting through,
however, the IRS incorrectly responded to 47 percent of the
questions. The topics for the test calls were obtained as the
most frequently requested requests of callers.'' Could you
address that?
Mr. Rossotti. Well, as I said in my testimony, we certainly
believe we made progress in both the quantity, access and
quality of calls. But we are far from satisfied with where we
are. By looking at the entire filing season rather than just 4
days, we know what the access is. If someone wants to talk to a
person and tries to get through, right now, for the season as a
whole, the access is about 66 percent. In other words, about
two-thirds of the time, which is not too different from what
they found.
In terms of quality, we have a very complete system that
tracks in a statistical way actual calls that are made by
taxpayers that we have up in Philadelphia, as a matter-of-fact,
not in Pittsburgh, but it happens to be in Philadelphia, a site
that actually randomly samples all calls that are made and
listens into them, because we can do that electronically, and
through a statistical means actually rates the accuracy of the
calls.
I can give you the statistics for the whole filing season.
On tax law calls, the accurate response rate was 74.5 percent
for the filing season so far. On accounts calls, which are
people calling about their account, it was 86 percent. Neither
of those is an acceptable level, although, especially in the
accounts, we have improved drastically or at least
significantly over what it was last year. I think in terms of
where we are going with this, we want to try to get to a
commercial level of access, which would be more in the 90
percent range, and certainly, a significant improvement.
In terms of both of those, there are two key things that we
are doing besides just better management and better training.
One of them is the technology program; in fact, a near-term
technology program will provide us additional capacity to
answer calls and some additional ability to route calls more
precisely. We are also completely reorganizing our whole
telephone operation, in the sense that we have about 25
different call sites where there are people who answer calls.
In the older structure, we tried to answer pretty much all
the different kinds of calls, which, if you think about it, is
an enormous range across the tax laws as well as accounts. What
we are doing is working on a plan which we call center
optimization, which looks across the whole network, across the
whole country, and tries to figure out where we can specialize
both the sites and the people in the sites, so that they will
become more knowledgeable about the specific kinds of questions
they need to answer and then direct the calls to the right
kinds of people.
We are convinced that this is the only way we will get
completely up to the level of accuracy we need to, because it
is just too difficult to answer the entire range of calls in so
many different places. This is an example of something where we
are doing short-term things, as we are doing this filing
season, but we are also making some fundamental changes to
really reorganize the way the whole thing works in order to get
both access and quality up to the levels that we want.
Mr. Coyne. Thank you.
Chairman Houghton. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and thank you,
Commissioner, for being with us again. I think this
Subcommittee is very cognizant of your challenge to both
reengineer the IRS, while maintaining the taxpayer service as
necessary to operate a very complicated system and a very
complicated Tax Code.
If I could focus on a couple areas, one is with regard to
electronic filing, I am concerned that you are saying it would
be very difficult to meet the goal, but you think the goal is
very important for both taxpayer service and also for the IRS
itself, to be able to operate efficiently and more accurately.
It seems to me, looking at your data, that you have done a
pretty good job with regard to folks who file their own
returns. In fact, we have about a 37-percent increase on home
computers, for instance, this year, which is impressive, only
about 10 percent, though, among practitioners.
We are going to hear from some practitioners later and I
want to pose some questions to them if I can come back. I have
to step out for awhile for another meeting. I hope to be back.
What can you do to improve that rate among the practitioners?
As you know, more than half the returns are filed by
practitioners. You mentioned we can put all forms and all
schedules on, rather than the forms we currently have online,
but specifically with regard to practitioners, what are your
ideas for the next few years?
Mr. Rossotti. Well, I think there are really three things
we are trying to do concretely. One of them is to be able to
file all the 1040 forms online because they do not want to do
some of them on paper and some of them electronically. The
first time I ever met with a practitioner on this subject when
I came into office, that was one of the first things I heard.
It has taken us some time, but by 2002 we will be there.
The second thing is getting rid of the papers, the
signature document. We came up with a scheme this year. There
is some maturity, some perfection we need to do on that, and we
will be working with the practitioners this year to gain their
experience and improve it next year.
The third thing is to broaden their ability to interact
with us electronically, beyond just filing returns, into
dealing with us on other subjects. I think I mentioned that
briefly in an answer to the Chairman's question. In our
modernization program, our e-services project is aimed squarely
at that point. It is directly aimed at enabling us to have, in
a secure way, the ability to communicate with practitioners. If
we can succeed in our schedules, we will be rolling out the
first part of that capacity in 2002, and perhaps, the remainder
in 2003.
Within the next 2 years, I think we will have dramatically
increased the attractiveness of our offerings to practitioners.
Mr. Portman. Commissioner, can I interrupt you just for a
second? I have got a couple of questions I would like to get at
and my orange light is going to come on in just a second. If
you can get back to me in writing, that would be great with
regard to any other point on practitioners, specifically with
regard to the PIN numbers. There has been some information that
has recently come to our attention, Federal Computer Week just
said there is a lot of complaints about the new system,
enabling taxpayers to select their own PIN. We think there is
about a 20 percent error rate that you have acknowledged with
regard to PIN numbers, and we understand that there are a lot
of taxpayers who have been required to file their signatures
the old-fashioned way, by mail, in addition to filing returns
electronically.
I know you have tried several PIN systems in recent years.
They all seem to have some inherent problems and complexities.
If you could sort of cut through some of the red tape for us on
that and give us what the best systems might be over the next
couple of years, that would be very helpful to me and I think
to the Subcommittee.
[The following was subsequently received:]
Currently, IRS offers the Self-Select PIN program for
signing the 1040 Individual Income Tax Return electronically,
using a self-selected five-digit personal identification
number. The Self-Select PIN is totally paperless. The PIN
eliminates the need to send in Form 8453 and Form 8453OL. There
have been over 8.8 million returns filed electronically using
the Self-Select PIN.
However, the IRS has not yet determined which system would
be best for the next couple of years. IRS is exploring the
feasibility of reinstating the Practitioner PIN program. Under
this program, the taxpayer self-selects his or her own personal
identification number and personally inputs the PIN as his or
her electronic signature. The difference between the two
programs is that the Practitioner must maintain an
Authentication Worksheet for a period of 3 years. The worksheet
has the taxpayer's PIN listed along with his or her pen and ink
signature confirming that the PIN he or she selected will serve
as their electronic signature. The Self-Select PIN does not
require a Worksheet. Instead, it requires two pieces of
information from the taxpayer's prior year tax return--Adjusted
Gross Income and Total Tax---to authenticate the taxpayer.
Reinstating the Practitioner PIN program, as well as
maintaining the Self-Select PIN program, will provide
practitioners with a choice between the two systems depending
on their business and client's needs.
Mr. Portman. States, as you know, require the taxpayer to
retain a signed copy of their returns. It has to be produced if
the IRS conducts an audit. That is what we kind of came up with
in the commission a few years ago, and we talked about that in
this Subcommittee at various hearings. That seems a lot less
complex to me still, and I wonder why the IRS has not gone to
that.
[The following was subsequently received:]
Although some states may allow taxpayers to file returns
electronically and retain the signature on a paper copy, IRS
does not consider this appropriate for electronic filing of
federal tax returns. States can be reasonably confident that
the information filed with them is the same as on the federal
tax return. However, in the federal environment, we are not
provided with this same level of confidence. Administration of
the tax laws would likely be more difficult if taxpayers
retained the signed copy of their returns. If necessary, the
Service would need to use other means to prove that a return
filed electronically without a signature was, in fact, the
taxpayer's return.
Mr. Portman. Now, my orange light is on. Let me skip over
my questions on the telephone side and just to say quickly
there that you had done well in going from 50 percent to about
two-thirds. The error rate is still disconcerting, and one of
the issues I would love to get back in writing, would be to
move to an e-mail system where you are able to respond to more
than just tax law questions by e-mail, but actually respond to
specific questions on specific accounts. I know there are some
security issues with that and some modernization issues with
that, but it seems to me that would enable your people to have
a little more time to respond and come back with a response
that was, frankly, a little more accountable to them and a
little more thoughtful, which might lower that rate of
inaccuracy that Mr. Coyne talked about.
[The following was subsequently received:]
Currently, IRS has two Modernization projects underway that
will provide web-based account customer service. The first
project, Internet Refund application, is an automated
application that will provide English and Spanish refund status
information for our customers over the Internet during next
year's filing season. Although the initial version of the
application will not support e-mail, it will include ``what-to-
do-next'' templates and checklists with information taxpayers
should have available when calling or writing IRS to facilitate
resolution of refund problems. IRS will pursue e-mail
capability in the future iterations.
The second project, Electronic Account Resolution, will
offer practitioners the capability to resolve account-related
issues electronically using a secure internet application. The
first implementation of Electronic Account Resolution is
scheduled to occur in September 2002. Our Electronic Tax
Administration Office has used the Practitioner Secure
Messaging System (PSMS) Prototype as the basis for determining
the requirements for the Electronic Account Resolution.
Mr. Portman. The final question I have for you is with
regard to the oversight board. How is it working? I met with
the oversight board. I know you have spent a lot of time with
them, which I appreciate greatly. Chairman Levitan testified
yesterday before the Oversight Committee. I wonder if you would
give us a brief overview of the oversight board?
Mr. Rossotti. My sense is that the oversight board has
taken its responsibilities very seriously, very much in the
spirit of the Restructuring Act, and has put in a great deal of
serious time learning about the IRS. They were appointed in
September. They organized at the first meeting. They have had
three full-scale meetings, each about two days, the most recent
one about 2 weeks ago which included a public meeting, and then
they have three Subcommittees that have been organized that
have focused on key areas.
I think at this point they are up and running in a full-
scale way. They focused a lot of their attention on the
strategic plan in the budget, and as I mentioned in my
testimony, in January they actually approved the strategic
plan. I think that was an appropriate focus for them and
something they contribute a lot of value to. Now they have been
focusing on the budget to support the strategic plan, and they
have issued a report on that. I think they are going to issue
some more reports, including the testimony. The Chairman
testified yesterday and I believe he is going to testify
Thursday.
My sense is this board is doing what the Congress intended
it to do, which is to get into an in-depth understanding of the
IRS' problems. They certainly have been candid about
identifying our problems if you heard the testimony yesterday,
but they have also been very constructive about laying out what
they think needs to be done. Just speaking personally, I have
been involved with a number of boards, both being on them and
presenting to them and so forth, in different contexts, but I
think this is one of the most substantive kinds of meetings
that I have ever been engaged with.
I mean, they have been very substantive, very intense. You
were there at one of them for a period. They are fully capable
because of their backgrounds, to really know what questions to
ask in-depth about almost any subject about the IRS. And they
have not hesitated to do that. They have also met with all the
outside stakeholder groups and with GAO. The Comptroller
General came over to meet with them. I believe if you wanted to
have one body that has devoted the time and has the expertise
to understand what is going on about the IRS, you have that in
the IRS Oversight Board.
Mr. Portman. Thank you, Mr. Chairman.
Chairman Houghton. Well, I will bet you are very proud of
that; rather than asking where is it, it is how is it doing.
Mr. Portman. More fun to ask that.
Chairman Houghton. I would like to ask Mr. Pomeroy if he
has a question.
Mr. Pomeroy. I do, Mr. Chairman, and thank you. I would
just begin by saying Commissioner Rossotti has come to North
Dakota, and I never would have thought there was anyone who
could make people stand and cheer the IRS, but by golly he did.
It was a wonderful presentation. That kind of segues into the
point that I want to make. There is a lot of debate around tax
policy. There always will be. Unfortunately, sometimes I think
frustration at the structure of the Tax Code, or disappointment
about the impact of the Federal government's revenue demands on
taxpayers, is ultimately channeled into frustration on the
service and the outstanding professionals that run the Internal
Revenue Service.
I so appreciate your background, Commissioner, coming from
such demonstrated levels of success in the private sector at
senior levels of management, to look at the system during this
critical period of time and evaluation. My question is whether
or not the resources are there, allowing you to get the tasks
we, under statute, demand that you perform, done and done well?
Obviously, the numbers cited by Ranking Member Congressman
Coyne are disturbing, and would be a reflection of whether--
raise significant questions in terms of whether the resources
have been there as needed.
I guess, to put a point on my question, it is my
understanding that the service has sought a $9.7 billion
increase for the upcoming fiscal year. That amount itself has
generated controversy with the oversight board believing that
more was appropriate, I understand. Any idea how you are going
to fare in the upcoming President's budget?
Mr. Rossotti. Again, as I said to Mr. Coyne, I think I am
best advised not to be commenting on the President's budget
until it is released. I do not think I should do that. I will
say, just to back up one step, that in 2001, which is the
fiscal year we are in now, Congress passed a budget that after
a lot of debate and a lot of work that was, from my point of
view, a budget that enabled us to make significantly more
progress then we had for a number of years in the two key
areas.
One is, as I just mentioned, we have to operate. We have to
have some staff. We have to have trained people. This is the
first year we are actually out hiring some people to replace
people that left and to make some modest increases and also to
move our modernization. That is good and we want to try to
continue that in 2002. Without getting into details, because it
has not been announced yet, I think the 2002 budget that will
be released, will allow us to continue to make progress in both
of these areas. I think there will always be room for debate
about how fast we make progress and how much we have, but I
think we will be able to make progress in 2002, as well as we
have been in 2001.
Mr. Pomeroy. Good. I would hope that the request from the
IRS is met in the President's budget, and I will be looking
specifically at whether the funding matches the $9.7 billion
request. As I look at that, I will note that this advisory
board that has taken its responsibilities, as you mentioned,
very substantively, and have no stake other than sound
administration of the service itself, I believe you were $500
million low in that request. So we will have some benchmarks to
evaluate whether or not the resources are there.
Regardless of how you feel about the tax code or tax
policy, you represent an agency that has to get its work done.
And if it does not, literately discredits the entire Federal
government in a way that is more fundamental than what most
agencies would. Thank goodness for your distinguished
leadership, and I mean it, at doing the best possible under the
circumstances, but you need resources and I hope that they are
there for you. Thank you. I yield back, Mr. Chairman.
Chairman Houghton. Thanks very much. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman and Mr. Commissioner.
Good to see you again. I look forward to working with you. I
know when I came in, and I apologize for running late, but my
friend and colleague, Rob Portman, was discussing with you the
progress on electronic filing, something that reduces a lot of
paperwork and we all hope moves forward in simplifying the tax
filing process for taxpayers in this new economy.
One of the concerns that has been raised to me by some who
are in the business of helping prepare tax filing, as well as
individual taxpayers, I know Mr. Portman referred to the PIN
issue, but others have said that also the Social Security
number becomes a problem, as well. I was wondering, do you have
any idea what percent of electronic filings, where there is a
complication, results from a number that does not match up?
[The following was subsequently received:]
Our Electronic Filing program is designed to perform a
matching process with the social security number (SSN) and name
(combined is known as a (TIN)) provided by the taxpayer against
the SSN and name information maintained by the IRS. The Social
Security Administration (SSA) provides the IRS with weekly
updates of SSNs and matching names. If, during the initial
validation process of electronic filing, the SSN and associated
name on the tax return does not match the information on file
with the IRS, the return is rejected to the preparer with an
explanation of the errors. Electronic Filing information, as of
April 10, 2001, reveals approximately three million rejects, (a
single return may have multiple rejects as the primary and
secondary taxpayers, as well as dependents are checked) because
of mis-matching information between what was on the returns and
the information on the IRS master file from SSA records.
Mr. Rossotti. I can get you that number. I do not have it
off the top of my head. Let me just point out that verifying
social security numbers is not something that is unique to
electronically filed returns. It is exactly the same, whether
they are filed on paper or electronic. The only difference is
that it is quicker to identify the problem electronically,
which actually helps people, because we identify that rather
than sending them a piece of paper in the mail telling them
their social security number is wrong.
The reason we do that is really is part of the compliance
program. I think the Congress, the IG and GAO and everyone has
recognized that this is an important thing to do, to verify all
the social security numbers for people who claim dependents or
EITC qualifying child, those sorts of things. This is something
that is really not related to electronic filing as much as it
is making sure the returns are accurately filed. I can get you
the numbers. I will get back to you with the specific numbers
about how many returns have social security number----
Mr. Weller. Because I have been hearing numbers of up to 10
percent of those electronic filings being rejected because of
social security numbers. Now, whether those numbers are
accurate, I wanted to hear from you.
Mr. Rossotti. We will get you those numbers. My only point
is the same issue applies whether taxpayers file electronically
or on paper and it is just quicker to identify them
electronically.
Mr. Weller. Have your people ever sat down with the Social
Security Administration and tried to figure out a way to ease
that process? Because I realize it occurs probably when people
marry, a woman may take her husband's name and a change in
status, what kind of conversation do you have with Social
Security?
Mr. Rossotti. We actually do that on a regular basis. I was
just talking about it with some people this morning and the
kind of issues that come up are small issues. One example that
I heard, for example, is that some people were getting names
rejected because the social security number--in earlier periods
they had not allowed hyphens in certain people's names and then
they went and cleaned up the names to put the hyphens in. That
was a good thing for them to do, but it did not match what
people put on their returns in some cases. There are all these
little issues, but in total they add up. We are working with
the Social Security Administration to figure out ways to make
it as easy as possible for people to make the corrections, and
also make sure our files match.
Mr. Weller. I would appreciate it if you could share with
the Subcommittee, just to follow up on this question, where you
are in the progress, what the status of your conversation/
cooperation with the Social Security Administration would be.
They are not far from you and to try to solve that problem,
just to simplify the process of filing taxes.
[The following was subsequently received:]
IRS has established a working relationship with the social
security Administration (SSA) to resolve the difference between
IRS taxpayer information and the SSA social security number and
name data. Jointly, IRS and SSA make every effort to insure
that the TIN information on file with the IRS is accurate. All
changes to IRS programming that require validation of taxpayer,
taxpayer spouse, or taxpayer dependents are coordinated with
SSA before implementation. All decisions that impact taxpayer
Social Security numbers and name are made jointly between IRS
and SSA. The IRS also has procedures in place to use prior year
return information to validate spouse and dependent information
where the information IRS has is different from SSA
information. As of the first of April, the IRS identified over
five hundred thousand cases where the information on the tax
return did not match the SSA information on file with the IRS.
Through this matching program, the IRS has ``validated'' three
hundred thousand of these. Each of the 300,000 records has been
marked and the IRS and SSA will contact these taxpayers this
summer in an effort to correct this discrepancy.
In addition, IRS will continue to meet with SSA to discuss
issues concerning the date of birth and name control mismatches
and the accuracy of Citizenship Codes that can also cause
returns to reject.
Mr. Weller. Let me shift over to a kind of a different
subject, and that is you come out of the business sector. You
are a successful businessman. What is your philosophy about
government agencies competing with private businesses in
supplying services and products?
Mr. Rossotti. Well, I think that, by and large, it is not a
wise thing for the government agencies to get into business and
compete with the private sector. We have enough to do just with
what our mission is.
There are some gray areas. There were some issues about
exactly how far we should go in order to promote electronic
filing, offering additional services, and we have made a
determination. As a matter of fact, it was included in the
Restructuring Act guidance that we should work with the private
sector and foster competition rather than get into that
business. For example, we have no intention of getting into the
tax software business that distributes software.
Mr. Weller. That was the question I wanted to follow up. So
you have on plans to provide specific software to taxpayers
that would than obtain that through the private sources.
Mr. Rossotti. Yes, that is correct.
Mr. Weller. You do not want to compete it?
Mr. Rossotti. That is correct. As a matter of fact, we had
a discussion on that subject with the House Appropriations
Committee, the last October hearing, and there is some report
language in our appropriation bill that asks us to provide a
report to the Committee, which we will, but as I testified at
that point, we do not plan and we do not think it would be wise
for us to get into that. But we are trying to figure out ways
that we could encourage the competition as was specifically
required in RRA to drive the costs down as much as we can for
the taxpayer, but that would be within the realm of the private
sector, not by the IRS getting into the business.
Mr. Weller. Thank you, Commissioner. I look forward to
working with you, and look forward to hearing your report.
Thank you very much.
Chairman Houghton. Thanks, Mr. Weller. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman.
Commissioner Rossetti, I am glad to be back on this
Committee. Certainly, we have been through a couple of good
taxpayer rights bills over the last couple of years together.
So it is nice to be back here again.
I have a couple of questions that I would like to talk
about. Over the last couple of weeks, we have been, obviously,
doing some tax bills, and there has been a lot of concern about
the earned income tax credit and being fraudulent. I know we
have put a lot of work into doing this.
I noticed it was kind of a secondary in your prepared
remarks to us as compared to a story that actually was in the
Wall Street Journal yesterday talking about businesses and tax
shelters. So can you kind of bring me up to date where we are
on the earned income tax credit and what you are seeing in the
other filings that seem to go kind of unnoticed on occasion?
Mr. Rossotti. Well, I think, as I said in my opening
statement and in our strategic plan, there are compliance
problems across the entire spectrum. There really are, and they
affect all types of returns and all types of taxpayers.
With respect to the earned income credit, that remains a
problem. We issued a report last year that tried to quantify
that. We have a little better quantification on that than we do
in some other areas, and we did find that there were about,
after everything was said and done--and this was for the filing
season '98, so it is kind of old data before we had done some
new initiatives, but at that time, there was about $7.5 billion
of erroneous claims out of $30 billion.
I stress that we use the term ``erroneous claims'' or
``over-claims'' because we do not really know in all cases what
causes these claims. Some of them may very well be deliberate.
Some of them could be simply the fact that there is a complex
set of calculations in the EITC. So we do not know exactly what
causes them, but we do know what the amount of them was, and
that is a significant amount of money. We do have a special
appropriation from Congress to work on it.
We have one new feature that we have implemented this year
to try to deal with it which is called the dependent database,
which was authorized by law and gives us data from the States
on who the custodial parents are, and we can use that to match
with taxpayers claiming the EITC.
We are working on that, but as you noted in your question,
it certainly is not the only area of non-compliance. Ranging
from these abusive trusts to the corporate tax shelters to the
employment taxes, no matter where you go, you find it.
Obviously, the majority of taxpayers in every one of these
groups is very compliant and very honest, but there are those
who try to take advantage of it, and we try to do what we can.
Mrs. Thurman. I do appreciate that answer because it always
comes back to us like somebody is doing something that they are
not supposed to be doing on either one of those questions on
any one of those sides.
The second thing that I would like to ask you is--actually,
there are two, before I run out of time. One was there was a
notice in the FNA Today that was talking about the IRS
electronic newsletter that was dated April 1st dealing with
taxpayers and preparers are actually misrepresenting
instructions used in a notice 703. This has to do with Social
Security benefits, and I just was kind of going to ask, can you
give us some idea of the extent of this problem, how many
taxpayers are making this mistake, and more importantly,
something that we might be able to help on is do you think it
would be fair for us to be forcing these folks to pay penalties
and interest due to the lack of a clarity of a notice that IRS
actually sent out.
[The following was subsequently received:]
Unfortunately, the IRS currently does not have a tracking
tool that will provide the number of taxpayers that were misled
by the language on Notice 703. The issue was discovered through
research by IRS technical staff. As a result, the language of
Notice 703 will be revised.
Penalties will only be assessed on those taxpayers in this
circumstance that have made the same error in a previous tax
year. Normally, only interest will be assessed.
Mrs. Thurman. Second, different subject, but just in case
we run out of time, when I was on this Committee before, there
was a piece of legislation that was passed specifically to deal
with the complexities of the IRS Code. I think what we finally
came up with was that after the bill was passed out of the
Committee, it would go to the Joint Tax Committee, and then in
consultation with you all, that it was to try to help us
streamline this and make this the least complicated form that
we could come out with.
I would like to kind of get an update on where we are in
that area as well.
Mr. Rossotti. Let me answer that question first.
Yes, you are correct. That is exactly what was passed, and
we have been following that.
The way it works is that when there is a specific proposal
for a Tax Code change--and I think there is a threshold of how
significant it is--the Joint Committee staff gets together with
us through our legislative affairs office and we send them an
analysis. We have been doing this now, I guess, for at least 2
years.
Mrs. Thurman. You just send them an estimate, but do you
have conversation about ways of writing this, so that it
achieves the same in, but makes it less complicated?
Mr. Rossotti. Well, that is not exactly what we are
required to do.
We provide them a specific statement as to what additional
complexity, what changes, or what the impact is going to be. It
is kind of like an impact statement.
For example, it says such and such a change that it is
going to require changing these forms. There are going to be so
many more line items or so many less line items, and here is
how many taxpayers are going to be affected, and that sort of
thing. We provide that to the Joint Committee staff and then
they provide that to the Ways and Means Committee and the
Finance Committee for inclusion in the Committee reports. We
have been doing this since that provision went into effect.
Mrs. Thurman. I guess the follow-up question on that, then,
was has our Tax Codes gotten less complicated because of that.
Mr. Rossotti. I am afraid I could not say that. I do not
think it has gotten less complicated.
I think that there was one occasion, I do know, in which
there was a proposal to change the way capital gains were
treated. In fact, I remember calling Chairman Archer on this
particular point myself and saying this is really going to
cause a significant problem. I think the Chairman figured out a
way to save that so it would not have that particular impact.
So, at least at a certain level, it has had some beneficial
impact, but, of course, there have been no really big tax bills
enacted since that provision was implemented either.
Mrs. Thurman. Well, they have come out of this Committee.
The other issue was on the 703.
Mr. Rossotti. I am afraid I am going to have to get back to
you on that first question because I do not have the answer. I
will have to get back to you on it. I just do not have the
answer in my head.
Mrs. Thurman. I would love to hear from you because it does
deal with the Social Security benefit taxable income, and if we
are in a situation where we have given now some bad information
or makes it complicated, then I would really like to be able to
look at this penalty issue.
Mr. Rossotti. We will get back to you. I just do not have
the information readily available.
Chairman Houghton. Thank you, Mrs. Thurman. Mr. Coyne.
Mr. Coyne. Commissioner, as part of the reforms 2 years
ago, there was what was called the 10 Deadly Sins provision
that was in there, and one of them had to do with the willful
failure to file any return after the due date for filing
returns and extensions for employees. Are you familiar with
that?
Mr. Rossotti. Yes, I am.
Mr. Coyne. Have you had to enforce that at all?
Mr. Rossotti. Yes, sir. As a matter of fact, last year we
provided a complete report to the Congress. So I can give you
an update on all of the provisions, all of the sections, not
only that one section of 1203(b). I think that we have a great
deal of experience trying to administer that provision.
Mr. Coyne. So you have submitted that as part of a report?
Mr. Rossotti. We submitted it last year, and I have got an
update that I can give you this year, if you like, on the whole
section.
Mr. Coyne. OK, that would be good.
Mr. Rossotti. It gives all the statistics on how many
investigations there have been and how many people have been
dismissed for violations of various subsections.
Mr. Coyne. Thank you. Thank you.
Chairman Houghton. Mr. Commissioner, thanks very much. We
are delighted that you have been here with us.
Now I would like to call the second witness, Nina Olson,
National Taxpayer Advocate Service. She is an old hand, having
been in this office for a little over a month.
So, Ms. Olson, you will never be more objective than you
are now. So we would love to hear your testimony.
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE
Ms. Olson. Thank you, sir.
I am pleased to appear before you today to address the 2000
filing season. As you know, this is my first appearance before
you as the National Taxpayer Advocate. I come to this position
with over 25 years of front-line experience in tax practice and
procedure, and yet, during my first 30 days on the job, I have
learned an enormous amount about how the IRS works.
I already knew from my private practice that IRS employees
are dedicated public servants. They are a valuable resource for
anyone trying to identify and resolve taxpayer problems. I
would like to acknowledge with gratitude my predecessor, W. Val
Overson, the first National Taxpayer Advocate, and the Deputy
National Taxpayer Advocate, Henry O. Lamar.
I know that the National Taxpayer Advocate's independence
and authority are a matter of interest to this Subcommittee. So
I will address this issue first.
The Commissioner of Internal Revenue delegated certain
authorities to the National Taxpayer Advocate on January 17th,
2001. Some TAS employees may prefer more authority than will be
re-delegated to them. I have made it clear to my employees that
I will not hesitate to seek additional authorities if we need
them. However, I am keenly aware that if we become a shadow
IRS, we may lose our effectiveness as an advocate for systemic
change.
Some doubt our independence. I have no such doubt. I
believe it is appropriate for the Taxpayer Advocate Service to
be located within the IRS. TAS is not TIGTA or the GAO. The
National Taxpayer Advocate is not a watch dog. She is an
advocate before, during, and after the filing season.
For at least the last two filing seasons, IRS compliance
personnel were detailed to the customer assistant sites or
telephone lines in order to assist more taxpayers. Whenever
operational personnel are detailed out of their original areas,
response times in those areas lengthen. If the delay is more
than 30 days over normal processing time, the matter will meet
Taxpayer Advocate criteria.
We are concerned that the number of cases arising from
delays of more than 30 days may prevent us from assisting
taxpayers we are uniquely designed to help, mainly those
suffering from some form of financial hardship or irreparable
harm.
No review of the filing season would be complete without
mentioning the earned income credit. The statute and procedures
developed to reduce error and fraud in this program must also
protect the rights of taxpayers. If we subjected middle-class
and more affluent taxpayers to the kind of intrusive inquiries
we routinely subject a taxpayer to in an EIC audit, the entire
EIC audit program would be shut down in response to taxpayer
complaints.
Last month, I observed the operation of the dependent
database. Once the database is refined, it should significantly
lessen the number of eligible taxpayers examined, have a
chilling effect on those taxpayers contemplating fraud, and
provide an opportunity to better educate those taxpayers who
are being examined.
The Taxpayer Advocate Service recognizes the importance of
electronic tax administration to the integrity of the tax
system. However, we are concerned that taxpayers who face
language or literacy barriers, or who do not have ready access
to computers, will be left behind in the push for electronic
filing.
We are mindful of Congress' direction that the IRS not
interfere with the free operation of the market. We also do not
believe that the IRS should enter the business of tax return
preparation.
As I outline in my written comments, I believe there is a
middle ground, but before we reach it, we must answer this
question. To what extent should the tax system protect a
vulnerable population in the tax preparation arena? This is not
a decision the IRS can undertake without further guidance from
Congress.
Every filing season results in a host of document-matching
procedures and taxpayer notices. Taxpayers and practitioners
alike are confused by the various forms these communications
may take. We sympathize with the taxpayer's frustration in
determining his or her rights related to IRS notices, including
the right to appeal.
We have addressed these issues in our administrative and
legislative recommendations and will continue to be active in
this area.
The Taxpayer Advocate Service's dual mission of problem
resolution and systemic advocacy involves a delicate balancing
act with almost irreconcilable tension, but this tension can be
a source of creativity for all. By being independent, but
remaining inside the IRS structure, the National Taxpayer
Advocate has access to all IRS employees. This places an
obligation on TAS employees to persuade and negotiate, but that
is the job of an effective advocate.
Mr. Chairman, I thank you for this opportunity to come
before this Subcommittee, and I welcome your questions.
[The prepared statement of Ms. Olson follows:]
Statement of Nina E. Olson, National Taxpayer Advocate, Internal
Revenue Service
Mr. Chairman and Distinguished Members of the Subcommittee:
I am pleased to appear before you today and to address the
Subcommittee on matters relating to the 2001 filing season. As you
know, this is my first appearance before this Subcommittee in my
capacity as National Taxpayer Advocate. I started my employment with
the Internal Revenue Service on March 1, 2001, a little over a month
ago, in the middle of the 2001 filing season. I have spent the last 30
days travelling the country, visiting service centers to observe the
return submission process, and meeting with Taxpayer Advocate Service
field employees and managers as well as employees and management of IRS
operating and functional divisions. I emerge from this ``on-boarding''
process extremely pleased with the Service's progress in re-engineering
its systems and its corporate culture. I believe that the Internal
Revenue Service will continue to progress in this regard, however
haltingly it may appear at times.
Although I come to this position with over 25 years of front-line
experience in tax practice and procedure, during the last 30 days I
have learned an enormous amount about the internal workings of the IRS,
including its information technology systems. I know from my private
practice that IRS employees are among the most dedicated of public
servants. I also know that they are a valuable resource for anyone
trying to identify and resolve taxpayer problems, making them essential
to the mission of the Taxpayer Advocate Service. Thus, I am firmly
committed to maintaining open lines of communication between my office
and all functions of the IRS, whether located here in the Washington,
DC area or in any of the field offices. To that end, I have held and
will continue to hold Town Hall Meetings on my trips to the field. I
will also continue to reach out to taxpayers, practitioners, and
consumer and business groups, as my predecessor did before me.
I would like to publicly acknowledge, with gratitude, my
predecessor, W. Val Oveson, the first National Taxpayer Advocate. Mr.
Oveson came on board when the Taxpayer Advocate Service was more a
concept than a reality. With the able assistance of the Deputy National
Taxpayer Advocate, Henry O. Lamar, he carved this organization out of
whole cloth to become the organization of dedicated and professional
public servants that it is today. I can only try to imagine the effort
it took to get the Taxpayer Advocate Service off the ground. Mr. Oveson
has left the new National Taxpayer Advocate a truly wonderful gift--an
up and running organization poised to undertake the challenging and
interesting work ahead. I am the humble recipient of that gift, and I
am forever grateful. I am also appreciative of Mr. Lamar's fine
leadership of the Taxpayer Advocate Service during the period following
Mr. Oveson's resignation and prior to my reporting to duty. His ongoing
support in his role as Deputy National Taxpayer Advocate will be
invaluable to me.
I look forward to presenting you with the Report on the FY 2002
Objectives of the Taxpayer Advocate Service on or before June
30th, 2001. The Taxpayer Advocate Service is entering an
exciting period, with challenges related to delegation of additional
authorities, the revision of the content and format of the Annual
Report to Congress, a pilot 4-year integrated training program, and
improved procedures for monitoring and gathering case data.
With regard to the Annual Report, we at the Taxpayer Advocate
Service take seriously Congress' charge to us that we give you
suggestions, based on our and other's first-hand, front-line experience
with taxpayer problems. We are in the process of redesigning the Annual
Report, so that the final product will not only provide you with its
current elements, including legislative recommendations, but also
illustrative examples and a substantive discussion and analysis of each
recommendation's impact on information and business systems, as well as
privacy considerations. We may use the legislative recommendations to
highlight developing issues, exploring and suggesting a range of
solutions for your consideration. In short, we at the Taxpayer Advocate
Service want the Annual Report to be a useful working document,
providing you with valuable, practical information.
2001 Filing Season: General Comments
The 2001 filing season is a remarkable one for me, in part because
I have experienced it from differing vantage points--initially as a
private tax attorney and a low income taxpayer clinic director and now
as an employee of the Internal Revenue Service. It is also unique on a
personal level, in that it is the first filing season in 25 years in
which I have prepared and filed no tax returns other than my own. In
each of the prior 25 years, I have prepared between 25 and 200 returns
for compensation. My comments thus reflect my past experience as a
private practitioner, as well as the perspective of the National
Taxpayer Advocate.
The Taxpayer Advocate Service (TAS) has an odd relationship with
the filing season. We do not prepare or process income tax returns. Nor
are we set up to answer customer service questions. There are, however,
several discrete areas associated with the filing season for which TAS
is responsible or which significantly impact TAS operations.
Manual Refunds: Requests and Processing
Taxpayers experiencing significant hardship and who need their
refunds immediately, may contact the Taxpayer Advocate Service and
request our assistance in expediting their refunds. The manual refund
process may help in documented situations of hardship (e.g. eviction,
medical coverage) and where we have the ability to intercept the
automated refund process. Manual refunds can be issued by electronic
funds transfer or regular paper checks. We secure authorized
signatures; obtain documentation of the hardship; check for outstanding
debts, which might offset the refund; and monitor the account to
prevent erroneous or duplicate refunds from occurring. When these steps
are not followed, the taxpayer can face financial responsibilities for
a duplicate refund including interest. We exercise great care to ensure
we do not create more costly and devastating taxpayer problems. We also
recognize that IRS officials may incur financial responsibilities
resulting from the issuance of erroneous refunds.
The Taxpayer Advocate Service is currently monitoring its issuance
of manual refunds to ensure that second, erroneous refunds are not
issued. We are increasing our access to various databases so that we
may better identify situations when a manual refund will be offset by
existing federal or state agency debts. Although field advocate
employees review these procedures as part of their own filing season
readiness, the TAS is also incorporating a review of these procedures
in our 2002 Service-wide filing season preparations.
Social Security Number Problems
This past year the TAS identified a potential disruption of service
to many of the two million taxpayers who have name and social security
number mismatches on a joint income tax return. Frequently, the
mismatch occurs because taxpayers neglect to inform the Social Security
Administration of a name change following a change in marital status.
We suggested that the proposed implementation of 1996 legislation,
which required the IRS to strengthen validation procedures for social
security numbers, would cause taxpayers concern and undue alarm. As
described by Acting National Taxpayer Advocate Henry O. Lamar in our
2000 Annual Report, IRS Operations and the Taxpayer Advocate Service
worked together to develop what we call a ``soft'' notice for taxpayers
with secondary social security number problems. This notification
allows taxpayers time to correct their official records before filing
their next tax return. Thus, we were able to prevent taxpayers' 2000
refunds from being frozen without an opportunity to correct the
information. This is an excellent example of how the TAS is able to
work within the IRS in a nonadversarial manner in order to advocate on
behalf of taxpayers.
Taxpayer Advocate Caseload
The filing season impacts TAS in another way: for at least the last
2 filing seasons, IRS personnel normally assigned to front line
compliance positions were detailed to the customer assistance sites or
phone lines for the worthy objective of assisting more taxpayers during
filing season and improving its customer service level. Unfortunately,
whenever other operational personnel are detailed out of their original
areas, response times in those areas inevitably lengthen. If the delay
is more than 30 days over normal processing time, the matter will
automatically meet TAS case criteria, as set forth in Internal Revenue
Code Section 7811.
The Taxpayer Advocate Service is currently preparing an analysis of
its FY 2000 and 2001 monthly receipts inventory. We will identify the
types of cases that are coming to TAS and their criteria for
eligibility. We expect that this analysis will point up some of the
deficiencies in our own case-tracking system and the current
limitations of our case management system. We will use this information
to address inconsistencies (or recommend design improvements) in our
own databases, and we will work with both the Wage & Investment and
Small Business/Self Employed Operating Divisions to determine how we
can avoid unnecessary ``overflow'' referrals. To some extent this
overflow will be mitigated by the hiring of Tax Resolution
Representatives under the STABLE initiative, thereby freeing up
compliance employees to do their own work. We also expect to see a
positive impact on our overflow case inventory as the Service improves
its monitoring and measurement of the level and delivery of service.
TAS is also reviewing our intake procedures to make sure we are
accepting those cases in which we can actually ``add value'' to the
taxpayer's case. In fact, we have identified ``Reducing Inappropriate
TAS Caseload'' as a strategic goal. We are concerned that the dominance
of cases arising from delays of more than 30 days or from multiple
unsuccessful taxpayer contacts with the IRS actually prevents us from
assisting the one category of taxpayers who TAS is uniquely designed
and mandated to help, namely those suffering some form of financial
hardship or irreparable harm. Over the next year, we will make a
concerted effort to educate taxpayers about our unique role within the
IRS and also review our case acceptance procedures. Finally, we will
initiate an education campaign within the IRS to ensure that IRS
employees understand the criteria for case referral and feel
comfortable referring appropriate cases to TAS.
Earned Income Credit
No review of any filing season would be complete without mentioning
the Earned Income Credit (EIC). Over the years I have been a consistent
advocate for the rights of low income taxpayers, and I have personally
represented hundreds of such taxpayers in EIC examinations, refund
claims, audit reconsiderations, and Tax Court cases. I will be vocal in
my advocacy that the statute and procedures developed to reduce error
and fraud in this program must also protect the rights of taxpayers.
Too often, taxpayers who file for the EIC do not have professional
representation and because of the burdens of poverty, language or
literacy barriers cannot make an effective case for themselves. It is
my firm belief that if we subjected middle class and more affluent
taxpayers to the kind of intrusive inquiries we routinely subject a
taxpayer to in an EIC audit, the entire EIC audit program would be shut
down in response to taxpayer complaints.
Last month I spent several days at two service centers, observing
the return submission and processing pipeline as well as the operation
of the Dependent Database (DDB). The DDB is a very sophisticated and
valuable tool for EIC administration. It is essentially a series of
rules that, when applied to a taxpayer's return, will identify those
returns that present the possibility of taxpayer error or, more
seriously, an attempt at fraud. The IRS employee reviewing these
returns can determine which rules are implicated and can tell the
taxpayer what information should be submitted to support the claim.
This single bit of information alone will resolve many cases, since
pre-2001 the IRS could not necessarily tell the taxpayer what
information triggered the return review. However, the system is only as
accurate as the underlying databases. If the databases are not
regularly (or correctly) updated, we will be needlessly contacting
taxpayers and causing them undeserved aggravation.
Another problem with the DDB is that it will sometimes flag the
second-filed return in a dueling claims situation. In certain
circumstances it is still possible for a noncustodial parent to file
electronically and receive a refund, including the EIC, causing the
second-to-file custodial parent's return to be audited. This occurs
when there is nothing in the DDB to trigger an examination of the
noncustodial parent's return; that is, no rules are apparently
violated. Obviously in this situation, we will lose revenue and
needlessly distress the custodial parent.
Representatives of the Taxpayer Advocate Service will be working
with the DDB design team to explore solutions to this and similar
limitations. It is my belief, however, that the DDB, once refined, will
significantly lessen the number of eligible taxpayers examined, have a
chilling effect on those taxpayers contemplating fraud, and provide an
opportunity to better educate those taxpayers who are being examined.
Electronic Tax Administration and the Information Age Gap
The Taxpayer Advocate Service recognizes the importance of
electronic tax administration to the integrity of the tax system. We
stand completely behind the Service's efforts to modernize the return
submission and processing pipeline. However, we are concerned that one
category of taxpayers will be left behind in the push for electronic
filing. Today, low income taxpayers have several options for filing a
tax return. They may file a paper return and wait an average of 4 to 6
weeks for a refund. They might seek out a return preparer, pay one fee
for return preparation, another fee for electronic submission, and a
third fee for a refund anticipation loan, if they need their refunds
immediately.
Low income taxpayers can also visit a Volunteer Income Tax
Assistance (VITA) site, or, if they are elderly, a Tax Counseling for
the Elderly (TCE) site. Such taxpayers may also be able to utilize
TeleFile, or visit an IRS Taxpayer Assistance Center. Finally, if the
taxpayer has access to a personal computer, he or she can file
electronically through the e-file program, even accessing filing
software from the IRS website. Thus, on the surface it appears that low
income taxpayers have a multitude of filing options.
Taxpayer Advocate Service employees, VITA and TCE volunteers, and
low income taxpayer clinics have all expressed concern about the impact
of refund anticipation loans (RALs) on low income taxpayers. One
particularly compelling example of the RAL's detrimental impact
involves a taxpayer who uses his RAL as a down payment for an
automobile and makes one or two additional payments before he learns
that his refund is denied. The automobile is repossessed, the taxpayer
loses the monthly payments he's made, he owes the financing company for
a vehicle he does not have and, if the company forgives the balance of
the loan, the taxpayer has cancellation of indebtedness income.
Taxpayers do not necessarily distinguish the IRS from the parties
driving this scheme. Such practices have a negative impact on tax
compliance.
I believe that the Customer Account Data Engine (CADE) now under
development and testing by the Internal Revenue Service, will
ultimately remove most if not all of the demand for RALs. CADE
applications for refund processing should enable taxpayers to receive a
deposit of their refunds within 2 to 3 days of final return processing.
Further, the IRS and Financial Management Services (FMS) are now able
to establish deposit accounts for taxpayers who do not have bank
accounts. These deposit accounts can receive direct deposits of tax
refunds.
Although I applaud and support these efforts, I do not believe our
inquiry should end here. Low income taxpayers may not have access to
VITA sites (which are not necessarily located where low income
taxpayers live or work); VITA sites may not be equipped with computer
equipment appropriate for electronic return filing; low income
taxpayers may not have access to personal computers or be computer
literate; and finally, the TeleFile system does not accept a return
from a single taxpayer who claims a dependent. These factors, combined
with the sheer complexity of determining filing status and entitlement
to dependency exemptions and the EIC, demonstrate that low income
taxpayers will continue to require the assistance of return preparers
in the future.
It is interesting to note that of 576,351 1999 Form 1040 returns
claiming EIC with math errors, 44% of those returns showing
computational errors were commercially prepared. In addition,
commercially prepared returns accounted for 55% of the math error
adjustments in which the EIC was partially or fully disallowed.
Essentially, taxpayers whose income is so low as to be eligible for the
Earned Income Credit are a captive market for return preparers who are
not very accurate or who are not making the proper inquiries of their
clients in order to accurately complete the returns.
The Taxpayer Advocate Service is concerned that down the road, as
RALs become relatively obsolete, some commercial return preparers will
seek to recover the lost revenue through increased electronic filing
fees and/or return preparation fees. We are mindful of Congress'
direction in Section 2001(a)(3) of the IRS Restructuring and Reform Act
of 1998 that the IRS not interfere with the free operation of the
market. We also do not believe that the IRS should enter the business
of tax return preparation. However, I would like to suggest that there
is a middle ground.
Congress, for example, could investigate whether low income
taxpayers operate within a free and open market or if that particular
market segment is imperfect and requires some corrective action.
Congress could determine that a taxpayer who is eligible for EIC in
order to maintain a baseline standard of living should not see his EIC
reduced by large return processing or preparation fees.
One solution to this dilemma is to establish National Filing Days,
similar to National Problem Solving Days, during the filing season. The
National Filing Days could be located at public schools or houses of
worship, be staffed by volunteers, offer on-site electronic return
submission and direct deposit accounts. Congress could also establish a
separate grant program for administrative expenses (including computer
equipment) incurred by VITA initiatives. Thus, free tax return
preparation would be available to low income taxpayers where they live
and worship.
Other less complicated measures can address the more obvious
consumer abuses. The Taxpayer Advocate Service is currently suggesting
that the IRS incorporate a consumer alert into appropriate brochures
and publications. This caveat would state in clear and simple language
that taxpayers who pay for their return preparation should receive a
copy of their returns, signed by the preparer. For that matter, members
of Congress can include this information in their constituent
communications. The notice might include a toll-free number so that
taxpayers could report their preparer to the IRS if he or she refuses
to sign the return. This program dovetails into the Service's current
efforts to educate return preparers about the EIC substantive and due
diligence requirements. It will enable the Service to actually locate
those preparers most in need of education.
I must emphasize, though, that to some extent the solution to the
low income taxpayer return preparation dilemma rests on a judgment call
by Congress. Does the tax system have some responsibility to protect a
vulnerable population from questionable market practices in the tax
arena? This is not a decision the Internal Revenue Service can
undertake without further guidance from Congress, given the directive
in RRA 98 that the IRS refrain from interfering in the commercial
return preparation marketplace.
Taxpayer Advocate Service Independence and Authorities
The final issues I would like to address are not related to the
filing season specifically. As you know, the Commissioner of Internal
Revenue Service delegated certain authorities to the National Taxpayer
Advocate on January 17, 2001. These authorities, once delegated to the
field, will enable TAS employees to resolve taxpayer problems more
quickly. In many cases, the delegated authorities should eliminate the
need to refer the case back to the originating function. Generally, the
delegated authorities provide to the TAS the authorities that former
Problem Resolution Officers derived from their district directors. We
hope to have a redelegation, implementation, and training plan in place
by July 1, 2001.
I am aware that some TAS employees will be dissatisfied with the
redelegation order. These dedicated employees would like very much to
resolve a taxpayer's case entirely within the Taxpayer Advocate shop.
In some instances, this may be the appropriate result. I have made it
clear to my employees that if, after we have tested these new
authorities, we find that we need additional authorities, I will not
hesitate to seek them. But I am keenly aware that if TAS takes on more
IRS authorities, it risks becoming a ``shadow IRS'' and it loses its
effectiveness as an advocate for systemic change. That is, after all,
the ultimate goal--to work with the other IRS operating and functional
divisions in identifying and mitigating individual and systemic
taxpayer problems.
Some commentators doubt the Taxpayer Advocate Service's ability to
maintain its independence while remaining part of the Internal Revenue
Service. I have no such doubt. I believe that it is appropriate for the
National Taxpayer Advocate and the Taxpayer Advocate Service to be
located within the IRS. The Taxpayer Advocate Service is not TIGTA or
the GAO. The National Taxpayer Advocate is not a watchdog. Rather, she
is an advocate.
Congress has charged the National Taxpayer Advocate with the
mission of assisting taxpayers with their problems and assisting the
IRS and Congress in mitigating those problems. It is indeed a very
difficult mission, with almost irreconcilable tensions built into it.
But I believe that this tension can be a source of creativity for all
of the participants. By being independent but remaining inside the IRS
structure, the NTA is a player at the table with access to all members
of the IRS management team as well as the field employees. This
relationship places a strong obligation on TAS employees to persuade
and negotiate, and to have courage in the face of opposition or
bureaucratic obstacles. But that is the job of an effective advocate.
I am committed to seeing that each and every member of the Taxpayer
Advocate Service is trained and supported so that he or she can well
serve the taxpayer, the Internal Revenue Service, its Oversight Board,
and the Congress. I look forward to this challenge.
Mr. Chairman, thank you for this opportunity to come before this
subcommittee and discuss these matters.
Chairman Houghton. Well, thanks very much. I appreciate it.
Mr. Coyne, would you like to ask a question?
Mr. Coyne. Thank you, Mr. Chairman.
The Taxpayer Advocate's office in the past has had the
problem with the innocent spouse provision, and I was just
wondering if you could update us at this point on what the
status of the large numbers of those instances are.
Ms. Olson. We pulled an inventory on March 23rd of our
cases. Nationwide, Taxpayer Advocate cases were approximately
2,000, out of about 50,000 cases, or one out of 25 or 4 percent
of our caseload. I honestly do not know yet whether that seems
a large number or small number.
What I found very interesting is that of those 2,000 cases,
95 percent of them related to the criteria that we use to
accept a case resulting from unreasonable delays, more than 30
days; something unresolved by the time it was promised; or
systemic failure. The cases were not related to the criteria
that we use for the immediate and irreparable harm, the
significant hardship type criteria. Those counted for only 10
percent of the cases.
We found that the average processing of those cases was
over 180 days, and, interestingly, we found that very few of
the cases dealt with tax years after the restructuring act.
Almost 20 percent of them dealt with 1980s cases, where the
underlying tax liability was in the 1980s, and 60 percent of
them dealt with the years 1990 through 1997.
We found some interesting information that we are using to
think about recommendations for the innocent spouse program.
Currently, all innocent spouse cases by the operation unit are
being reviewed, every single one of them. And the Service did
that, obviously, to ensure that with a new statute there was
some continuity and consistency in the decision. But we do need
to ask, should we be doing this, because that review adds 2 or
3 months.
We also found that there was a long delay, often 2 months,
when a case was actually closed, and the decision had been
made. Two or 3 months were related to an accounting function of
trying to separate out the accounts from the innocent spouse
and the non-electing spouse, and we couldn't close the case
finally until we had done that actual accounting separation.
Let's see if there is anything else. We found that in our
particular cases, for many of the cases that were categorized
innocent spouse, there was no 8857 form, the request for
innocent spouse relief, that had yet been filed. Somebody had
just called us saying we are an innocent spouse. So the
paperwork hadn't even begun, and yet they are on our system as
an innocent spouse case.
We also found that a large number of cases were categorized
as innocent spouse, and they were injured spouse, and we had
not made that determination.
Finally, we found that some cases were categorized as an
innocent spouse case that are really more an erroneous type
offset.
So that has led me to believe that in just our own data we
need to go in and look at how we are categorizing these cases
and then to really see what is going on in the national program
about innocent spouse.
Mr. Coyne. On another subject, on the earned income tax
credit, in your testimony you point out, and I quote, ``It is
interesting to note that of 576,000 1990 Form 1040 returns
claiming EITC with math errors, 44 percent of those returns
showing computational errors were commercially prepared. In
addition, commercially prepared returns accounted for 55
percent of the math error adjustments in which the EITC was
partially or fully disallowed.'' And I think that goes to your
earlier comment in your testimony where you point out about the
necessity to be as fair with EIC filers as you would be with
moderate- and low-income filers in other circumstances. Thank
you.
Chairman Houghton. Thanks very much. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman.
First of all, Ms. Olson, I just want to tell you that if I
don't say this, my office will absolutely have a fit. So let me
just say on behalf of my congressional staffers who work very
hard in trying to also solve people's problems, they have been
very impressed with the Taxpayers' Advocates. They have been
very forthcoming. I have actually had the opportunity to sit
with one just recently on a case that my office has been
involved in on an estate tax issue, and they have been
knowledgeable and yet trying to--you know, this is--what you do
is not easy. It is not an easy job when you are trying to make
it work and sometimes that just doesn't happen. And you can see
it in them, and I appreciate their concern.
Ms. Olson. Thank you. I will pass that on to them.
Mrs. Thurman. In saying all of that, and as kind of the
question that I asked the Commissioner, and certainly because
of being one that would be right down there in the front-line
with some of these folks, I really do look forward to any
recommendations, as you have put out and as was put out
recently in your report, things that we can do to make it easy.
I guess I thought we had gone a little bit further a couple of
years ago when we thought that when this Committee did a tax
bill that there would be a lot more conversation, not just how
many taxpayers or--you know, I really would like to hear the
complexity because it certainly sounds to me--and with your
background and working with low-income families that the
complexity is as much of a problem as any real fraud and abuse
that seems to be spouted every so often when we try to get into
a tax fight up here.
Ms. Olson. I think that we are looking at our annual
report, and we have engaged in discussions with your staff as
to how we can turn this into a tool for you all. We are hoping
that this year we will provide examples in our legislative
recommendations so that you can see what has brought us to make
this recommendation. For certain recommendations, we hope to do
an analysis of the information system impact, just simply
saying this will save money, this will save time and effort,
this will be an easy thing to do.
We will be looking at privacy considerations because I
think that that is something that we don't spend enough time
about, and we may have some insight on that from the field,
maybe even just the appearance of privacy. There may be
something that is perfectly legal, but it sends shivers up
taxpayers' spines. So I think we have really heard from you
your expectations of this document.
I will say that we are--and I have utilized my liberty, my
honeymoon period as the new Advocate to come in and suggest
that we revisit some of our legislative recommendations over
the last 3 years. And you may find the Taxpayer Advocate
Service being so independent that they are reversing some of
their own legislative recommendations.
Mrs. Thurman. Well, and I think one of the other services
that has been provided for people that don't know this is just
the ability for them to come into our Web sites and be able to
go out to you all or even to IRS to find out some answers and
questions has been an enormous help for us to send people, you
know, and then they eventually probably end up back talking to
us.
Ms. Olson. Right.
Mrs. Thurman. But at least it is available to them, and I
know that the Taxpayers' Advocate group from Jacksonville were
in a couple of months ago, I guess even prior to your
appointment. But they have really given us some help in that
way, too.
I really think that you can offer us, instead of us even
slamming people that you are trying to help, that we really
figure out what we have done to cause a problem out there, so I
appreciate the work that you all do. Thank you.
Ms. Olson. Thank you.
Chairman Houghton. Thanks, Mrs. Thurman.
Ms. Olson, I think I only have one further question. We are
going to be hearing from taxpayer preparer groups and their
continued need for tax simplification. If there is one area you
think needs to be simplified in this brief tenure you have had
here, what would you think it would be?
Ms. Olson. I think there are two specific areas where we
see problems that also taxpayer practitioner groups do. One
obviously is the areas that impact all taxpayers, dependency
exemptions, filing status, and then if you go into the low-
income population, the earned income credit. And they do seem
to be linked, and we do seem to spend an inordinate amount of
time wrestling with these very basic issues that touch almost
every single taxpayer. What status do you claim? Are yousingle,
married filing jointly, head of household?
I think that there is a lot out there. We have certainly
made some recommendations about how you can unify the various
definitions, conform the definitions, and keep different
provisions for where there are true policy reasons for keeping
those definitions. And I think that we can make those changes.
Certainly my report, the annual report, will reflect some very
specific recommendations on those issues.
The second one is penalty and interest reform, and my
advocates, we have been polling the field asking for examples
from the frontline employees of where they see cases where they
feel that the taxpayer should be given relief in the interest
situation, where the tax debt has accrued interest. And we just
can't get there under the current statute.
And we have certainly been looking at penalty reform over
the years and have made a recommendation about that. And so we
hope that over the course of the year we will be able to give
you some very concrete examples of things that might help in
crafting legislative fixes for these issues. And as you see in
our report, penalties and interest is the top most litigated
issue in our list of ten most litigated issues. It is not the
underlying tax that they are going to court about.
Chairman Houghton. Well, thanks very much.
Ms. Olson. Thank you.
Chairman Houghton. We appreciate this.
Mrs. Thurman. Mr. Chairman.
Chairman Houghton. Yes, go ahead, Mrs. Thurman.
Mrs. Thurman. I have to ask you this because I just--the
great staff that I have over here said you need to ask her
about this.
Ms. Olson. OK.
Mrs. Thurman. And it actually deals with a Second Circuit
Court of Appeals ruling, and it is called the mail box rule.
Evidently, there is a misconnect, just so you will know,
between some of the--our Florida office and out of here. So if
you would let your Florida office know about this, I could get
a constituent very happy. Thank you.
Chairman Houghton. OK. Thanks very much.
Ms. Olson. I am familiar with that, yes.
Chairman Houghton. OK. Well, thanks very much, Ms. Olson.
We are delighted to have you here.
OK. Now we have our next panel: Hon. David Williams,
Inspector General, Treasury Inspector General for Tax
Administration, Department of Treasury; and James R. White,
Director of Tax Policy and Administration Issues of the General
Accounting Office.
Well, gentlemen, thanks very much for being with us. Mr.
Williams, would you like to testify?
STATEMENT OF HON. DAVID C. WILLIAMS, INSPECTOR GENERAL FOR TAX
ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY
Mr. Williams. Thank you, sir. Mr. Chairman and Members of
the Subcommittee, I appreciate the opportunity to appear here
today to discuss the 2001 tax filing season and the IRS'
continuing efforts to improve taxpayer service.
The IRS is experiencing success in processing tax returns
and issuing refunds. The IRS also continues to provide
substantive information to taxpayers on its Web site. This
filing season alone, the Web site received over 986 million
accesses. While these are bright spots to recognize, the IRS is
faced with the challenge of processing a greater number of
returns around April 15th, since many taxpayers have chosen to
file later than expected.
Electronic returns, while significantly up, have not
reached the anticipated level. Challenges also continue to
exist regarding the performance of and the plans to enhance
customer service. The IRS acknowledges the need for customer
service improvements. Our audit results also show the need for
improvement.
Over a 4-day period during this filing season, our auditors
made 368 random test calls to IRS toll-free numbers and were
unable to gain access 37 percent of the time. When successful
in getting through, the IRS incorrectly responded to 47 percent
of the questions. The topics of the test calls were obtained
from the IRS' list of frequently asked questions. We also
encountered a similar situation when we visited 47 taxpayer
assistance centers in 11 States. The IRS did not provide
auditors with the correct answers 49 percent of the time. In
the majority of our contacts, we were served within 15 minutes
and were treated courteously. However, in over 10 percent of
the contacts, the IRS did not provide an adequate professional
response.
Dramatic improvements in customer service are heavily
dependent on the success of the IRS systems modernization
initiatives. Among the benefits taxpayers are expected to
receive from systems modernization initiatives are: better and
quicker access to tax help; readily available, accurate, and
current account information; more electronic filing
capabilities; more refund in days instead of weeks; and
expanded self-service options over the telephone and the
Internet.
To accomplish modernization, the IRS contracted with a
consortium of experienced information technology companies led
by a major integrator. This contract, known as the PRIME, is a
multi-billion-dollar contract over a 15-year period. Since it
began 2 years ago, about $400 million has been spent on systems
modernization. And while the basic architecture and program
management processes have been established to guide the
modernization, thus far most of the ongoing systems projects
are taking longer and costing more than originally estimated.
As a result, benefits to taxpayers have yet to be realized.
The customer communications project is intended to be the
first major systems modernization accomplishment. This project
is designed to route taxpayer calls to a customer service
representative who is best qualified to answer the taxpayer's
question anywhere in the United States and will also provide
expanded self-service telephone and Internet services. Although
progress has been made on the project, deliverables originally
scheduled for 2001 have been scaled back significantly,
including the ability to route calls to the best qualified
person. Also, implementation dates for the deliverables have
steadily slipped and cost overruns have occurred. As a result,
the expectation of answering an additional 9.6 million calls
during the 2001 filing season will not be realized, nor will
the telephone assistors be freed up for other work.
This situation in part is due to the decision to move the
project's development stage before completing critical
foundational products, such as the risk management plan and
security testing schedules, initial software design failures,
and virtually no allowance for unplanned events. The project
has special significance since it is the first systems
modernization deliverable for taxpayers' benefits. In this and
other instances, the PRIME and the IRS have overestimated their
ability to deliver products on schedule and within cost
estimates.
I would be pleased to respond to questions that you have at
the appropriate time.
[The prepared statement of Mr. Williams follows:]
Statement of the Hon. David C. Williams, Inspector General for Tax
Administration, U.S. Department of the Treasury
Mr. Chairman and members of the Subcommittee, I appreciate the
opportunity to appear here today to discuss the 2001 tax filing season
and the IRS' continuing efforts to improve taxpayer service.
The IRS is experiencing success in processing tax returns and
issuing refunds. The IRS also continues to provide substantive
information to taxpayers on its Web Site. This filing season alone, the
Web Site has received over 986 million accesses. While these are bright
spots to recognize, the IRS is faced with the challenge of processing a
greater number of returns around April 15th since many
taxpayers have chosen to file later than expected. Electronic returns,
while up significantly, have not reached the anticipated level.
Challenges also continue to exist regarding the performance of and
plans to enhance customer service.
The IRS acknowledges the need for customer service improvements.
Our audit results also show the need for improvement. Over a four-day
period during this filing season, our auditors made 368 random test
calls to the IRS' toll-free number and were unable to gain access 37%
of the time. When successful in getting through, the IRS incorrectly
responded to 47% of the questions. The topics for the test calls were
obtained from the IRS' List of Frequently Asked Questions.
We also encountered a similar situation when we visited 47 Taxpayer
Assistance Centers in 11 states. The IRS did not provide auditors with
correct answers 49% of the time. In the majority of our 90 contacts, we
were served within 15 minutes and were treated courteously. However, in
over 10% of the contacts, IRS did not provide an adequate professional
response.
Dramatic improvements in customer service are heavily dependent on
the success of the IRS' systems modernization initiative. Among the
benefits taxpayers are expected to receive from systems modernization
initiatives are:
Better and quicker access to tax help;
Readily available, accurate and current account
information;
More electronic filing capabilities;
More refunds in days instead of weeks; and
Expanded self-service options over the telephone and the
Internet.
To accomplish modernization, the IRS contracted with a consortium
of experienced information technology companies, led by a major
integrator. This contract, known as the PRIME, is a multi-billion
dollar contract over a 15-year period. Since it began 2 years ago,
about $400 million has been spent on systems modernization. While the
basic architecture and program management processes have been
established to guide the modernization, thus far, most of the ongoing
modernization projects are taking longer and costing more than
originally estimated. As a result, benefits to taxpayers have yet to be
realized.
The Customer Communications Project is intended to be the IRS'
first major systems modernization accomplishment. This Project is
designed to route taxpayer calls to a Customer Service Representative
who is best qualified to answer the taxpayer's question, anywhere in
the United States, and will also provide expanded self-service
telephone and Internet services.
Although progress has been made on this Project, deliverables
originally scheduled for 2001 have been scaled back significantly,
including the ability to route calls to the best-qualified person.
Also, implementation dates for those deliverables have steadily slipped
and cost overruns have occurred. As a result, the expectation of
answering an additional 9.6 million calls during the 2001-filing season
will not be realized, nor will telephone assistors be freed up for
other work. This situation is due, in part, to:
The decision to move to the Project's development stage
before completing critical foundational products, such as the risk
management plan and security testing schedules,
Initial software design failures, and
Virtually no allowance for unplanned events.
This Project has special significance since it is the first systems
modernization deliverable for the taxpayer's benefit. In this and
several other instances, the PRIME and the IRS have overestimated their
ability to deliver projects on schedule and within cost estimates.
I'd be pleased to respond to any questions that you have at the
appropriate time.
Chairman Houghton. Thanks very much. Mr. White.
STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX ISSUES, U.S. GENERAL
ACCOUNTING OFFICE, ACCOMPANIED BY RANDOLPH C. HITE, DIRECTOR,
INFORMATION TECHNOLOGY SYSTEMS ISSUES, AND ROBERT F. DACEY,
DIRECTOR, INFORMATION SECURITY ISSUES
Mr. White. Mr. Chairman and Members of the Subcommittee----
Chairman Houghton. Do you want to put the microphone on?
Thank you.
Mr. White. Mr. Chairman and Members of the Subcommittee, we
are pleased to be here today. As requested, our testimony deals
with three related subjects: IRS' performance during the 2001
tax filing season, the status of IRS' business
systemsmodernization effort, and the security of IRS' electronic filing
system. It is fitting to discuss these topics together. The only
contact most Americans have with IRS comes during the filing season. If
the promise of IRS' modernization is to be realized, that is, if
taxpayers are to receive better service in future filing seasons, then
IRS must succeed at modernizing its information systems and ensuring
the security of tax data.
With respect to this year's filing season performance, as
shown by Figure 1 and also on page 11 of my statement, IRS had
received roughly 50 million tax returns by March 16th. The
white bars are total returns, starting in 1997. Our preliminary
analysis of data available to date shows several positive
aspects to the filing season as well as some concerns.
First, IRS' reorganization into four operating divisions
has been virtually invisible to taxpayers. Neither positive nor
negative effects on service are evident--not surprising, given
the newness of the divisions.
Second, IRS has processed tax returns and issued refunds
without significant problems and has seen a continued increase
in the percentage of returns filed electronically, as shown by
the gray bar in Figure 1. The rate of growth in the number of
electronically filed returns is important because Congress set
a goal that IRS receive 80 percent of all returns
electronically by 2007. IRS has projected growth in
electronically filed returns of about 20 percent this year;
however, the actual increase to date has been only about half
that. IRS had tried to make electronic filing more convenient
this year by allowing more filers to sign their returns with a
PIN number. While used by millions of taxpayers, the PIN
program has encountered some problems, however. Many taxpayers
have had their returns rejected, for example.
Third, as shown in Figure 2 on page 19 of my statement, IRS
has done a better job of answering the telephone this year
compared to last. Figure 2 shows level of service or the
percentage of calls that are answered. Because IRS rerouted a
substantial number of calls this year to improve service, we
adjusted the 2001 base to allow for valid comparison to 2000.
The comparison to 1998, however, is less certain. In any case,
however, there are concerns about assistor productivity,
including concerns about the amount of time taken by assistors
between calls. Even with the improved service this year,
further improvement in telephone assistance is needed if IRS is
to achieve its goal of providing top-quality service.
Fourth, the quality of tax law assistance of walk-in sites
remains poor, as TIGTA reports. IRS has changed the way it has
organized and staffed to provide walk-in assistance and is
planning to make changes to improve service during the 2002
filing season.
Turning now to business systems modernization, we have long
held that IRS needs to establish fundamental modernization
management controls before it begins to build and implement
modernized systems. IRS has made important progress in
developing and implementing these capabilities, but it still is
not where it needs to be. In Figure 3, also on page 31 of my
statement, the bottom four horizontal timelines represent four
key ongoing systems acquisition projects. The stars on those
lines show where detailed design and development began on those
projects. The fact that IRS has moved past those stars without
all the needed management controls implemented means the risk
associated with those projects is now considerably greater. At
these later stages in a project's life cycle--that is, after
detailed design and development has begun--any systems rework
is much more expensive and time-consuming. Given that IRS needs
additional money for modernization and is seeking congressional
approval of these funding needs, this is an opportune time to
ensure that IRS addresses these risks. And just today, the
Commissioner told us he is taking steps to pull back on some
projects in order to focus on these concerns.
Finally, with respect to the security of IRS' electronic
filing systems and electronically transmitted taxpayer data,
our review last year showed that IRS had ineffective controls
to ensure security. We demonstrated that individuals both
inside and outside of IRS could gain unauthorized access to
IRS' electronic filing systems and view, modify, copy, or
delete taxpayer data. According to IRS officials, IRS moved
promptly to correct the access and control weaknesses we
identified before this filing season. It developed plans to
improve security over its electronic filing systems and
internal networks and said that it had substantially
implemented those plans.
Mr. Chairman, this concludes my statement. We would be
happy to answer any questions.
[The prepared statement of Mr. White follows:]
Statement of James R. White, Director, Tax Issues, U.S. General
Accounting Office
Mr. Chairman and Members of the Subcommittee:
We are pleased to participate in the Subcommittee's hearing on the
Internal Revenue Service's (IRS) 2001 tax return filing season. As
requested by the Subcommittee, our testimony deals with three related
subjects: (1) the status of the 2001 filing season, (2) the status of
IRS' business systems modernization effort, and (3) the security of
IRS' electronic filing system. It is fitting to discuss these three
topics together. The only contact most Americans have with IRS comes
during the filing season, when they file their returns, call IRS for
help, or visit an IRS walk-in site for assistance. If the promise of
IRS' modernization is to be realized, that is, if taxpayers are to
receive better service in future filing seasons, IRS must succeed at
modernizing its information systems and ensuring the security of tax
data.
Our statement is based on (1) the preliminary results of our review
of the 2001 filing season being done at the Subcommittee's request, (2)
past and ongoing reviews of IRS' systems modernization effort, and (3)
information in our recently-issued report on the security of IRS'
electronic filing systems.1
Our testimony makes the following points:
Although the 2001 filing season appears to be
running smoothly, there are some matters that require further
attention. First, not unexpectedly, IRS' reorganization has had
little effect on taxpayers this year, but several challenges
remain if the reorganization is to ultimately improve taxpayer
service. Second, although the percentage of returns filed
electronically has increased, the rate of increase is below
expectations. Third, in an effort to make electronic filing
truly paperless, IRS now allows electronic filers to ``sign''
their returns with a Personal Identification Number (PIN).
Although many taxpayers have successfully used a PIN, many
others who tried to do so had their returns rejected for
reasons that are still not clear. Fourth, data obtained from
IRS indicate that taxpayers are having an easier time reaching
IRS to ask questions about the tax law, their accounts, and
their refunds; but IRS still has concerns about the
productivity of its telephone assistors. And, fifth, IRS' walk-
in sites are continuing to provide poor tax law assistance this
year. Although IRS has changed the way it is organized and
staffed to provide such assistance, it has deferred making
changes to improve the quality of that assistance until fiscal
year 2002.
With respect to business systems modernization, we
have long held that IRS needs to establish fundamental
modernization management controls before it begins to build and
implement modernized systems. IRS has made important progress
in developing and implementing these capabilities, but it is
still not where it needs to be. We are therefore concerned that
IRS is allowing its system acquisition projects to get ahead of
its capabilities for managing them and ensuring that modernized
systems deliver promised value, on time and within budget.
While allowing acquisition and building management controls to
proceed concurrently introduces an element of risk when systems
acquisition projects are in their early, formative stages, the
risk is considerably greater when projects enter their later
phases (detailed design and development). At these later
junctures in a project's life cycle, system rework, due to not
employing disciplined modernization management controls, is
much more expensive and time-consuming than it is earlier.
Given that IRS needs additional money to invest further in
modernization, both near-term and longer term, and is seeking
congressional approval of these funding needs, this is an
opportune time to ensure that IRS addresses these risks.
Our review of IRS' electronic filing systems last
year showed that IRS had ineffective controls to ensure the
security of those systems and electronically-transmitted
taxpayer data. We demonstrated that individuals, both inside
and outside of IRS, could gain unauthorized access to IRS'
electronic filing systems and view, modify, copy, or delete
taxpayer data. Although IRS said that it had not evidence of
any such intrusions, it did not have adequate procedures to
detect intrusions if they had occurred. According to IRS
officials, IRS moved promptly to correct the access control
weaknesses we identified before this filing season. It
developed plans to improve security over its electronic filing
systems and internal networks and said that it had
substantially implemented those plans. Sustaining effective
computer controls in today's dynamic computing environment will
require top management attention and support, disciplined
processes, and continuing vigilance.
Preliminary Data on the 2001 Filing Season Show Mixed Results
At the Subcommittee's request, we are reviewing IRS' performance
during the 2001 filing season. Our testimony today on the 2001 filing
season focuses on four specific areas--the effect of IRS' recent
reorganization on the filing season, IRS' performance in processing
returns and refunds, the ability of taxpayers seeking help to reach IRS
by telephone, and the quality of service being provided taxpayers who
visit an IRS walk-in site. Our preliminary analysis shows mixed
results; there are several positive aspects of this filing season as
well as several concerns. Specifically,
not unexpectedly, given its newness, IRS'
reorganization has had little effect on taxpayers this year;
but several challenges remain if the reorganization is to
achieve its ultimate goal of improving customer service;
IRS has processed income tax returns and refunds
without any significant problems and has received a growing
percentage of returns electronically; but the rate of growth in
electronic filing is less than expected, and many taxpayers
encountered problems in trying to file their electronic returns
with a PIN;
IRS has done a better job of answering the telephone
when people call for assistance, but there are continuing
concerns about declines in the productivity of telephone
assistors that have prevented further improvements in service;
and
IRS changed the structure and increased the staffing
of its field assistance program in an effort to provide better
service, but remains concerned about the quality of tax law
assistance being provided by its walk-in sites.
Our preliminary analysis is based primarily on data provided by IRS
that we did not verify. However, those data generally came from
management information systems that we have used in the past to assess
IRS operations.
IRS' Reorganization Has Had Little Effect on Taxpayers This Year;
Several Challenges Remain If the Reorganization Is to Achieve
Its Ultimate Goal
This year marks the first filing season since IRS reorganized into
four operating divisions based on the type of taxpayer. The
responsibilities of one of those four divisions, the Wage and
Investment (W&I) Division, include processing individual income tax
returns and assisting taxpayers at walk-in sites and over the
telephone.2 Other than some persons having to mail their
returns to different service centers than in the past, IRS'
organizational changes appear not to have altered the way individual
taxpayers are interacting with IRS this filing season. For example,
taxpayers are calling the same telephone numbers for assistance that
they called last year and are generally visiting the same walk-in sites
to pick up forms or get help preparing their returns.
We have also seen no evidence that the reorganization itself has
led to significant changes in the level of service being provided
taxpayers this filing season. That is not unexpected. The
reorganization provides a focus on taxpayer segments that IRS expects
will help it better understand taxpayers' needs and identify changes to
its systems and procedures for meeting those needs. Because the
reorganization has just been completed, IRS generally has not yet
identified those changes in its systems and procedures that may better
serve taxpayers. In the long term, IRS must overcome several challenges
if it is to realize the full potential of its reorganization, in terms
of improved taxpayer service.
Identifying needed changes and determining whether new approaches
to serving taxpayers are successful and worth expanding requires real-
time, reliable program performance data. As we will be discussing
later, IRS has made and is making several changes to the measures it
uses to assess its performance in processing returns and refunds and
serving taxpayers. IRS plans to have most of these new and revised
measures in place this fiscal year and collect sufficient information
to set targets or goals for the measures in fiscal year 2002. We
support IRS' efforts to improve its performance measures. The new and
revised measures could provide useful information in helping IRS assess
its performance. Because trend data on the new measures will not be
available until 2002, there will be limited ability to compare IRS
year-to-year performance.
IRS also has to do a better job of assessing the information it
does collect. As we discuss in a report on IRS' telephone assistance
that we will be issuing to the Subcommittee later this month, although
IRS has undertaken efforts to analyze its performance in providing
telephone assistance and identify ways to improve that performance, its
analyses did not cover all of the key management decisions and other
key factors that affect telephone performance. For example, in studying
the productivity of its telephone assistors, IRS considered the average
time taken to handle a call but not the time in-between calls. Without
such a comprehensive analysis, IRS management lacks information that
would be useful when making decisions about how to improve performance.
We recognize that collecting and analyzing performance data is costly.
However, not having timely, reliable, and comprehensive performance
data to support management decision making and aid congressional
oversight can also be costly.
Having real-time, reliable data to support decision making also
requires that IRS successfully modernize its information systems. We
will be discussing IRS' progress in that regard later.
IRS' Processing of Returns and Refunds Appears To Be Proceeding
Smoothly, But Preliminary Data on Electronic Filing Raises Some
Questions
Although there is much analysis still to do, our preliminary review
has not identified any significant problem that has adversely affected
IRS' ability to process returns and refunds. IRS has developed several
new or revised measures for assessing its processing performance this
year. However, meaningful performance data related to those measures
will not be available for analysis until later in the year, and, as
discussed earlier, there will be limited opportunities to compare IRS'
performance with prior years. One indicator of IRS' performance that
has not been revised is the percentage of individual income tax returns
filed electronically. That indicator shows that the upward trend in
electronic filing is continuing although at a slower rate of increase
than expected. IRS has undertaken several initiatives this year to
enhance the processing of individual income tax returns. Although it is
too soon to assess the results of those initiatives, there are
indications that one initiative--allowing electronic filers to ``sign''
their returns with a PIN--has encountered some problems.
IRS' Tax Processing Systems Appear To Be Operating Without Significant
Problems
For the first time in several years, the information systems that
IRS uses to process returns and remittances are not affected by
extensive Year 2000 changes, consolidation of computer operations, or
replacement of critical equipment, prompting us to anticipate few
problems this year. That appears to be the case so far this filing
season. Except for some problems associated with IRS' effort to allow
electronic filers to ``sign'' their returns with a PIN, which we will
discuss later, we have seen no evidence that IRS is not processing
returns or issuing refunds as quickly as it has in the past.
Given the volume of tax returns and remittances and the programming
changes that IRS makes annually to its systems, some ``glitches'' are
to be expected. In that regard, IRS experienced minor programming
issues during start-up related to notices, and the programming was
corrected. For example, in one case, fewer than 8,000 payment due
notices were not mailed timely, which may have resulted in taxpayers
being assessed penalties and interest due to no fault of their own. To
remedy the situation, when the notices were mailed, IRS included a
statement that said that the notice had been delayed due to technical
difficulties and that the payment due date was extended with no impact
on the amount due.
IRS Has Developed Several New or Revised Measures for Assessing Its
Processing Performance
IRS has developed several new or revised measures for gauging its
performance in processing returns, refunds, and remittances. This is
part of an agency-wide effort to develop a system of balanced measures
to help IRS achieve its mission of providing America's taxpayers with
top quality service by helping them understand and meet their tax
responsibilities and by applying the tax law with integrity and
fairness to all.
The new or revised measures are described in table 1.
TABLE 1: NEW OR REVISED PERFORMANCE MEASURES FOR RETURNS PROCESSING
------------------------------------------------------------------------
Measure Description
------------------------------------------------------------------------
Letter Accuracy (new)..................... Percent of letters issued by
the Submission Processing
function that are
incorrect.
Notice Accuracy (revised)................. Percent of notices issued by
the Submission Processing
function that are
incorrect.This measure was
revised to include only
notices for which
Submission Processing is
identified as the owner and
to include systemic errors.
Deposit Accuracy (new).................... Percent of payments applied
in error by, for example,
issuing a refund to a
taxpayer who overpaid when
the taxpayer wanted any
overpayment credited to
next year's tax bill.
Deposit Timeliness (new).................. Interest value of money not
deposited by the close of
business the business day
after receipt, per $1
billion in deposits.
Measure assumes an 8
percent interest rate.
Refund Timeliness (revised)............... Percent of refunds not
issued in 40 days or less.
IRS changed the date it
uses to start computing the
time it takes to issue a
refund.
Refund Accuracy (revised)................. Percent of returns with an
IRS-caused error in the
entity information (e.g.,
name or Social Security
number) or refund amount.
IRS revised this measure to
include systemic errors.
Refund Interest (new)..................... Amount of interest paid per
$1 million in refunds
issued.
Productivity (new)........................ Weighted volume of documents
processed per staff year
expended at the Submission
Processing Centers
------------------------------------------------------------------------
Source: IRS data.
One performance measure that IRS revised for the 2001 filing season
is ``refund timeliness''. IRS' goal is to issue a refund on paper
returns within 40 days. Before this year, IRS used the date the
taxpayer signed the return as the start date for determining the number
of days before it issued the refund. Under the revised measure, IRS is
using the date that IRS received the return. According to IRS, the way
it previously measured timeliness was flawed because the taxpayer could
have signed the return several days before mailing it--something that
could cause IRS to miss its 40-day goal but over which IRS had no
control. IRS had originally decided to use the postmark date as the
starting date for its computation. However, IRS subsequently determined
that it would be labor intensive and costly to use the postmark date--a
date that IRS does not currently record for returns received by the
filing deadline of April 15. Instead, IRS decided to use the IRS-
received date, which is the date that the document is received at a
submission processing center's loading dock--a date that IRS already
records. Because that date could be several days later than the date
the taxpayer signed the return, IRS has, in effect, increased its
chances of meeting the 40-day goal. To maintain something of a level
playing field and to better enable IRS to compare this year's
performance with prior years', it seems that, at a minimum, IRS should
have adjusted its 40-day goal downward to approximate the number of
days it ``saved'' by changing the computation start date.
We will continue to monitor IRS' progress in benchmarking its new
or revised performance measures and will report the status of IRS'
efforts in our final report on the 2001 filing season.
Use of Electronic Filing Continues an Upward Trend, But at a Reduced
Rate of Increase
One indicator of IRS' performance in processing returns that has
not changed is the percentage of individual income tax returns that
have been filed electronically. Pursuant to a provision in the IRS
Restructuring and Reform Act of 1998, IRS' goal is to have 80 percent
of all returns filed electronically by 2007. Electronic filing has
several advantages for taxpayers and IRS. For example, IRS acknowledges
receipt of an electronic return, electronic filers receive their
refunds faster, up-front mathematical checks and other filters in the
electronicfiling system help to reduce the number of taxpayer errors
that IRS has to correct after the return is filed, and returns filed
electronically bypass the error-prone manual procedures that IRS uses
to process paper returns.
As noted in our report on the 2000 filing season, the number of
individual income tax returns filed electronically increased
substantially--about 20 percent--in both 1999 and 2000, bringing the
total to 35 million returns.3 IRS' projection for this year
was 42 million returns--another 20-percent increase. However, filing
data as of March 15, 2001, indicate that IRS may fall short of that
projection.
As shown in table 2, about 29.3 million returns had been filed
electronically as of March 16, 2001. Although that is a 10.2-percent
increase compared to the same time last year, the rate of increase is
considerably lower than last year. The rate of increase over the last
month of the filing season would have to increase substantially for IRS
to achieve its projected growth of 20 percent for the year. Figure 1
shows how the numbers of returns filed overall and electronically have
changed over the past 5 years. Table 2 provides more detailed
information on filings for the past 3 years.
Figure 1: Individual Income Tax Returns Received IRS in Total and
Electronically
TABLE 2: INDIVIDUAL INCOME TAX RETURNS RECEIVED BY IRS
[Number of returns in millions]
------------------------------------------------------------------------
1/1/ 1/1/ Percent 1/1/ Percent
99 to 00 to change: 01 to change:
Filing type 3/19/ 3/17/ 1999 to 3/16/ 2000 to
99 00 2000 01 2001
------------------------------------------------------------------------
Paper......................... 34.4 32.1 -6.7 28.9 -10.0
Electronic.................... ..... ..... ......... ..... ........
Traditional a................. 16.8 19.6 16.7 21.7 10.7
On-line b..................... 1.6 3.1 93.8 4.2 35.5
TeleFile c.................... 4.5 4.1 -8.9 3.5 -14.6
Subtotal...................... 22.9 26.6 16.2 29.3 10.2
Total......................... 57.3 58.7 2.4 58.2 -0.9
Percentage of total filed 39.9 45.4 ......... 50.3 ........
electronically.
------------------------------------------------------------------------
Note: Subtotals, totals, and percentages may not compute due to
rounding.
a Traditional electronic filing involves the transmission of returns
over communication lines through a third party, such as a tax return
preparer or electronic transmitter, to an IRS service center.
b On-line returns are prepared and transmitted by the taxpayer through
an on-line intermediary using a personal computer and commercial
software.
c Under TeleFile, certain taxpayers who are eligible to file a Form
1040EZ are allowed to file using a toll-free number on touch--tone
telephones.
Source: IRS' Management Information System for Top Level Executives.
IRS Has Initiatives Underway to Improve Processing
IRS has several initiatives underway to improve the processing of
individual income tax returns. These initiatives include (1) allowing
electronic filers to ``sign'' their returns with a PIN, thus reducing
some of the paper processing associated with electronic filing; (2)
validating spouses' Social Security numbers (SSN), thus ensuring more
accurate returns; and (3) enabling taxpayers to authorize IRS to
discuss their returns with their paid preparers, thus expediting the
resolution of certain issues that arise during processing. Although it
is too soon to assess the affect of these initiatives, there is some
information that the PIN initiative, while used by millions of
taxpayers, has encountered some problems.
Allowing Electronic Filers to Use a PIN
A major criticism of the electronic filing program over the years
has been that it is not entirely paperless. For example, all electronic
filers, except those who filed by telephone (i.e., TeleFile) had to
send IRS a signature document. According to IRS, feedback from the tax
practitioner community indicated that making electronic filing
paperless would significantly increase taxpayers' and tax
practitioners' willingness to file electronically. For the past 3
years, IRS has allowed taxpayers to pay their taxes electronically,
thus eliminating the need for taxpayers to send IRS checks and paper
vouchers. But until this year, most electronic filers still had to send
IRS a form with their signature.
For the 2001 filing season, IRS instituted the self-select PIN
program that makes it possible for taxpayers who file on-line or
through a tax practitioner to ``sign'' their returns electronically and
thus file a totally paperless return. The self-select PIN program, so
named because taxpayers select their own 5-digit PIN, replaces the two
alternative signature options that IRS tested last year. The major
difference between the self-select PIN program and the alternative
signature options tested last year is that virtually all taxpayers
filing through a practitioner or on-line this year can file a totally
paperless tax return. Last year only certain taxpayers could do so.
Before IRS will accept an electronic return with a PIN, the taxpayer
must include in his or her electronic submission two pre-identified
pieces of information from the previous year's tax return. This
information is required to help IRS assure that taxpayers filing with a
PIN are who they say they are. If IRS determines that the information
is correct and the submission passes other up-front checks that have
been in place for several years, the electronic submission is accepted
and the return is considered filed; otherwise the submission is
rejected.
As of March 11, 2001, about 5.9 million returns had been filed
electronically using the self-select PIN. Of those 5.9 million returns,
about 3.3 million were filed through practitioners and about 2.6
million were filed on-line. For the same time period last year, about
4.7 million returns were filed using the two alternative signature
programs.
One intriguing part of the PIN usage this filing season is that as
of March 11, 2001, about 64 percent of the electronic returns filed on-
line had a PIN compared to about 16 percent of the returns filed
electronically through practitioners. IRS intends to conduct focus
groups with tax practitioners later in the year, and one of the issues
to be discussed is what prevented practitioners from using the self-
select PIN. IRS officials said that they believe large tax
practitioners are not using the PIN more extensively because many of
their customers are first-time clients and neither the customer nor the
practitioner has ready access to the necessary data from last year's
return. Without that information, the practitioner may simply file the
return electronically with the paper signature document.
According to a representative of the largest tax preparation
company, returns filed electronically using self-select PINs have
higher reject rates--about twice as high as the reject rates they
usually experience on electronic submissions--causing additional burden
on the taxpayer and the practitioner. As a result, the company had been
advising its clients to use the self-select PIN with caution. Data
obtained from IRS indicated that of about 6.8 million reject conditions
identified on electronically filed returns as of March 15, about 1.5
million involved problems related to PINs.4 A representative
of the National Association of Enrolled Agents told us that one of the
problems associated with the self-select PIN program is that many
taxpayers and practitioners don't understand what information is needed
to use a PIN.
We will continue to monitor the use of PINs and the issues
surrounding that program as we proceed with our assessment of the
filing season. As part of that effort, we will attempt to determine to
what extent, if at all, PIN-related problems caused taxpayers to not
file electronically.
Validating Secondary SSNs
During its processing of tax returns, IRS validates SSNs on the
returns. If IRS determines that an SSN is invalid, it can disallow the
related exemption or deny a claimed earned income credit or child tax
credit.5 That, in turn, can change the taxpayer's tax
liability and reduce or eliminate any refund the taxpayer might be
expecting. In past years, IRS has validated primary6 and
dependent SSNs. This year, IRS has expanded its SSN validation effort
to include secondary SSNs.
Because of a concern that taxpayers are treated fairly in the
validation process, the Committee on Government Reform sent a letter to
the Commissioner of Internal Revenue in January 2001 requesting
information about this initiative. In his February 2001 response, the
Commissioner said that IRS has an extensive, multi-step process to
determine the acceptability of a secondary SSN. If an individual fails
to furnish a correct secondary SSN, IRS said it would disallow the
exemption but would not alter the joint filing status claimed on the
return.
Authorizing IRS to Discuss Returns with Preparers
IRS added a checkbox to the individual income tax forms that are
being filed this year that enables taxpayers to
authorize IRS to discuss their returns with their paid preparers.
By being able to contact the return preparer directly, IRS believes
that it can expedite the resolution of certain issues that arise during
processing, such as math errors and missing information on the return,
and thus reduce taxpayer burden. In testimony before the House
Government Reform Committee last year, the Commissioner of Internal
Revenue estimated that about 2.5 million notices generated from returns
processing were related to returns prepared by paid practitioners.
Level of Telephone Service Has Improved, But Declines in Assistor
Productivity and Delays in Modernization Prevent Further
Improvement
Millions of taxpayers call IRS each year with questions about the
tax law, their accounts, and their refunds. One important indicator of
IRS' performance in assisting these taxpayers is ``level-of-service'',
which is computed by dividing the number of calls answered by the
number of call attempts. We have adjusted computation of that indicator
this year to allow a more accurate comparison with IRS' performance in
past years, although a completely accurate comparison is not possible
because data for one of IRS' phone lines does not show the extent to
which taxpayers hung up before being served. The adjusted indicator
shows that IRS has been answering a greater percentage of calls this
filing season than it did last year. However, declines in the
productivity of telephone assistors and delays in modernization have
prevented even further improvement. Further improvement is needed if
IRS is to achieve its goal of providing telephone assistance comparable
to that provided by leading public and private telephone customer
service organizations. In an effort to facilitate that kind of
comparison and better gauge its performance in assisting taxpayers, IRS
is putting in place some new measures of telephone service.
According to Data From IRS, the Accessibility of IRS'
Telephone Service Has Improved
Taxpayers calling on IRS' toll-free assistance lines can obtain
needed information by talking to an assistor or by using an automated
``interactive application.'' However, unlike last year, taxpayers
calling on the assistance lines in 2001 are given the option of being
routed to another telephone line, the Tele-Tax line, for an automated
response to an inquiry about their refund.7 IRS is routing
refund inquiry calls to the Tele-Tax line in an effort to improve
taxpayer service. According to IRS, in previous years, these calls
would have been answered by a similar automated refund inquiry service
on the assistance lines. Sending these calls to Tele-Tax frees up the
assistance lines for calls that require an assistor's help, making it
less likely that taxpayers calling on these lines will get a busy
signal.
Because of this change in routing, the level-of-service computation
has to be adjusted to properly compare IRS' performance this year with
last year. As computed in previous years, level of service reflected
IRS' performance on its toll-free assistance lines. Because refund
inquiries were answered by automated systems on the assistance lines in
previous years, they were included in computing level of service. Even
though those inquiries are no longer being answered on the assistance
lines, they should be included in computing level-of-service for
comparability.
Although including the Tele-Tax refund inquiries in the computation
of level of service makes the measure more comparable to previous
filing seasons, it is not completely comparable because it assumes that
all of the callers who were routed to Tele-Tax were actually served.
Unlike data for the assistance phone lines, data for the Tele-Tax line
does not allow IRS to determine whether taxpayers hung up before
completing an automated service, calls that IRS refers to as
``abandoned''. Calls to the assistance phone lines that are abandoned
are not counted as ``calls answered'' in computing level of service.
While the adjusted level-of-service computation is not completely
comparable to previous years, it does indicate that level of service
has improved relative to 2000. Other information from IRS supports this
view. According to IRS data, for example, the level of service through
March 10, 2001, for calls routed to assistors was somewhat higher than
for a comparable period last year and the number of calls receiving
busy signals on the assistance lines during the first 11 weeks of the
filing season had declined from about 5.4 million in 2000 to about 3.1
million in 2001. IRS data also indicate that there have been virtually
no busy signals on the Tele-Tax line this filing season.
As shown in figure 2, as of March 17, 2001, IRS' level of service,
including the refund inquiries answered through the Tele-Tax line, was
76 percent--13 percentage points above last year.
Figure 2: Toll-Free Telephone Level of Service for the First 11 Weeks
of the 2001, 2000, 1999, and 1998 Filing Seasons
Table 3 contains more detailed information behind the level of
service computations depicted in figure 2.
TABLE 3: TOLL-FREE TELEPHONE LEVEL OF SERVICE FOR THE FIRST 11 WEEKS OF
THE 2001, 2000, 1999, AND 1998 FILING SEASONS
[in millions]
------------------------------------------------------------------------
Filing season
Telephone service ---------------------------------------
2001 a 2000 1999 1998
------------------------------------------------------------------------
Call attempts...................
Excluding refund calls routed to 18.7 28.4 41.4 29.2
Tele-Tax.
Refund calls routed to Tele-Tax 11.6 ........
in 2001.
Total call attempts............. 30.2 28.4 41.4 29.2
Calls answered.................. .......... ........ ....... .......
Automated....................... 1.6 7.5 6.6 Not
availa
ble
Assistor........................ 9.7 10.4 13.2 Not
availa
ble
Refund calls routed to Tele-Tax 11.6 ........ ....... .......
in 2001.
Total calls answered............ 22.9 17.9 19.8 21.5
Level of service................ 76% 63% 48% 74%
------------------------------------------------------------------------
Note: Totals may not compute due to rounding.
a The level-of-service computation for 2001 is not completely comparable
to the computation for the other years because the Tele-Tax data does
not account for taxpayers who may have abandoned their calls before
getting an answer.
Source: GAO analysis of IRS data.
Figure 2 and table 3 indicate that the level of service this year
is higher than in 1998. However, because available data for those years
are not comparable, we do not know if that is an accurate
representation.
Assistor Productivity Decline and Modernization Delays Have
Prevented Further Phone Service Improvement
Taxpayer access to telephone assistors is less than it could be
because (1) telephone assistor productivity--measured by IRS as how
quickly assistors complete telephone calls--has declined for the third
filing season in a row and (2) implementation of a modernization
project has been delayed. Increases in assistor productivity could lead
to further improvements in telephone service by allowing assistors to
answer more calls, thus reducing the extent to which taxpayers receive
busy signals or are kept on hold. Implementation of the modernization
project could lead to improved service by freeing up assistors to
handle more calls.
As we discuss in a report to be issued to the Subcommittee later
this month, the productivity of telephone assistors declined during the
1999 and 2000 filing seasons. According to IRS officials, although some
of the decline in 2000 was caused by assistors handling more of the
types of calls that take longer to answer, four policy changes that had
the unintended effect of lowering productivity in the 1999 filing
season continued toadversely affect productivity in the 2000 filing
season. Specifically, in 1999, IRS (1) discontinued automatically
routing another call to an assistor immediately upon completion of a
call; (2) increased restrictions on using productivity data when
evaluating assistors' performance; (3) disproportionately diverted
staff from peak demand shifts to other shifts when it implemented 24-
hour-a-day, 7-day-a-week assistance; and (4) discontinued measuring the
productivity of individual call sites.
According to IRS officials, these factors have continued to
negatively affect productivity in the 2001 filing season. The officials
said that although some of the decline can be explained by assistors
answering more complex calls, assistors clearly are not using their
time efficiently. In that regard, according to IRS, site visits it made
earlier this year indicated that assistors who were directly monitored
(i.e., someone sitting with them) spent about half as much time
wrapping up a call after the taxpayer had hung up than assistors who
were remotely monitored. IRS, in conjunction with the National Treasury
Employees' Union, has taken steps intended to improve productivity. For
example, IRS has conducted a series of training sessions at call sites
designed to assist supervisors in ensuring assistors use their time
productively, particularly with respect to the time they spend wrapping
up calls. According to IRS officials, data shows that productivity has
improved during the year as a result of these efforts.
Delays in implementing a modernization project has also prevented
further improvements in telephone service. IRS' Customer Communication
Project is one of the most important first steps in improving customer
service as envisioned in IRS' modernization plans. As a key part of
IRS' strategy for improving level of service, Customer Communications
enhancements are designed to free-up assistors to handle more calls by
routing and answering more calls through automation. However, one of
the enhancements designed to significantly improve level of service
will not be implemented until May or June 2001--at least 3 months later
than expected and too late to provide the expected benefits this filing
season.
Under this enhancement, IRS expected to implement a telephone voice
recognition capability in February 2001. Voice recognition would allow
callers with rotary-dial telephones to interact with IRS' automated
routing and answering system in the same way as touch-tone callers do.
Also, voice recognition would require callers with a touch-tone phone
to use the automated system even if they do not respond to phone menu
prompts to press the appropriate touch-tone key. According to IRS, a
significant number of callers, whether they have rotary-dial telephones
or not, do not respond to the prompts; assistors must answer these
calls to determine what the taxpayer is calling about and then route
the call to the most appropriate source of assistance. Voice
recognition would have allowed IRS to offload some of this workload
from live assistors and answer more calls.
According to the Treasury Inspector General for Tax Administration
(TIGTA), the Customer Communication Project fell behind schedule, in
part, because some key work products were not timely completed and
several identified barriers to deployment, such as an inadequate
database to track modernization project risks and the need to complete
the security certification process, had not been overcome.8
IRS is Putting in Place New Performance Measures for
Telephone Operations
According to IRS officials, its current level of service measure is
not strategically aligned with those used by world-class customer
service organizations, and does not focus efforts at enhancing the
customer's experience or clearly show how human capital and technology
investments affect performance. Therefore, IRS is planning to replace
its current level of service measure with two primary measures of
service, one for measuring IRS' success at providing taxpayers access
to assistors, and another for measuring IRS' success at serving
taxpayers though automated services. Also, IRS intends to gather data
on other new measures, including measures of how long taxpayers have to
wait to speak to IRS assistors.
We support IRS' efforts to improve its performance measures,
particularly efforts to better gauge how well IRS serves taxpayers and
how its performance compares to that of leading private and public
telephone customer service organizations. However, unless IRS maintains
its current measures while transitioning to its new measures, it will
not have comparable data to monitor performance from one year to the
next. We recognize that there is a cost associated with maintaining
current measures while developing new measures, and we recognize that
doing so may not always be feasible. However, without comparable
historical performance data, IRS will be unable to assess the results
of past efforts to improve performance, such as the 1999 policy changes
discussed earlier.
IRS Has Deferred Making Changes to Improve the Quality of Tax Law
Assistance Provided by Walk-in Sites Until Fiscal Year 2002
IRS changed the way it was organized and staffed to provide face-
to-face assistance for the 2001 filing season. Despite these changes,
there are continuing concerns about the quality of tax law assistance
being provided. According to IRS officials, the staffing and training
challenges associated with the restructuring made it impractical for
IRS to make changes to improve the quality of tax law assistance this
fiscal year. Instead, IRS, with the help of a contractor, is studying
how the quality of face-to-face assistance should be measured and
improved, with the expectation of making changes for the 2002 filing
season.
IRS Has Changed the Way Its Taxpayer Assistance Centers Are
Organized and Staffed
Taxpayers can obtain forms, get answers to questions about the tax
law and their accounts, and get help in preparing their returns at
about 400 Taxpayer Assistance Centers (TAC), which were formerly known
as walk-in sites. Before IRS' reorganization, the TACs and associated
staff reported to 33 district offices. According to IRS officials,
differences in the way TACs were organized and operated within each
district caused inconsistencies in the assistance provided to
taxpayers. To provide more consistency in field assistance, the 400
TACs now report to the W&I Division's Field Assistance unit, through a
network of 7 area and 34 territory offices. As of March 17, 2001,
according to IRS, the TACs had assisted about 3.4 million taxpayers,
compared to about 3.9 million taxpayers as of the same time last year.
According to IRS, it began the year with about 1,000 technical
employees in field assistance and had hired another 504 as of March 16,
2001. Of those 1,504 technical employees, 1,041 are in a new position--
taxpayer resolution representative (TRR)--that IRS had established as
part of its reorganization. Persons filing these positions will be
required to assume some functions previously done by compliance staff,
such as office audits, in addition to their taxpayer assistance duties.
Although IRS is filling the TRR positions primarily from qualified
staff in related job series, additional training is required. According
to officials, IRS is surveying the new staff to assess the training
gaps and prioritizing the delivery of abbreviated training to fill the
gaps. Not all of the gaps were filled in time for the 2001 filing
season. For example, about 100 staff placed in TRR positions in January
2001, who needed the full 6 weeks of required first-year training,
received only 3 weeks of that training.
Considerable hiring and training is also required for new managers
in the Field Assistance unit. Managers of the former walk-in sites were
compliance staff who generally moved to the new Small Business and Self
Employed Division as part of IRS' reorganization. As of December 31,
2000, IRS had filled 29 of the 34 territory manager positions and 154
of the 226 group manager positions authorized. According to IRS
officials, about one-half of the new managers had no field assistance
experience and some had no managerial experience.
IRS and TIGTA Reviews Show That TACs Provide Poor Quality
Tax Law Assistance
According to W&I field assistance officials, the quality of tax law
assistance provided to taxpayers who walk into one of IRS' TACs this
year is about as poor as the quality reflected by IRS' own reviews last
year.
IRS employees posing as taxpayers conducted 272 visitations to TACs
before the 2000 filing season and another 272 during the filing season.
IRS' final report on the combined results found, among other things,
that although 92 percent of the ``assistors spoke to reviewers in a
pleasant manner and tone of voice,''
81 percent of the reviewers' questions were not
answered correctly; and,
21 percent of the reviewers were denied service.
Officials based their characterization of the quality of this
year's field assistance on reviews of quality during late January and
early February 2001 by TIGTA. According to TIGTA, its review of TAC
quality involved 90 contacts in which tax law questions were posed to
IRS representatives. In 7 of those 90 contacts (8 percent), service was
denied (i.e., the TIGTA reviewers were not given an opportunity to
speak with an assistor). When service was provided, TIGTA's reviewers
received inaccurate answers 48 percent of the time. Although TIGTA's
results might indicate that service quality, although not good, has
improved compared to the results of IRS' reviews last year, such a
comparison cannot be made because TIGTA used a different methodology
from the one used by IRS. One of the recommendations resulting from
IRS' quality reviews during fiscal year 2000 was that IRS develop a
comprehensive, year-round quality review program for walk-in offices.
The recommendation anticipated changes in the scope of the reviews, the
selection and training of reviewers, the review checksheet, and the
relevant database. In that regard, field assistance officials informed
us that IRS, with help from a contractor, is studying how field
assistance quality should be measured and improved. According to IRS
officials, because of that study and the staffing and training
challenges associated with the restructuring, IRS decided not to
conduct its own review of quality during the 2001 filing season and to
defer making changes to improve the quality of tax law assistance
provided by TACs until fiscal year 2002, after the results of the
ongoing study are known.
Despite Important Progress, IRS Has Yet to Fully Implement the
Capabilities Needed to Effectively Manage the Business Systems
Modernization Program
We turn now to business systems modernization (BSM)--IRS' multiyear
program to put in place the technology that will support revamped
business processes. This multi-billion-dollar program, which began a
little over 2 years ago and has thus far received congressional
approval to obligate about $450 million,9 is vital to
achieving IRS' new, customer-focused vision and enabling IRS to meet
performance and accountability goals. BSM consists of a number of new
systems acquisition projects that are at differing stages of
acquisition and implementation, as well as various program-level
initiatives intended to establish the capacity for IRS to effectively
manage the projects.
We have long held--and communicated to IRS--the importance of
establishing sound management controls to guide its systems acquisition
projects; to its credit, IRS has made important progress in this area.
Nevertheless, IRS is starting to let project acquisitions get
perilously ahead of controls--proceeding in some cases with detailed
systems design and development without having the capacity in place to
help ensure that projects perform as intended and are completed on time
and within budget. We remain concerned that at these later stages in
systems' life cycles, the risk of rework due to missing modernization
management controls increases, both in terms of probability and impact.
Given that IRS expects to totally exhaust congressionally-approved BSM
funding by about November 2001, and thus is seeking additional money
for fiscal year 2002, this is a good time to ensure that the overdue
modernization management controls are emphasized as a BSM priority.
Beginning in 1995, when IRS was involved in an earlier attempt to
modernize its tax processing systems, and continuing since then, we
have made recommendations to implement fundamental modernization
managementcapabilities before acquiring new systems. We concluded that
until these controls were in place, IRS was not ready to invest
billions of dollars in building modernized systems.10
Although IRS has since taken steps that have partially addressed our
set of recommendations, important ones remain unfulfilled. In general,
the areas in which we found controls to be lacking and made
recommendations to fill these voids fell into five interrelated and
interdependent information technology management categories, as shown
in figure 3--investment management, system life-cycle management,
enterprise architecture management, software acquisition management,
and human capital management.
Figure 3: Information Technology Management Control Areas Needing
Attention
In December 1998, IRS hired a systems integration support
contractor to, among other things, help it develop and implement these
program capabilities. Subsequently, the Commissioner adopted a
modernization strategy that appropriately required, for example, (1)
the use of incremental investment decision making, (2) adherence to a
rigorous systems and software life-cycle management method, and (3)
development and implementation of an enterprise architecture or
modernization blueprint to guide and constrain the content, sequencing,
and integration of systems investments. This approach, however,
involved development of these kinds of program-level management
capabilities while simultaneously proceeding with project acquisition,
in anticipation that program controls would be in place and functioning
when these projects reached their later, less formative stages. Figure
4 illustrates this approach.
Figure 4: Concurrent Development of Program-Level Controls and Projects
During BSM's first 18 months, progress in implementing these
management controls was slow, while at the same time project
acquisitions moved rapidly. At that time we reported to IRS' Senate and
House appropriations subcommittees that projects were getting ahead of
the modernization management capacity that needed to be in place to
manage them effectively. In response to our concerns and the
subcommittees' direction, IRS appropriately pulled back on the projects
and gave priority to implementing needed management capacity.
Despite this shaky start to implementing management controls, IRS
has since made important progress in its modernization management
capacity. For example, last year we reported that IRS (1) largely
defined and implemented its system life-cycle methodology that
incorporates software acquisition and investment management processes,
(2) defined program roles and responsibilities of IRS and its
modernization contractor and began relating with the contractor
accordingly, (3) began formally managing modernization risks in an
effort to proactively head off problems, and (4) made progress toward
producing the first release of its enterprise
architecture.11
In addition, we recently reported that IRS had taken steps to
address our recommendations aimed at strengthening management of
individual BSM projects.12 For instance, it started to
manage the Custodial Accounting Project13 as an integral
part of the modernization program. On another project, the Security and
Technology Infrastructure Release,14 IRS assessed security
threats and vulnerabilities, analyzed the resulting risk in terms of
probable impact, and planned to reevaluate project requirements in
light of this risk analysis. Recently, IRS hired experienced technical
and managerial executives and augmented existing modernization staff
with experienced IRS information systems personnel.
We are concerned, however, because projects are entering critical
stages without certain essential management controls in place and
functioning. In particular, in our ongoing work for IRS' appropriations
subcommittees, we found that IRS is proceeding with building systems--
including detailed design and software development work--before it has
implemented two key management controls. First, IRS has yet to develop
a sufficiently defined version of its enterprise architecture to
effectively guide and constrain acquisition of modernization projects.
Second, it has not yet implemented rigorous, disciplined configuration
management practices. Both of these are requirements of IRS's own
systems life-cycle methodology and are recognized best practices of
successful public and private-sector organizations. This increases the
risk of cost, schedule, and performance shortfalls. We have discussed
these missing controls with the Commissioner and his BSM executives;
they have stated that they plan to have them in place by the end of
June 2001.
Timing is critical. While the lack of controls can be risky in
projects' early stages, it introduces considerably greater risk when
these projects enter design and development. To mitigate this added
risk, IRS needs to fully implement the remaining management controls
that we have recommended. Figure 5 illustrates the growing risk that
accompanies project development in its later stages.
Figure 5: Increased Risk Associated With Inadequate Controls at Later
Stages of Project Development
The timing of this hearing is appropriate for ensuring that IRS
implements the remaining needed modernization management controls.
While Congress has appropriated about $578 million for this program to
date, it also took steps to limit the agency's ability to obligate
funds until certain controls were in place by establishing a multiyear
capital account--the Information Technology Investments Account--to
fund IRS systems modernization initiatives. IRS has received about $450
million of this total, and has submitted a plan to Congress to spend
the remainder over the next 7 months. In addition, IRS plans to include
$396 million in funding for BSM in its upcoming fiscal year 2002 budget
request. This is, then, an opportune time to ensure that IRS addresses
these outstanding risks as a condition of future funding.
IRS Had Ineffective Controls to Ensure the Security of Electronic
Filing Systems And Electronically-Transmitted Taxpayer Data
As a major steward of personal taxpayer information, IRS has a
demanding responsibility in collecting taxes, processing returns, and
enforcing the nation's tax laws. In conducting its work, IRS must
obviously depend to a great extent on interconnected computer systems.
Due to the nature of its mission, IRS collects and maintains a
significant amount of personal and financial data on each American
taxpayer. These data typically include the taxpayer's name, address,
SSN, dependents, income, deductions, and expenses. The confidentiality
of this sensitive information is important because American taxpayers
could be exposed to a loss of privacy and to financial loss and damages
resulting from identity theft and financial crimes should this
information be disclosed to unauthorized individuals.
Computer security is an important consideration for any
organization that depends on information systems and computer networks
to carry out its mission or business. However, without proper
safeguards, systems and networks pose enormous risks that make it
easier for individuals and groups with malicious intent to intrude into
inadequately protected systems and use such access to obtain sensitive
information, commit fraud, disrupt operations, or launch attacks
against other computer networks and systems. And the number of
individuals with the skills to accomplish this is increasing;
intrusion--or hacking--techniques are readily available and relatively
easy to use.
We recently examined the effectiveness of key computer controls
designed to ensure the security, privacy, and reliability of IRS'
electronic filing systems and electronically filed taxpayer data during
last year's tax filing season. Our recent report discusses the computer
control weaknesses that we found, along with actions that IRS says that
it took to correct these weaknesses before this year's filing
season.15 What we found to date concerning IRS' electronic
filing program can illustrate the challenges that many organizations
are facing.
In an attempt to meet the 80-percent electronic filing goal
provided for in the IRS Restructuring and Reform Act of 1998, IRS has
aggressively marketed the electronic filing program and has authorized
private firms and individuals to be electronic filing trading partners.
These partners include electronic return originators, who prepare
electronic tax returns for taxpayers, and transmitters, who transmit
the electronic portion of a return directly to IRS. Except for TeleFile
taxpayers, who file their returns using the telephone, IRS does not
allow individual taxpayers to transmit electronic tax returns directly
to the agency; they must use the services of an IRS trading partner.
Figure 6 demonstrates the path that an electronically filed tax return
took from the taxpayer to IRS during the time of our review.
Figure 6: Electronic Filing Journey, 2000 Filing Season
During the 2000 filing season, IRS did not implement adequate
computer controls to ensure the security, privacy, and reliability of
its electronic filing systems and the electronically-transmitted tax
return data that those systems contained.
We demonstrated that individuals, both internal and external to
IRS, could gain unauthorized access to IRS' electronic filing systems
and view, modify, copy, or delete taxpayer data. Our successful access
did not require sophisticated techniques. Last May, for example, we
were able to access a key electronic filing system using a common
handheld computer. We could gain such access because IRS at that time
had not
effectively restricted external access to computers
supporting the electronic filing program through effective
perimeter defenses;
securely configured its electronic filing operating
systems, which used several risky and unnecessary services;
implemented adequate password management and user
account practices (for example, we successfully guessed many
passwords and noted user IDs and passwords posted conspicuously
on a monitor);
sufficiently restricted access to computer files and
directories containing tax return and other data (for example,
all users had the ability to modify numerous sensitive data and
system files, and certain users with no ``need to know'' had
access, contrary to policy); or
used encryption to protect tax return data on
electronic filing systems (as is required by IRS' Internal
Revenue Manual).
Further, these weaknesses jeopardized the security of sensitive
business, financial, and taxpayer data on other critical IRS systems
that were connected to electronic filing computers through its
servicewide network because IRS personnel turned off (bypassed) network
control devices that were intended to provide security between
electronic filing systems and other IRS systems. Although IRS stated
that it did not have evidence that such intrusions had actually
occurred or that intruders had accessed or modified taxpayer data, it
did not have adequate procedures to detect such intrusions if they had
occurred. For example, IRS did not (1) record certain key events in
system audit logs, (2) regularly review those logs for unusual or
suspicious events or patterns, or (3) deploy software to facilitate the
detection and analysis of logged events. Consequently, IRS did not
recognize or record much of the activity associated with our tests.
These serious access control weaknesses existed because IRS had not
taken adequate steps during the 2000 filing season to ensure the
ongoing security of electronically transmitted tax return data on its
electronic filing systems. For example, IRS had not followed or fully
implemented several of its own information security policies and
guidelines when it developed and implemented controls over its
electronic filing systems. It decided to implement and operate its
electronic filing computers before completing all of the security
requirements for certification and accreditation.16 Further,
IRS had not fully implemented a continuing program for assessing risk
and monitoring the effectiveness of security controls over its
electronic filing systems.
According to IRS officials, IRS moved promptly to correct the
access control weaknesses we identified before the current filing
season. It developed plans to improve security over its electronic
filing systems and internal networks and said that it has substantially
implemented those plans. In his response to our report, the
Commissioner said that ``electronic filing systems now satisfactorily
meet critical federal information security requirements to provide
strong controls to protect taxpayer data.'' Sustaining effective
computer controls in today's dynamic computing environment will require
top management attention and support, disciplined processes, and
continuing vigilance.
Application controls also need to be designed and implemented to
ensure the reliability of data processed by the systems. IRS believes
that electronically filed tax returns are more accurate than paper
returns and has implemented many application controls designed to
enhance the reliability of data processed by its electronic filing
systems. However, we identified additional opportunities to strengthen
application controls for IRS' processing of electronic tax return data.
Based on IRS statistics, it processed electronic tax returns and paid
refunds of about $2.1 billion without receiving required authenticating
signatures or electronic PINs from taxpayers. Data validation and
editing controls did not detect certain erroneous or invalid data that
could occur in tax returns. In addition, weaknesses in software
development controls increased the risk that programmers could have
made unauthorized changes to software programs during the 2000 filing
season.
Further, taxpayers who filed electronically may not have been aware
that transmitters, who actually send the data to IRS and may be unknown
to the taxpayers, could have viewed and modified their data and that
such data are transmitted to IRS in clear text--human readable form.
This is because IRS decided to (1) not allow taxpayers to file most
electronic returns directly to IRS, (2) require taxpayers who elected
to file electronically to use the services of third-party transmitters,
and (3) not accept electronic tax returns in encrypted form. In
addition, taxpayers may not have been aware that IRS has no assurance
of the security of its electronic filing trading partners' systems.
Other than providing guidance about protecting certain passwords, IRS
did not prescribe minimum computer security requirements for
transmitters and did not assess or require an independent assessment of
the effectiveness of computer controls within the transmitters'
operating environment.
We provided specific technical recommendations to improve access
controls over IRS' electronic filing systems and networks. We also
recommended that IRS complete the certification and accreditation of
its electronic filing systems, assess security risks and routinely
monitor the effectiveness of security controls over electronic filing
systems, improve certain data reliability and integrity controls, and
notify taxpayers of the privacy risks of filing electronically. IRS
agreed with our recommendations and said that it implemented most of
the improvements, including correcting critical vulnerabilities, before
this year's filing season. IRS further said that the actions it has
taken demonstrate a systematic, risk-based approach to correcting
identified weaknesses. Such an approach will continue to be important
in ensuring that corrective actions are effective on a continuing basis
and that new risks are promptly identified and addressed.
Mr. Chairman, that concludes our statement. We would be pleased to
respond to any questions that you or other members of the Subcommittee
may have at this time.
----------
1 Information Security: IRS Electronic Filing Systems
(GAO-01-306, Feb. 16, 2001).
2 The other three operating divisions are: (1) Small
Business and Self Employed, serving fully or partially self-employed
individuals and businesses with assets of $5 million or less; (2) Large
and Mid-Size Business, serving businesses with assets over $5 million;
and (3) Tax Exempt and Government Entities, serving pension plans,
exempt organizations, and governments.
3 Tax Administration: Assessment of IRS' 2000 Tax Filing
Season (GAO-01-158, Dec. 22, 2000).
4 The number of reject conditions cannot be equated to
the number of electronic submissions that were rejected because one
submission can have more than one reject condition.
5 IRS considers an SSN invalid if it is missing from the
return or if the SSN and associated name on the return do not match
data in the Social Security Administration's records.
6 On a joint return, the person whose name appears first
on the return is considered the primary taxpayer. The other person is
considered the secondary taxpayer.
7 In addition to automated refund information, Tele-Tax
provides recorded information on about 150 tax topics.
8 Progress in Developing the Customer Communications
Project Has Been Made, But Risks to Timely Deployment in 2001 Still
Exist, TIGTA, Reference No. 2001-20-055, Mar. 12, 2001.
9 IRS requested and Congress established a multiyear
systems modernization account and funded it with about $578 million via
IRS' fiscal years 1998, 1999, and 2001 appropriation acts. To date, IRS
has received approval from Congress to obligate about $450 million from
the account.
10 Tax Systems Modernization: Management and Technical
Weaknesses Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-
95-156, July 26, 1995).
11 Tax Systems Modernization: Results of Review of IRS'
Third Expenditure Plan (GAO-01-227, Jan. 22, 2001).
12 See, for example, IRS' Custodial Accounting Project
(GAO-01-444R, Mar. 16, 2001) and GAO-01-227, Jan. 22, 2001.
13 The Custodial Accounting Project is expected to
provide a single data repository of taxpayer accounts and tax payments
as well as related tax revenue accounting and reporting capabilities.
IRS also plans for this project to, among other things, automatically
reconcile accounts and payments, post updates to IRS' general ledger,
and produce revenue accounting reports.
14 This project is the common integrated infrastructure
to support and enable modernization business systems applications. As
designed, it consists of a combination of custom and commercial off-
the-shelf software, hardware, and security solutions, integrated to
form the technical foundation upon which modernized business systems
applications will operate.
15 GAO-01-306.
16 Accreditation is the formal authorization for system
operation and is usually supported by certification of the system's
security safeguards, including its management, operational, and
technical controls. Certification is a formal review and test of a
system's security safeguards to determine whether or not they meet
security needs and applicable requirements.
Chairman Houghton. Thanks very much. Well, Mr. Williams,
based on what you said, do you think the 2001 filing season was
successful?
Mr. Williams. I am sorry, Mr. Chairman.
Chairman Houghton. Based on the information you have given
me, do you think the 2001 filing season was successful?
Mr. Williams. Yes, generally I think it has been a
successful filing season. The numbers are up. I think IRS has
met the goals. The 1040 are being processed in a timely
fashion, so far as we know.
We have some concerns with regard to enforcement and
customer service, but the filing season itself we felt good
about the IRS' performance.
Chairman Houghton. OK. The accuracy of the tax law
questions when TIGTA called the IRS telephone assistance line
was less than 50 percent. And these questions came from the IRS
list of frequently asked questions. What are we goingto do to
solve this problem?
Mr. Williams. The modernization that is moving in our
direction we feel very good about. We think that it is very
difficult to train low-paid and seasonal workers to answer
complex tax law questions. The modernization will bring to them
automated tools that will both allow the account to be
accessible in a way that has accurate and current information,
and it will provide the answers to the kinds of questions that
are posed by taxpayers. So we feel that that is certainly part
of the solution.
The IRS is moving, although we are not very comfortable
with the pace, with regard to simplifying notices and working
on forms to simplify those as well. There are taxpayer
education programs and programs for preparers that we think
will be very helpful, too. And then the IRS needs to continue
advising you of efforts to simplify the taxpayer burden with
regard to legislation. You asked IRS to begin that, and they
have given you the first few products. We need to aggressively
continue letting you know where IRS just can't get the job done
in terms of explaining to the customers.
Chairman Houghton. All right. Thank you. Now, very briefly,
Mr. White, you talked about the security issue. Has the GAO
been able to test the new security measures?
Mr. White. Mr. Chairman, let me bring up Mr. Dacey. He is
the Director of Information Security Issues at GAO.
Mr. Dacey. Mr. Chairman, no, we have not. We plan to do
that as our normal follow-up process.
Chairman Houghton. When will that be?
Mr. Dacey. That will be some time this late summer or fall.
Chairman Houghton. All right. And when you do that, will
you report to the Committee? Will you report to the
Commissioner? What will you do with that information?
Mr. Dacey. When we finish that, we will go through our
normal process of reporting that out in our reports.
Chairman Houghton. Well, I would be interested--I don't
know if the rest of the panel would--in getting that
information. If you could pass it along to us, it would be
appreciated. Mr. Coyne, would you like to ask questions?
Mr. Coyne. Thank you, Mr. Chairman.
Mr. Williams, I wonder if you could outline for us what
portions of your funding, the IG's funding, and staffing are
allocated to the following compartments: systemic problems at
the IRS as one category; complaints about high-level IRS
employee actions; and, number three, fraud and abuse in the tax
system itself. Are you able to break down what your commitments
are to those?
Mr. Williams. Yes, sir, I am. We have about 1,000 people,
and our funding, of course, is largely in support of those
efforts.
With regard to attacking the systemic problems and the root
causes for issues that come forward and trying to make
recommendations for those, we have about 375 of our FTE
dedicated to that. They produce about 160 reports a year.
With regard to our fraud efforts, of the 1,000 we have
about 475 of our FTE dedicated toward attacking fraud and
abuse. They conduct about 4,000 investigations a year.
With regard to complaints and allegations that we have
regarding our GS-15s and SES'ers and Presidential appointment
level personnel, we have about 8 percent of our resources on
that, and we manage about 540 complaints annually. That has
been the history of our short existence in the first 2 years.
Mr. Coyne. So the last one you put in percentage terms
instead of employee terms? Eight percent, did you say?
Mr. Williams. Yes, sir.
Mr. Coyne. Eight percent of the personnel?
Mr. Williams. Yes. Our investigators--8 percent. Our
investigators manage that, and within their case inventory are
a mixture of general kinds of investigations and high-level
investigations.
Mr. Coyne. All right. Thank you.
Chairman Houghton. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman. I have a couple of
questions.
In your testimony, Mr. White--I had to figure out who was
writing this--you talk about the folks that are actually giving
this information, either the telephone--and the problems that
have caused. Can you give me who this person might be, what
kind of background, what kind of training, what kind of
training goes into this person? Because I noticed here it said
that in some cases they couldn't even get the 6 weeks' training
that was necessary. I need to know a little bit about who this
person is that may be answering these questions.
Mr. White. Yes, there are different kinds of assistance
there. The IRS has about 10,000 telephone assistors, and then I
think the type of assistance you are referring to there is the
walk-in assistance. A lot of those people are moved over from
other spots in IRS, and they are now taxpayer resolution
representatives.
Mrs. Thurman. So they have some background in the law, they
have----
Mr. White. They have some background, but IRS has also
recognized that there are training needs associated with these
people. They need a fairly broad-based knowledge of IRS and IRS
processes in order to deal effectively with taxpayer problems.
And so far what we have found is in standing up these new
positions and filling these new positions, while they have been
trying to meet training needs, there still are unmet training
needs there.
Mrs. Thurman. So maybe one of the recommendations is to
make sure before we put them out, they are on the frontline or
answering phones or whatever, that they should be given some
kind of training before we let that happen? Because the next
follow-up question I have, especially based on some of the
issues that we have heard from other folks, either the
Taxpayer's Advocate and/or the Commissioner, I mean, if I am a
taxpayer and I call these lines or I go in for this assistance,
I mean, I am assuming that the information that I am getting
back is correct. And I make a determination based on that
information on how I might file. And if my filing is not
correct or the information I was given was incorrect, and I
don't meet--and all of a sudden I get audited or there is a
penalty or whatever, I mean, how do we correct that part for
the taxpayer who actually may end up getting the wrong
information and they end up having to pay the penalties?
Mr. White. Part of the correction there is the
responsibility of middle-level managers at IRS, and in order to
better manage that program, they need, first of all,
information, about what performance actually is, and then they
need to do the kinds of studies to be able to link IRS'
training efforts, for example, to the quality of answers. Are
assistors getting the right kind of training so that they can
give better answers? And that requires an in-depth evaluation
of the performance data to make those kinds of linkages. It is
not easy to do, but that is the responsibility of middle-level
management.
Mrs. Thurman. But are you seeing that happening now?
Mr. White. We see continued needs for that kind of
evaluation. With respect to telephone assistance, for example,
we are issuing a report to this Subcommittee later this week
where we recommend that the Commissioner ensure that exactly
those kinds of performance evaluations are done.
Mrs. Thurman. I just had a situation in my office where
somebody was given some information of not to pay by a tax
preparer. I don't know where they got this information if they
didn't have this final piece of paper that tells them what the
valuation of their property was. So for 4 years, they didn't
pay anything. All of a sudden now they are sitting here with,
you know, $100,000 worth of penalties anddidn't even include,
you know, what their estate tax would have been. And these folks are
making $14,000 a year. Needless to say, they are in a real bind.
But it just strikes me that if we are giving wrong
information and--I mean, you know, where do we go to make this
work? I don't know. And how do we make sure that the taxpayer
is not getting the penalty for an answer that was given
incorrectly?
Mr. White. It is a good question. Again, I think part of
the response there is that better information systems are
needed at IRS. They need to be able to track those kinds of
cases. They need to have the data on how many cases are taking
that long to resolve. And then with that kind of data, they can
do the sort of analysis to try to figure out what the causes
are, and with that information then presumably managers could
take informed action to fix the problems.
Mrs. Thurman. So then based on what, I guess, some of us on
this side have asked about with this next budget coming up, is
there a number, I mean, based on what has been submitted and--I
mean, have you all looked at what the cost of doing this would
be? And when we make a recommendation to, you know, the
appropriators to make sure that this is covered, is there a
magical number out there that makes this work?
Mr. White. I don't think there is a magical number for the
sort of evaluation of performance that we are talking about.
There clearly is a cost to doing those kinds of evaluations. So
it is a management----
Mrs. Thurman. And then the training.
Mr. White. Yes. There is a cost there as well, and
ultimately it is a management judgment that has to be made by
higher-level management at IRS about how much of this is worth
doing.
Mrs. Thurman. I will be interested to see the budget to see
if it reflects some of the issues that you have raised here
today as far as training and personnel and what we are doing.
So I hope we will have an opportunity to look at that when it
comes in.
Chairman Houghton. Thanks very much. Gentlemen, we
appreciate your being here with us. I would like to call the
next panel: Mark Ernst, president and chief executive officer
of H&R Block, who comes from Kansas City; and Claudia Hill,
Chair of the Government Relations Committee, the National
Association of Enrolled Agents, from Cupertino, California.
Mr. Ernst, delighted to have you here with us. Would you
like to testify?
STATEMENT OF MARK A. ERNST, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, H&R BLOCK, KANSAS CITY, MISSOURI
Mr. Ernst. Thank you, Mr. Chairman, Members of the
Subcommittee, and thanks for inviting us.
As you know, Mr. Chairman, H&R Block prepares about one in
seven individual income tax returns--over 16 million, which
works out to about 37,000 per congressional district. We serve
clients at 9,000 offices in the United States, and we publish
Kiplinger TaxCut software as well as offer online tax
preparation and electronic filing.
We are reshaping the company to also offer clients
financial planning, mortgages, savings and investment products,
so they can combine tax compliance with an annual financial
checkup. And to expand our business services, we have built a
national accounting practice anchored by RSM McGladrey.
My comments this afternoon can be boiled down to four
points:
First, the filing season has gone very well, but not
without some problems. We want to highlight three and hope to
work with the IRS to fix them.
Second, because we are likely to fall short of the 2007
electronic filing goal set by Congress in 1998, we urge
elevated efforts by the IRS and tax professionals, and we
recommend a more dramatic incentive to taxpayers in the form of
a 3-year refundable credit to accelerate electronic filing.
Third, IRS reform is progressing well, and we are impressed
by Commissioner Rossotti's success. To maintain that momentum,
we hope that Congress will follow the recommendation of the IRS
Oversight Board to ensure adequate funding.
And, fourth, IRS can operate more effectively if it enlists
more help from its external stakeholders.
First, on the filing season, although the season does not
end for another 13 exciting days, we have enough information to
report that it has been successful. Our experience in working
with the IRS has been very positive. The e-file system has
worked well across all service centers, and we have experienced
very little down time.
As of March 15th, our return preparation is up
approximately 2 percent and electronic filing is up about 8
percent. Over 87 percent of our returns are electronically
filed. Electronic filing through our TaxCut software and Web-
based tax preparation is up 58 percent over last year.
But every season has glitches. Three from this year are
particularly noteworthy.
First, the IRS needs to aggressively enforce its new rules
requiring tax practitioners to use a client's W-2 in order to
e-file.
Enforcement delays this year gave unfair competitive
advantages to firms that improperly used pay stubs or leave-
and-earnings statements to prepare substitute W-2s.
Despite warnings that this might occur, the IRS response
was too little and too late. More needs to be done next year so
compliant taxpayers and practitioners won't be hurt.
Second, the IRS needs to improve the debt indicator.
When the debt indicator works, taxpayers learn whether any
delinquent State or Federal taxes, student loans, or child
support payments will be offset against their refunds. The
program helps taxpayers by making them aware of problems they
need to resolve. It helps tax preparers and lenders by
clarifying risk, which helps lower the cost of refund
anticipation loans. And it helps the IRS by increasing
electronic filing and improving compliance.
But when errors occur, as they did this year when all
Social Security numbers were not included in IRS offset screens
until February 1st, all suffer. The firms participating in this
year's DI test incurred significant losses, which eventually
get passed through as higher fees or discourage electronic
filing.
We look forward to working with the IRS to make the DI
program run more effectively when it is renewed, as we hope it
will be, in 2002.
The third glitch involves difficulties using PINs in place
of paper signature documents to authenticate electronic filing.
The PIN program needs to be redesigned because the reject
rate caused by taxpayer-provided information that doesn't match
data in IRS computers is unacceptably high. The reject rate
this year for self-prepared returns, using software or online
applications, has been 20 percent compared to a normal reject
rate of 12 to 13 percent. Almost all the difference is related
to PIN rejects.
Whether this occurs because taxpayers or tax practitioners
enter the wrong data or because the IRS has wrong data in its
computers, the program is in trouble if e-filers using a PIN
have a greater likelihood that their returns will be rejected.
Second, on electronic filing generally, we need to face the
fact that 3 years after Congress set twin goals of
electronically filing all computer-prepared returns by 2002 and
electronically filing 80 percent of all tax and information
returns by 2007, projections are that America will not meet
these targets.
The IRS and practitioners must redouble our efforts to
convert paper filers. We need more promotion and marketing,
more cooperation from CPA firms, a more workable PIN program,
and friendlier standards to encourage more professionals to
enlist as authorized e-filers.
But because the present arsenal of incentives may not be
adequate, we recommend a more dramatic jump-start, which is the
enactment of a $10 to $15 refundable tax credit for a limited
period of time for taxpayers who choose electronic filing.
Third, on the budget for 2002, we are concerned about
reports that the administration may not endorse the IRS
Oversight Board's recommended budget, especially the personnel
and technology initiatives.
We believe the IRS should have the funds it needs to do its
job. Too much is at stake to shortchange computer updates or
risk breakdowns, especially when Congress is about to add new
provisions to the tax code.
And, finally, on working with the IRS, we continue to find
a welcome spirit of partnership. The new national accounts
manager system works well. We get excellent help in solving
problems, and IRS staff, especially in the Electronic Tax
Administration area, are responsive and diligent.
Mr. Chairman, we look forward to working with the
Subcommittee to ensure that for most Americans the tax-filing
experience is, if not enjoyable, at least tolerable. We
appreciate the chance to be here today and welcome your
questions.
[The prepared statement of Mr. Ernst follows:]
Statement of Mark A. Ernst, President and Chief Executive Officer, H&R
Block, Kansas City, Missouri
Mr. Chairman and Members of the Subcommittee:
I'm Mark Ernst, President and Chief Executive Officer of H&R Block.
We appreciate the opportunity to discuss the 2001 tax filing season.
With me is Robert Weinberger, our Vice President for Government
Relations.
About H&R Block. H&R Block, founded in 1955 and headquartered in
Kansas City, is America's largest tax return preparation company. Over
175,000 individuals take our tax training courses annually. With more
than 9,000 U.S. offices, we handled over 16 million individual returns
in 2000, which is one in seven received by the IRS and about 37,000 per
Congressional district. We are leaders in electronic filing,
originating over half the practitioner e-filed returns that the IRS
receives. We publish Kiplinger TaxCut tax preparation
software, which has over 1.6 million users, and we author the annual
``H&R Block Income Tax Guide.'' Internationally, we prepare tax returns
at over 1,200 offices in Canada, Australia, and the United Kingdom.
In the past several years, we have reshaped the company to offer
our clients--many of whom view a stop at H&R Block as an annual
financial check-up--more than tax services. We also offer financial
planning, mortgages, and savings and investment products. And to expand
our business services, we have built a national accounting practice
anchored by RSM McGladrey.
Filing Season News. We're offering a number of innovations this
year to make online tax preparation and e-filing more appealing. In
addition to our online program for do-it-yourself tax filers, we offer
``Electronic Refund Advances'' that allow online e-filers to get a
loan in the amount of their refund in as little as 24 hours. Our
``Professional Review'' allows taxpayers who use our do-it-yourself
program to have an experienced H&R Block tax professional review, sign,
and guarantee their return. ``Ask a Tax Advisor'' enables any taxpayer
to connect with a Block tax professional by phone, e-mail, or online
chat for immediate answers to specific tax questions. And our new
``Professional Tax Service'' allows customers to enter their tax
information in our online tax organizer and then send it to an H&R
Block tax professional, who will prepare, sign, and guarantee the
taxpayer's federal and state return.
We're also aiding clients with ``Express IRAs'' to convert refunds
in a tax-advantaged way into retirement savings. And this year, in
cooperation with the U.S. Department of Health and Human Services, we
advised clients of their potential eligibility for free or low-cost
state children's health insurance programs (SCHIP) and how to get more
information. We've been told that calls to the ``Insure Kids Now'' 800-
number in January-February tripled over last year.
We continue to emphasize the multiple benefits of e-filing while
reducing cost as a possible barrier. This year, we did not charge
additional fees for e-filing in 80% of our offices, we participated in
the IRS's PIN, DI, and Web hyperlink programs, we distributed 500 IRS
public service announcements promoting e-filing to local TV stations
with whom we place our ads, and we offered additional services to
online and software clients that created value-added incentives to e-
file--and that suggest a future in which combinations of new technology
and traditional service will enable customers to be served when, where,
and how they choose.
Filing Season Results. Although the main 2001 tax filing season
does not end for 13 exciting days, we have enough information to report
that it has generally been successful. Our own experience in working
with the Service has been very positive. The e-file system has worked
very well this year across five service centers. We experienced very
little IRS down-time as compared to previous years.
Our return preparation as of February 28 is up 2.4%, and e-filing
is up 7.8%, as nearly 90% of our returns are e-filed. E-filing through
our Kiplinger TaxCut software and Web-based tax preparation
is up about 60% over last year.
Filing Season Problems. Given the range of disruptions that might
occur, we count ourselves lucky when things go so well. That said, we
believe more can be done to make the next filing season even better. No
system that processes 1.2 billion tax and information returns, issues
97 million refunds, answers over 100 million assistance calls, and
collects almost $2 trillion annually--much of it in a 105-day filing
season--will ever be error-free. Let me identify three glitches in an
otherwise good season--in shorthand LES, DI, and PIN:
LES/W-2 Requirements: Under new IRS rules, tax preparers need a
client's W-2 form before electronically filing his taxes. Some
firms, however, improperly use pay stubs or leave and earnings
statements (LES) to prepare substitute W-2s. Their clients file
earlier and get refunds sooner, which is a competitive
advantage over firms that comply with the rules. We alerted the
IRS to the potential for this problem prior to tax season. We
hoped that swift enforcement would address it.
Delays, however, blunted any impact until after February 16,
following the early peak of the filing season, costing many
honest firms tax business and income. One of our company-owned
districts near a military base in North Carolina, for example,
saw business plummet by nearly 50% during what should have been
our busiest time of the season. If the IRS expects firms to
follow the rules, it must enforce the law against those who do
not. The IRS was ill-prepared to deal with violators, despite
advance warnings, and when it acted it did too little, too
late. More needs to be done for next year.
Debt Indicator (DI): This is the second year of a test of a
Debt Indicator in which, at the taxpayer's instruction, IRS and
the Financial Management Service electronically signal the
representatives of taxpayers who use bank products (like refund
anticipation loans) if offsetting obligations (delinquent
federal or state taxes, student loans, or child support
payments) will reduce refunds. The information helps taxpayers
and enables lenders to avoid making loans for which they will
not be repaid which, in turn, enables them to pass reduced
costs through to clients in the form of lower fees charged.
Last year, the program worked fairly well although there were
some problems. In anticipation of the DI, the provider of bank
products for H&R Block led the industry in lowering fees. For
taxpayers, the private sector and the IRS, it should have been
a ``win-win'' with e-filing up, bank fees down, and compliance
improved. But IRS didn't get the DI working properly until well
into the tax season.
This year, again, there were problems. Social Security
numbers ending in 00 to 32 were not included in IRS offset
screens until February 1. Returns reported as having no offset
had offsets taken when refunds were processed. The result was
unhappy taxpayers and significant losses for participating
firms.
When it works well, the DI program benefits taxpayers, tax
preparers, lenders, and the IRS. Unfortunately, when errors
occur, all suffer. We believe the program is worth continuing
and look forward to working with the IRS to ensure better
execution.
One use of a DI--supporting RAL transactions--may decline as
the IRS fulfills its strategic plan to speed refunds to all e-
filers within 48-72 hours. We welcome faster refunds as a solid
plus for taxpayers, a strong incentive to e-filing, and a
showpiece of IRS's computer modernization program. But if the
IRS wants to win taxpayer confidence in electronic
notifications and two-way e-transactions--both e-filing and e-
responses--it must make its responses reliable so taxpayers are
not confused.
PINs. Practitioners welcomed the IRS allowing
taxpayers to use a self-selected personal identification
numbers (PIN) in place of paper form 8453 that is otherwise
required to be sent by mail with a signature to authenticate an
e-filed return. To obtain a PIN, the taxpayer must provide his
correct name, SSN, date of birth (now required only for on-line
filers), AGI, and total tax from last year's return.
This year, thousands of PIN applications submitted with
correct ``shared secrets'' information were rejected, costing
tax professionals time and income as they worked to correct the
rejects, and angering many customers who anticipated easier
filing and faster refunds. Some preparers abandoned the program
as it became easier to use the paper 8453 form instead of
having to deal with a PIN reject and asking the client to
return to file an 8453.
Under the online e-filing program, for self-prepared returns
using software or online applications, the reject rate this
year has been about 20% compared to our normal e-file rejection
rate for TaxCut and online customers of about 12-13%.
Almost all of the difference is attributable to PIN rejects.
One problem is that IRS records are sometimes wrong. As a
result, a taxpayer may enter the correct AGI and total tax but
the IRS system says it's wrong. IRS also has potential errors
in its records of citizenship, marriages, decedents, and name,
SSN, and DOB as received from the Social Security
Administration.
The IRS believes the majority of PIN rejects are caused by
customer error. But whether the problem is with the
practitioner, the taxpayer, or the IRS, one fact remains: If
you e-file using a PIN, your return is more likely to be
rejected. We hope to work with the IRS to solve this problem so
that filers won't abandon PINs and e-filing in frustration next
year.
If PINs, intended to make e-filing easier, make it harder,
more complex, more expensive, and less satisfying, the entire
e-filing program will be endangered. We look forward to helping
the IRS find error-free, non-paper, simple signature
authenticators that work to encourage, not discourage, e-
filing.
In highlighting these points, we don't want to detract from the
larger conclusion that the filing season is going well and IRS's
overall record is good. We hope to work with the IRS to mend these
problems next year.
IRS Reform. In the last year, the IRS's four new divisions ``stood
up,'' a landmark in continuing reform, and the IRS Oversight Board
began its work. Commissioner Rossotti has continued impressive
initiatives to improve the agency's performance, modernize technology,
and improve customer service. We think he's doing a great job.
Electronic Filing Shortfall. The IRS has increased its e-filing
promotion to achieve Congress' twin goals of e-filing all computer-
prepared returns by 2002 and e-filing 80% of all tax and information
returns by 2007. But the early numbers this year are slightly below IRS
projections and the projections are that the targets will not be met
unless more Americans overcome apprehensions and more practitioners
enlist.
Our suggested priorities, many already a part of the IRS strategy,
remain: (1) a continuing focus on private-sector cooperation, through
the Electronic Tax Administration Advisory Committee, through
industry's Council on Electronic Revenue Communication Advancement
(CERCA), and especially with accounting firms who will soon be able to
e-file all forms and attachments; (2) expanding IRS's already-strong
marketing and promotion; (3) universal PINs to enable paperless
filing--if the information needed to validate the PIN does not itself
become a hurdle and if IRS rejects are not so numerous as to make the
PIN counterproductive; (4) streamlining the application process to make
it easier for tax practitioners to become Electronic Return Originators
(EROs) and easing suspension rules for EROs--high ERO application
standards and stringent suspension rules are barriers that deter
participation in the program; and (5) continued reform of old rules for
the e-filing program.
E-Filing Jump Start. Despite our optimism and support, we may face
the uncomfortable reality that for many Americans, the incentives to e-
file--beyond a faster refund--are simply not compelling. Before
reaching that conclusion, we believe both the IRS and tax professionals
can try harder to persuade taxpayers of the benefits of e-filing. And
Congress can help.
We recommend a three year refundable tax credit of $10-25 to
encourage e-filing and to provide the dramatic pull needed to convert
more American taxpayers and enable the IRS to meet your goals for 2002
and 2007.
The IRS Restructuring and Reform Act of 1998 allows IRS to pay
``appropriate incentives,'' and the Clinton Administration last year
proposed a $10 tax credit for those who e-filed in 2002-6. We prefer
incentives that go to taxpayers, not to e-file originators or
transmitters.
Complexity. In three of the last five years, we sent the Ways &
Means Committee, the Senate Finance Committee, the Treasury, and the
IRS ten modest suggestions for Tax Code simplification, several of
which have now been enacted. We look forward to working with you on
your efforts to simplify the tax law, especially as it affects average
American families.
Check Box. This year, the IRS allows taxpayers to check a box to
allow their tax preparer to be contacted by the IRS for additional
information. The idea is good but it only authorizes contact with tax
preparers, not tax preparation companies. We recommend modifying the
program to allow us to help clients with in-office personnel rather
than bring back the actual tax preparer since we have both seasonal and
year-round tax preparers.
IRS Liaison. This year, the IRS installed an accounts manager
system for its largest external customers to serve as our ombudsman in
solving various problems. The program has worked well and it deserves
high marks. We found other IRS staff responsive and diligent,
especially in the area of electronic tax administration.
Most IRS interaction with practitioner groups comes through formal
advisory committees or public liaison meetings. Outreach and
information sharing have increased. Status reports and briefings are
excellent.
As a large customer, we also work directly with senior IRS
officials to manage an ongoing agenda. We are often an early-warning
system for the IRS, spotting problems before they generally appear. We
hope to expand our contacts to improve cooperation, reduce bumps in the
next filing season, and participate in the IRS's planning process. The
problems that inevitably occur each filing season, especially as new
programs are implemented, can be reduced if private-sector partners
have a greater opportunity to discuss ideas in the planning stage to
identify issues and share perspectives.
FY 2002 Budget. While the President will not submit his detailed
IRS budget until April 9, early reports indicate that the
Administration will not support the full $10.26 billion recommended by
the IRS Oversight Board. Plans to hire 4,000 new employees would be
trimmed by 1,400 and a $1 billion fund for two years of technology
modernization would be cut to $400 million.
We strongly support the agency receiving the funds it needs to do
its job, especially in modernizing outdated technology, so that the
risk of any system breakdown is reduced. IRS reform and restructuring
requires dependable financial support to enable the agency to fulfill
its strategic plans for better customer service, faster return
processing, more effective law enforcement, and modernized technology.
Conclusion. Mr. Chairman, there are many other areas I could
comment on, and I will be happy to respond to your questions. We look
forward to working with the Subcommittee to ensure that for most
Americans the tax filing experience is, if not enjoyable, at least
tolerable. We are working to ensure that lessons from this tax season
will help us all achieve smoother filing next year, with refunds issued
promptly, and with the IRS continuing on the path of reform.
Chairman Houghton. Thanks very much. Ms. Hill.
STATEMENT OF CLAUDIA HILL, CHAIR, GOVERNMENT RELATIONS
COMMITTEE, NATIONAL ASSOCIATION OF ENROLLED AGENTS, CUPERTINO,
CALIFORNIA
Ms. Hill. Mr. Chairman, members, my name is Claudia Hill--
--
Chairman Houghton. Would you put the microphone on?
Ms. Hill. OK. Thank you. Mr. Chairman, members, and staff,
my name is Claudia Hill, and I am an enrolled agent from
Cupertino, California, in private practice. I work primarily
with individuals, small business, and I am an electronic
filer--some. Some.
On behalf of my more than 10,000 enrolled agent colleagues
in the National Association of Enrolled Agents, I would like to
express my appreciation for our ability to present testimony at
this hearing today and to express my appreciation for your
interest in hearing what the taxpayers have to say about
dealing with the filing season.
I have several comments. The first one has to do with the
IRS budget. Over the last decade, the IRS has been asked to do
more with fewer resources. While theoverall budget has grown in
recent years, by many measurements it has declined. At the same time,
Congress has demanded and the Commissioner has delivered a greater
emphasis on taxpayer service. While much of the technology
infrastructure for a modern accounts management system has yet to be
delivered, our members report that IRS is generally doing a more
professional job of handling case management issues and general tax
questions from taxpayers.
Unfortunately, we have also witnessed a corresponding
decline in service at the audit and collection levels.
Experienced IRS employees in these areas have been reassigned
to cover the phones and help with tax returns during filing
season. It is our belief that adequate resources for the IRS
make a difference in the public satisfaction with the IRS
specifically and the Federal government in general. We also
believe it is essential that IRS be given adequate resources to
maintain an enforcement presence.
Taxpayers need to know that there is a consequence to non-
compliance. When audit collection efforts are reduced as
greatly as they have been in recent years, it sends an
ambiguous message about our voluntary tax system. Some people
start thinking the system really is voluntary. As a front-line
practitioner, we then must deal with taxpayers who want to play
audit roulette or engage in illegal tax schemes.
As to modernization, this is the first filing season since
the IRS completed its business restructuring in an effort to
organize around its customers. NAEA members are beginning to
see some positive returns. Access to information has been
dramatically enhanced with the continued improvement of the IRS
Web site. The new small business self-employed Web site is a
marvel of accessibility and usability. The new criminal
investigations site gives practitioners a resource to point to
when we find taxpayers who don't believe the IRS is using
compliance resources to fight abusive trust and employment tax
avoidance schemes. More forms are capable of being filed
electronically than ever before, and access to forms and
information on the Web is available through public libraries,
through home computers. It has been a great, a very good
improvement.
The communications and public liaison efforts of the IRS
have been greatly enhanced to inform and advise the public on a
broad range of issues, and partnerships between the IRS and the
public on a broad range of association needs, taxpayer needs
are developing and longstanding issues are being resolved in a
timely and cost-effective manner.
The ability of the agency to collect more accurate data
more efficiently and then to be able to use that better data
will help taxpayers deal with the Service and practitioners
deal with the taxpayers and the IRS. We look forward to the day
when we can resolve problems online, when we can use
information that we have gathered electronically and
communicate with the IRS electronically. Our message to
Congress is to stay the course with these investments in
technology and insistence with customer service, make sure the
IRS and its partners deliver benefits to taxpayers and
practitioners on schedule.
Every year we survey our members on the problems of the
filing season, and the number one response we get from our
members is tax law complexity. We then ask our members to
choose the most complex item in the Internal Revenue Code. We
have dubbed their selection ``the tax headache of the year.''
For the second time in 2 years, the overwhelming response has
been the individual alternative minimum tax. It is affecting
more of our population, including senior citizens, farm
families, middle-income taxpayers, U.S. taxpayers living and
working overseas, employees expected to bear the majority of
their own employment-related expenses, and workers with
incentive stock options.
Now, how can one type area of the tax code affect such a
wide variety of taxpayers? Because in the last 15 years, the
regular tax system has been changed, rearranged, and indexed,
without attention to the AMT system running silently beneath
it. Unfortunately, as the economy has changed, more taxpayers
have found themselves pulled into an AMT trap. Quick examples
of people that are affected this year, which you may have seen
in some of the media:
A senior citizen who had to take money out of a pension
plan to pay for medical expenses to care for his wife with
Alzheimer's. He found himself in AMT because the AMT does not
allow a complete deduction for medical expenses as the regular
tax system does, nor does it allow the deduction for his
property taxes or his State income taxes.
We saw taxpayer farmers affected. A few years ago, Congress
saw the need to help balance out their income when they have
volatile income from year to year by offering what is called a
3-year special income averaging. Unfortunately, there was no
provision when income averaging using that method dipped below
the AMT to allow the benefit. The taxpayer pays the AMT.
U.S. citizens residing outside our country who are
encouraged to file in the U.S. and use the credits for foreign
taxes paid are allowed to offset 100 percent of their regular
tax but not all of their alternative minimum tax. In essence,
they are double taxed.
Chairman Houghton. Ms. Hill, could I just interrupt just a
minute? Your time has expired, so if you could wind up your
testimony as fast as possible, I would appreciate it. Thank
you.
Ms. Hill. OK. We have seen numerous issues on this. I will
just name two other complexity issues and then be available for
questions.
More complexity having to do with phase-outs and the earned
income credit. There are over 20 commonly encountered aspects
of individual returns that require phase-outs. These add
complexity and they give a perception of unfairness with the
law. When it comes to the EIC, the fraud in this program is
anembarrassment to practitioners, the public, to Congress, and the IRS.
We believe that this might be addressed by dealing with
whether or not there should be regulation of all commercial
preparers, at least registration of them, as is done with the
electronic return originator program.
That concludes my testimony, and I would be happy to answer
any questions.
[The prepared statement of Ms. Hill follows:]
Statement of Claudia Hill, Chair, Government Relations Committee,
National Association of Enrolled Agents, Cupertino, California
I am honored Mr. Chairman to present this testimony on behalf of
the National Association of Enrolled Agents (NAEA). There are
approximately 35,000 Enrolled Agents, more than 10,000 of whom are
members of our organization. Enrolled Agents represent over 5 million
taxpayers and small businesses at all administrative levels of the IRS,
including tax preparation. In order to be enrolled before the
Department of Treasury, a practitioner must pass a detailed exam
covering the administrative procedures and practical tax laws affecting
real people and small businesses, or have significant experience
working at the IRS. In addition to demonstrating ongoing competency
each year through continuing education requirements, our members must
undergo a thorough background check and abide by a strong code of
conduct. Our members are proud to be the federal tax code specialists.
The Subcommittee has asked us to comment on the state of the filing
season, and we are happy to report that from the perspective of
frontline practitioners the state of the filing season is generally
good. The IRS seems to be providing a basic level of service to more
taxpayers with generally fewer resources at the same time that they
manage annual tax code changes. They seem to be making progress with
their strategic initiatives such as 80 percent electronic filing and
business organization restructuring, while technology modernization has
yet to materialize in terms of deliverables to taxpayers or frontline
IRS employees. On the other hand, as there are in any undertakings as
complex as filing season, there are some problems.
Before I touch on a number of specific problems our members have
discovered with the current filing season, I would like to discuss a
number of issues that affect the job IRS is doing with the filing
season and with taxpayers service and compliance in general.
Resources
Over the last decade, the IRS has been asked to do more with fewer
resources. While the overall budget for the agency has grown in recent
years, by many measurements it has declined.
First of all, the number of full time employees available to handle
the workload for more taxpayers and more transactions has gone down
over the last 10 years. At the same time, Congress has demanded and the
Commissioner has delivered a greater emphasis on taxpayer service.
While much of the technology infrastructure for a modern accounts
management system is yet to be delivered, the IRS is generally doing a
more professional job of handling case management issues and general
tax questions from taxpayers. For example, our members continue to
experience helpful and knowledgeable IRS employees. Generally, we have
seen a strong positive change in attitude with employees at the agency.
Unfortunately, we also have witnessed a corresponding decline in
service at the audit and collection functions. Experienced IRS
employees in these areas are being reassigned to ``cover the phones''
and help with tax returns during filing season.
While at first glance, audits and collections activities do not
seem to fit into the definition of ``service,'' resources available in
these areas often assure the timely resolution of costly disputes for
middle-income and small business taxpayers. An enrolled agent from
North Carolina recently wrote to us telling of an incident where the
single remaining auditor in Durham has been reassigned temporarily to
customer service and will not be able to complete any ongoing audits
until after April 16th. Without adequate resources, audits, which
should take hours, spread out to days and even weeks. Meanwhile
taxpayers are left with the uncertainty of knowing where they stand
with the IRS. Other relief measures such as offers in compromise and
innocent spouse claims are delayed to the point that many taxpayers are
harmed needlessly.
It is our belief that adequate resources for the IRS make a
difference in the public's satisfaction with the IRS specifically, and
the federal government in general. We also believe it is essential that
IRS be given adequate resources to maintain an enforcement presence.
Honest taxpayers need to know that there are consequences for non-
compliance. When audit and collection efforts are reduced as greatly as
they have been in recent years, it sends an ambiguous message about our
voluntary tax system. Keep in mind, more citizens interact with the IRS
than any other agency of the federal government. Their budget should
reflect this reality.
Modernization
This is the first filing season since the IRS finished its business
reorganization. The purpose behind this complex and expensive
undertaking is to organize the IRS around its customers so that they
can better respond to the needs and track non-compliance of particular
taxpayer groups. NAEA members are beginning to see some positive
returns:
Access to information has been dramatically enhanced
with the continued improvement of the IRS web site. The
incredible number of taxpayers and professionals visiting and
using this site attests to the needs it has met.
The Small Business/Self Employed Web site is a
marvel of accessibility and usefulness. We hope to see it
expanded and that other divisions will embrace this concept of
providing information out where taxpayers and tax practitioners
can access it easily.
More forms are capable of being e-filed than ever
before. We expect 99% of all forms to be capable of being e-
filed by next filing season. Changes in the number of
occurrences in which a form may be e-filed have also had a
positive impact on the ability of taxpayers to e-file.
Two hundred NAEA members are currently working with
the IRS on a secure messaging system pilot program. It has
taken longer than we expected for a variety of reasons, among
them security concerns and the meshing of various computer
systems and software, but this has been a project to which NAEA
has been committed for a long time. It is meeting certain needs
effectively for the practitioner community and we are gratified
with the progress made thus far.
The Communications and Public Liaison effort at IRS
has been greatly enhanced. We are seeing the leveraging of the
information systems of practitioner groups, the small business
community and other business organizations to inform and advise
the public on a broad range of issues. This is smart thinking
and we applaud those who have run counter to the old IRS
culture of ``no comment.''
Partnerships between IRS and professional societies
and trade associations are making it possible for us to develop
solutions to long-standing issues in a timely and cost-
effective manner.
While the business modernization seems to be taking its first
tentative steps toward delivering value to taxpayers, it is clear that
its full promise will not be delivered until the IRS and its
contractors complete the information systems modernization. Our
understanding is that a great deal of the initial planning and
designing stages for the first projects are almost completed, and that
IRS and its private sector partners are about to begin building key
elements of the project. Unfortunately, we have yet to see benefits
delivered in the field.
The ability of the agency to collect more accurate data more
efficiently and then to be able to better manage taxpayer data is key
to the future of the IRS. Taxpayers will see their refunds faster.
Practitioners and individual taxpayer will be able to resolve more
problems with one or two calls instead of dozens. Additionally, the new
system will allow taxpayers and practitioners more options for solving
problems like 800 lines and on-line access and management of accounts.
The IRS will be able to spot non-compliance faster making it cheaper
for both taxpayers and the IRS to resolve these problems. Currently, it
takes the IRS over 18 months to reconcile tax returns with information
from 3rd parties such as W-2 and 1099 information. Modern systems and
business practices should shorten this cycle considerably.
Our message to Congress is stay the course in these investments and
make sure the IRS and its partners begin delivering benefits to
taxpayers on schedule.
Complexity and the ``Tax Headache of the Year''
Every year, we survey our members on problems with the filing
season. Separate from this effort, we ask our members to choose the
most complex item in the Internal Revenue Code. We have dubbed their
selection the ``Tax Headache of the Year.'' For the second time in two
years, the overwhelming response in both cases has been the same--the
individual alternative minimum tax. We believe the message is clear:
Complexity is the number one tax filing season problem.
Why is the AMT the ``Tax Headache of the Year?'' Our members tell
us of increasing numbers of their clients who were blindsided this year
by falling into this insidious alternative tax system. Here are a few
examples:
One of our enrolled agents in Youngstown, Ohio wrote to us to say
how deeply troubled she was to see an elderly client ``clobbered by the
AMT.'' The taxpayer was caring for his wife with Alzheimer's, and had
to withdraw extra pension money to pay medical bills. The AMT
calculation required him to add-back into AMT a portion of his
otherwise deductible medical bills and his state income and property
taxes. This caused the AMT to exceed the regular tax. He didn't think
it was a good alternative!
In my state of California, I find that many middle-income taxpayers
fall unwittingly into the AMT because of the high cost of property
taxes on their homes and equally high state income taxes. When these
taxpayers also happen to be employees who incur ordinary and necessary
business expenses and whose employers either do not reimburse expenses
or use ``not accountable plans,'' they are injured even more, since
those miscellaneous deductions are also added back to the AMT base.
None of these items, normally allowable deductions, are permitted
against AMT.
Our members are reporting that more and more farm families are
being hit with the AMT. Congress saw a need to provide farmers a
special income averaging method a few years ago. Unfortunately, when
that method lowers the regular tax below AMT, the taxpayer loses the
benefits, and must pay the higher AMT.
U.S. taxpayers living outside our country are provided in the law a
means to avoid double taxation through the use of foreign tax credits
(FTC). Once again, AMT undermines the intent of fairness Congress
intended with the credit system, by allowing the FTC to offset no more
than 90% of the AMT while the regular tax can be completely offset. The
taxpayer is injured once again.
Although Congress may be considering an extension allowing use of
non-refundable child and education related credits against AMT, general
business credits still cannot be used against the AMT. In example, for
taxpayers that are affected, the benefits of the low-income housing
credit are not allowed against the AMT--a Code provision that is
essential for providing affordable houses in high-cost states.
With increasing emphasis on equity-based compensation, the use of
employee stock options as part of a worker's compensation package has
become mainstream. Nearly 30 percent of those surveyed as part of the
35th Index of Investor Optimism reported that they or their spouse had
received options at some point in their career. Of this group, 43
percent said options were part of their 2000 compensation and comprised
approximately 11 percent of their total income last year. However,
during this past year a hidden danger of employee stock options became
apparent. When an employee exercises their right to acquire incentive
stock options at a price below the fair market value of the shares on
the date of exercise, the ``virtual income'' (difference in values) is
included in the AMT base but not in the regular tax base. The date of
exercise value sets the preference--regardless of what eventually
happens with the value of the shares if they are not disposed of in the
same calendar year as exercise. If the employee chooses to hold the
stock for the one year period prescribed in the law to obtain capital
gains treatment of the income, they may find themselves expected to pay
taxes on income they never really receive.
There have been many accounts in the media recently of taxpayers
that have been injured by this ``preference'' because of dramatic
volatility in the stock market this past year. We have heard from
taxpayers and their advisors with egregious examples of phantom income
far exceeding any economic benefit the taxpayers will ever receive,
being taxed due to the provisions of the Alternative Minimum Tax
(specifically IRC 55 and 56 and Regs. Sections 1.421 and 1.422). A
taxpayer from San Luis Obispo, CA wrote,
``Ideally, ISOs works for both employer and employee. It
gives the employee an incentive to stay with the company and it
gives the company ways to reward the employee without
increasing salary costs--I exercised the stock options not
realizing that the price of the stock on the day I exercise
will be used to figure out my income WHETHER I ACTUALLY SELL
THE STOCK OR NOT. Now that the value of our stock has been
depressed over 60%, I am being taxed on income that was never
realized and have what is call a PHANTOM INCOME. This made my
effective tax rate to be 290%!''
This certainly was not what Congress intended. We hear of people
mortgaging or selling their homes to pay their year 2000 AMT. Others
are so distraught they fear filing their 2000 tax returns because they
cannot pay the liability. This certainly was not what Congress
intended.
Over three years ago, the National Commission on Restructuring the
IRS found a direct connection between the complexity of the Internal
Revenue Code and the difficulty of tax law administration and taxpayer
frustration. The AMT tops our list of complex provisions, but our
members cited two more that definitely cause problems each filing
season and need your intervention to resolve.
As frontline practitioners, we believe Congress could provide
significant relief and make the job of the IRS easier by making
immediate changes in three areas. First, Congress needs to repeal the
alternative minimum tax for individuals. Second, phase-outs and phase-
ins need to be standardized. And finally, it needs to simplify the
rules for qualifying for the Earned Income Credit.
There are over twenty commonly encountered aspects of individual
returns that require phase-out calculations. To mention a few: limits
for deductible IRA contributions, limitations on the use of education
credits, child credits, elderly credits, personal exemptions, itemized
deductions, passive activity losses and credits. When taxpayers are
told Congress has provided incentives or rate reductions for their
benefit, and realize when they actually file their returns that they
don't ``qualify'' for the benefits, they feel deceived.
Each year the IRS lists the top errors in filed returns. Earned
Income Credit issues make up almost half their list. Our members
concur, and express dismay at the number of taxpayers that come to them
asking for their assistance in ``working the system'' to obtain
benefits to which they are not entitled. Our members don't participate
in such activities. They are held to strict codes of professional
conduct, from our own organization and from the IRS. This is not the
case for the vast number of paid-preparers in this country.
These three changes would provide significant relief to taxpayers,
as well as allow the IRS to free up resources within the agency for
other purposes. In addition to improving tax administration, reducing
taxpayer burden by simplifying the tax laws will lower taxpayer
frustration and improve voluntary compliance.
Finally, we urge you to consider registration of all commercial tax
preparers. This would level the playing field so that return preparers
who submit paper returns are held to the same high standards as
Electronic Return Originators and as Circular 230 practitioners--
Enrolled Agents, CPAs and attorneys.
Electronic Filing and the Current Filing Season
In an effort to make electronic filing ``paperless'' IRS offered a
program that would eliminate the need for taxpayers to send in a
signature document through the use of an electronic signature Personal
Identification Numbers (PIN). The program is not truly ``paperless''
since the practitioners that offer this service must retain a signature
document and copies of the W-2 forms. However, numerous problems have
been experienced this filing season with the PIN. Although most of the
issues could be categorized as related to the start-up of the program,
many of our members have pointed out that the current requirements for
using taxpayer PINs are complicated enough that it is often easier to
have taxpayers sign the form 8453 instead. Additionally, some
practitioners report that as many as 10 percent of their e-filed
returns have been rejected this year because of PIN problems.
A new addition to the individual tax forms this year is the ``check
the box'' limited authorization for paid preparers. We believe this
addition will be beneficial for taxpayers and the IRS as their
telephone assistors become better informed as to the types of inquiries
it is to permit. An important step in streamlining the ability to
resolve issues with the largest account management intensive
organization in the country, the IRS. This leads into the final point I
would like to raise today. Despite the recent reorganization efforts
and technology improvements, and sometime because of them, the IRS
continues to have severe problems with basic account management. Simple
problems with client returns often entails hours or days of senseless
struggle to get the right information to the right person at the
agency. Faxed information is never received. Phone calls go unanswered.
Valuable time is spent on hold waiting to talk to a person at the
agency, who then has difficulties resolving problems quickly for lack
of training and basic technology tools. The IRS is doing better, but it
is a long way from resolving this basic problem first identified by the
National Commission on Restructuring the IRS. Congress needs to stay
the course with adequate resources for technological enhancements and
strong oversight.
I appreciate the Committee giving the National Association of
Enrolled Agents the opportunity to talking about the 2001 filing season
today. Commissioner Rossotti has a tough job and the organization is
generally doing the best it can with the limited resources it has.
Thank you.
Chairman Houghton. Thank you very much, Ms. Hill.
I would like to ask a brief question of Mr. Ernst, so thank
you very much for being here. We have talked a lot about
security. We talked about it with the Commissioner. We talked
about it amongst ourselves. And we know that the e-filed
returns are a tough area to keep secure. How do you keep those
returns secure in your office?
Mr. Ernst. Well, we use a number of different methods to
submit returns, both on the Internet and through our software
products at retail and through our offices. In our office
network, we have differing levels of restricted access and
security controls for individuals who work for us. All returns
go through a private network to a central location that is
secure that we maintain. We do extensive testing of security at
that facility as it aggregates returns from around the country
from our various offices. Annually, we test our online
electronic filing system for what we call ``hacker attacks'' or
by attempting to break into the system ourselves in advance of
the filing season and then on a random basis during the filing
season to ensure that people cannot access our electronic
filing system before or at the point we submit returns to the
IRS filing centers.
In addition to that, we maintain client records in a
central data warehouse for ongoing storage purposes, and from
that we have extensive controls around who within our
organization can even access those records. And we keep it
separate from our e-file system so that people can't get
through our e-file system into those records.
So we have built a fairly elaborate security system around
the return data, both at the point of access initially when we
acquire the data and when it is transmitted to our central
repository before submission to the IRS.
Chairman Houghton. Thanks very much. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Ms. Hill, as you know, too often people who file for the
EIC have their returns completed by practitioners that are paid
filers. It is a very high percentage, I believe 44 percent. And
also too often these filers, when there is a mistake, it
ispointed out that it is fraud and abuse on behalf of the filer, the
taxpayer that causes these mistakes and is not attributable in many
instances to the fact that such an overwhelming number are filed by
practitioners.
Is it your testimony--I think I heard you say that one way
to correct that is to make practitioners register?
Ms. Hill. Well, first of all, a few years ago Congress did
respond to the issue of preparers by having a special penalty
for preparers of the EIC returns for due diligence. I believe
the issue with electronic filing--not electronic filing but
earned income credit has to do with the complexity of the
provisions. There is a built-in incentive in the way that it is
currently structured to falsify one's filing status. We have
numbers of letters from our Members who say that people come
into their office and expect them to play a game where two
people who may be married to each other, at least parents of
children, each want to file as head of household and reap
maximum benefits to the earned income credit, when if they were
filing as married, they would not get the same dollar amount or
possibly not even be entitled to it. So there is a built-in
incentive in the way it is structured to encourage people to
falsify their status.
Now, when someone comes into an office and tells a preparer
here is their position, preparers that are regulated, CPAs and
attorneys and enrolled agents, have a due diligence standard
both to the IRS and to their professions that they cannot
prepare those returns. And our Members complain that they are
injured by the number of other paid preparers who are willing
to do this, because the people leave the office and have it
done somewhere else.
Mr. Coyne. So do you think that there is a way to help out
here by requiring registration beyond what already is required?
Ms. Hill. I believe that if there was a registration
similar to what is used with the electronic return originators,
IRS would have a much quicker access in instances where they
find lack of diligence with preparers. They would be able to
encourage education where currently in most States--there are
only two States that even encourage education of paid
preparers.
Mr. Coyne. Thank you.
Chairman Houghton. Mrs. Thurman.
Mrs. Thurman. Ms. Hill, just maybe to follow up on Mr.
Coyne's question, because you make it sound like a lot of the
earned income tax credit people that are trying to get these
benefits are out here trying to game the system. What do you
think is the real percentage of people trying to do that?
Ms. Hill. I believe there are errors both directions,
really. I believe there are a lot of honest mistakes with
misinterpretations. A major misinterpretation that was
available in January of this year when the preparers were
trying to understand was called the high income and the
household decision as to whether or not--who could take the
child as a dependent and claim the EIC.
I am not convinced that that was adequately resolved. So we
may have returns in the system this year that expect it to not
be available, but they were.
Mrs. Thurman. Mr. Ernst, what is your feeling about this
issue?
Mr. Ernst. Well, I agree. This is a very complicated area
of the law, and, in fact, much of what the IRS now requires in
terms of due diligence has been modeled after the work that we
originated in trying to address this issue at the front lines
of our own system working with clients.
Number one, many households in America do not fit the neat
requirements that the tax law tries to describe. You know,
household formation and deformation occurs with fluidity in
America in a number of these situations. And so the issue often
is not one of people trying to game the system per se, although
that certainly occurs. Often it is about honest differences in
households that don't fit neatly inside of the definitions that
practitioners are asked to help our clients comply with.
Mrs. Thurman. So would you say, then, on the other side of
this, since we don't hear as much about this, the complexity of
some of the tax shelter issues, some of the things that were
brought up in the Wall Street Journal and some of the other
issues, is it the same kind of situation?
Mr. Ernst. I certainly don't think it is a situation where
there is a loophole that practitioners are out helping
taxpayers exploit, which is I think what you allude to. I think
it is more of a situation of who qualifies as the primary
support for a child, which is a key element in determining who
gets to claim that child, and, therefore, who qualifies for the
EITC can change because different family situations and
differences of opinion of who is providing what kind of support
are often dumped on our desks, and we are asked to sort that
out and figure out who qualifies for what kind of credits.
Mrs. Thurman. So there is kind of a difference going on on
the other side.
First of all, let me suggest to you that I thank you for
doing what you have done with the Department of Health and
Human Services on the SCHIP program. I think that is a
wonderful thing that you have done there. We need--Ms. Hill,
you might want to let your folks know about that, because I
think it really was a really good way to get across to low-
income folks that need this program that that is available to
them.
Ms. Hill, I thought your testimony particularly on the AMT
and your--you know, you kind of gave us an outline of several
different people and how they interacted with the AMT. If we
were not able to do anything about the AMT, which is looking
less and less this year in some of these tax bills, some of the
areas that you described--the medical issue and some of those--
if there were something we could do, because certainly these
stories are just really very compelling. Could you give us,
besides the one that you mentioned on the health care, the
gentleman that took money out, where some others areas with AMT
are where you can see some extreme problems that we are facing
that we might be able to help in maybe a separate kind of bill?
And, Mr. Ernst, if you would like to jump in there, too, I
would appreciate it, because I think these examples are
extremely--just kind of pull at your heart when you read this
as compared to what is going on right now in total repeal.
Ms. Hill. A lot of the media coverage right now has to do
with incentive stock options. The taxpayers who did not
understand equity-based compensation, who thought that this was
the best thing in the world, and all of a sudden they find out
later that the amount of value on the day they exercised stock
got to be included in their alternative minimum taxable income,
even though the stock may have little or no value currently. I
don't think the law ever intended this. The concept of the
alternative minimum tax, back when it was restructured in 1986,
had to look at the economic income, and the concept is it
realized or recognized. And when you never realize it, should
it ever be recognized gets to be the issue on this.
I don't know that there is something that can quickly be
done to resolve that. I think to affect the largest number of
people--and I certainly wouldn't want to eliminate equity-based
compensation and incentive stock options from the system. But I
think you can affect the largest number of people by looking at
the benefits of eliminating those Schedule A itemized deduction
type preferences.
For example, medical expenses, people don't do them to
create a tax shelter. Having children and not being able to
take the exemption for your children against alternative
minimum tax, children are not a tax shelter.
So small steps, eliminating the children--putting the
children back into the exemption base for AMTI, allowing the
non-refundable credits to be used, that provision sunsets at
the end of this year. If something isn't done, all the talk of
families who are benefiting from the child credit, the
dependent care credit, will get no benefit at all. They will
see their taxes increase.
Mr. Ernst. You know, we would be happy to offer you a
number of those types of situations that we think could have
the greatest impact at the least amount of cost.
Mrs. Thurman. Mr. Chairman, I noticed in their testimony--
and it is one of the things that I am very concerned about, and
maybe Ms. Hill said it--the credibility that we have, and when
you take something, what you have been promised or what you
believe is out there to be promised, and then to run up against
this, we have a problem in what we are saying to folks at home.
And I think that is a realconcern for some of us, and
especially in some of these situations that I think have been described
today. So we thank you for bringing those to our attention.
Ms. Hill. Thank you.
Chairman Houghton. Well, thanks. Yes, AMT started out as a
beauty queen, and now it has ended up as a monster. Obviously,
this whole wave is coming in, and we have got to be careful.
Any ideas, any thoughts you have on this, because we are
going to be wrestling with this, whether it is this year or
this month or maybe next year, and we have got to have the best
advice you possibly can give.
Ms. Hill. It is insidious. It mutated.
Chairman Houghton. Yes.
Ms. Hill. That is what happened.
Chairman Houghton. Absolutely. Well, thank you very, very
much. We certainly appreciate it.
[Whereupon, at 4:05 p.m., the hearing was adjourned.]
[Submission for the record follows:]
American Institute of Certified Public Accountants,
Washington, DC 20004-1081
April 17, 2001
The Honorable Amo Houghton, Jr.
Chairman
Subcommittee on Oversight
Committee on Ways and Means
1136 Longworth House Office Building
Washington, D.C. 20515
RE: Hearing on the 2001 Filing Season Held on April 3, 2001
Dear Mr. Chairman:
The American Institute of Certified Public Accountants (AICPA)
appreciates the opportunity to submit this letter for inclusion in the
Subcommittee on Oversight's record for the hearing on the 2001 filing
season, held on April 3, 2001.
The AICPA is the national, professional organization of certified
public accountants comprised of more than 350,000 members. Our members
advise clients on federal, state, local, and international tax matters
and prepare income and other tax returns for millions of Americans.
They provide services to individuals, not-for-profit organizations, and
small and medium-sized businesses, as well as America's largest
businesses. It is from this broad base of experience that we offer our
comments on the 2001 filing season.
There has been a great deal of discussion during the 2001 filing
season surrounding the recent lack of IRS enforcement activity. We are
concerned with the negative impact this publicity is likely to have on
voluntary compliance. As we have said before, it is vital to our
voluntary compliance tax system that this reduction of audit and
collection activity must be reversed immediately, and that the
resulting increase in enforcement be widely publicized. If the IRS is
unable to actively administer and enforce the tax law, serious damage
to the effectiveness of our tax system results. Those who normally
flaunt the law will continue to do so at no risk; those who in the past
have reluctantly complied only because of a fear of enforcement may
become noncompliant; and, normally compliant taxpayers will lose faith
in the system and may be tempted to become noncompliant as well. For
our voluntary tax compliance system to operate effectively, taxpayers
must perceive that everyone pays their fair share, and that if they do
not do so voluntarily, they will be forced to do so by the IRS.
To date the AICPA has heard very little from our members regarding
the 2001 filing season. It appears that this year's filing season is
progressing without any major problems. Historically we have not
solicited input from our members regarding the positives and negatives
of a filing season until after the season has ended; and therefore, it
is not unusual to receive little feedback at this point unless a major
systemic problem has occurred. However, one issue of concern that has
come to our attention revolves around the electronic filing of
partnership returns. We discuss this issue in greater detail below. In
addition, for the benefit of the Subcommittee, we are pleased to
provide some general observations on filing season issues related to
electronic filing of individual returns, the Service Center
realignment, fiscal year reform for small businesses, and tax
simplification.
Electronic Filing of Partnership Returns
As you are aware, section 1224 of the Taxpayer Relief Act of 1997
modified section 6011(e) to require partnerships with more than 100
partners to file their returns on magnetic media (which the IRS and
Treasury have interpreted to mean electronically). The effective date
of this provision applied to partnership tax years beginning after
December 31, 1997. However, the final regulations are effective for
partnership taxable years ending on or after December 31, 2000. Thus,
returns for partnerships with more than 100 partners with December 31,
2000 year-ends will be the first returns required to be filed
electronically under this provision.
Unfortunately, the AICPA and its members have been frustrated in
our efforts to resolve a myriad of issues that have developed as CPAs
prepare to file these Forms 1065 electronically. Although we
acknowledge and appreciate the efforts of the IRS's Electronic Tax
Administration (ETA) personnel during this process, these employees do
not appear to have the authority or the ability to resolve many of the
issues we have raised in a timely manner. For example, many issues will
require systems changes that cannot be made at this time, or even in
the near future. Furthermore, there was already insufficient
coordination between the Service, practitioners and the major software
developers, resulting in software that does not support all forms and
schedules necessary for electronic filing. This leaves practitioners
and partnerships in a position where they cannot file the entire return
electronically, raising the question of whether or not the IRS will
allow unsupported forms and schedules to be filed on paper while the
bulk of the return is filed electronically. The answer we are given by
the IRS, quite simply, is ``it depends on which form or schedule is
involved.''
The confusion and uncertainty revolving around the electronic
filing of partnership returns has led to a great deal of frustration on
the part of our members. Many have applied for extensions of time to
file for partnership returns that would have otherwise been timely
filed. Of greater concern, however, is the impact of these problems on
future electronic filing programs for business returns. Taxpayers
should not be expected to, much less required to file returns
electronically until the IRS has a system in place to handle these
returns. The IRS should work closely with the practitioner community
and the software developers to ensure that future programs can satisfy
those needs. Without effective decision making, adequate resources, and
a good working partnership with the practitioner community, we believe
that the future of electronic filing of business returns will be
disappointing and mutually frustrating to the business community and
the IRS.
Electronic Filing of Individual Returns
Commissioner Charles O. Rossotti testified at the Subcommittee's
hearing on April 3, 2001 that ``Electronically-filed returns improve
service for taxpayers and boost productivity by reducing errors,
speeding refunds, and reducing labor costs.''
He also described improvements the IRS has made, or expects to
make, in the electronic filing area, including (1) expansion of the
types of forms and schedules accepted by the 1040-e-file program for
next year; (2) the Service's apparent success in testing of a Personal
Identification Number (PIN) code as to the taxpayer's signature,
eliminating the need to file the paper jurat; and (3) the testing of an
Internet-based pilot program for businesses to pay federal taxes on
line.
Although Commissioner Rossotti feels confident that expansion of
the 1040-e-file program will open up eligibility to 99.1 percent of all
individual taxpayers by the 2002 filing season, we must remain cautious
in an environment where the experiences of AICPA members with
electronic filing have historically been disappointing. During prior
filing seasons, we have expressed disappointment in the inability of
the electronic filing program to accept all forms and all schedules.
This inability to accept all forms and all schedules, including white
paper schedules, elections and related compliance disclosures, has been
seen by us as the greatest barrier to widespread use of electronic
filing by AICPA members (who tend to prepare the most complex returns).
Given that effective disclosure is key to the modern tax reporting
system, it is unrealistic to believe that electronic filing can be used
for complex returns until all forms and all schedules, including white
paper schedules, elections and compliance disclosures, can be filed
electronically.
Many CPA tax return preparers cannot be certain that all of the
individual returns they prepare can be filed electronically. Given that
uncertainty, the vast majority of these preparers have elected not to
use the electronic filing system at all, because to file some returns
electronically, but not all, would require two separate return
processing, review and filing procedures in their offices, increasing
their workloads and costs. Only when it is clear that all forms and all
schedules can be accurately filed electronically will most CPAs begin
the natural migration from filing paper returns to filing electronic
returns.
The AICPA fully supports expanding electronic filing. However, we
remain concerned that electronic tax administration in general, and
electronic filing in particular, fall short of the IRS's long range
goals of converting manual processes to electronic format. We are
dissatisfied with attempts both to partner with the IRS in promoting
electronic filing to our membership and in explaining to the IRS the
effects of the current system's limitations on our constituency. As the
Service shifts its focus from the electronic filing of individual
returns to the electronic filing of business returns, involving,
listening to, and responding to the various stakeholder groups will be
all the more critical. Unfortunately, our experience to date as a
stakeholder group in this matter has not been positive.
Service Center Realignment
The Internal Revenue Service Centers are in the throes of a massive
realignment, with redistribution of the Service Centers' workload
scheduled to be completed by 2002. On October 1, 2000, the Service
Centers were converted to ``campuses.'' Individual master filing
submission processing will eventually be handled by Andover, Atlanta,
Austin, Fresno, Kansas City, Memphis, Brookhaven, and Philadelphia. The
Ogden and Cincinnati campuses are scheduled to become processing
centers for business master file submissions. Five of the campuses will
handle account management and compliance service functions for the IRS
Small Business/Self-Employed Division, and the remaining five will
handle similar functions for the IRS Wage and Investment Division.
It is extremely important that the ongoing transition of Service
Center workflow should appear as seamless as possible to the taxpaying
public. However, the preliminary feedback we are receiving from CPAs
during the 2001 filing season indicate that the realignment is causing
some confusion among some taxpayers and practitioners. Part of this
confusion arises from the largely unexplained changes in IRS filing
addresses. We believe that the Service Center realignment, like the
future of electronic filing, is a matter that the Subcommittee on
Oversight should closely monitor.
Fiscal Year Reform for Small Businesses
There is an unintended problem created by the current tax rules
requiring year-end conformity for a majority of businesses reporting
their results to owners for inclusion in the owner's annual tax
calculation. Because they apply to every small business in the country,
these rules create unnecessary, disruptive and unproductive demands on
the majority of businesses and their advisors during a few months every
year. The unevenness of the workload during December and the
traditional January-April filing season is substantial. This ``workload
compression'' often negatively affects those who can least afford it--
start-up businesses and small businesses that create a solid foundation
for the American economy. The requirement that these entities use a
calendar year end for tax purposes means that in addition to other
unavoidable calendar year-end responsibilities, they must also close
their books, produce annual financial statements for their banks,
conclude financial statement audits or reviews, and prepare tax returns
and tax information for their owners (partners and S corporation
shareholders) by April 15.
Workload compression is an unnecessary burden on small businesses,
and can be alleviated with modest changes to the tax system. In order
to mitigate this burden, the AICPA recommends amending the Internal
Revenue Code to allow qualified small businesses to elect a year-end
with any-month ending from April through December.
Tax Simplification
For many years, the AICPA has been outspoken with respect to the
need to reduce tax law complexity, especially from the perspective of
the administrability of the tax law. We believe that these issues have
a direct impact on the nation's filing season each year. Congress
recognized the tax administrability issue when it wrote section 4021 of
the IRS Restructuring and Reform Act of 1998 (RRA '98) which states
``It is the sense of Congress that the Internal Revenue Service should
provide the Congress with an independent view of tax administration,
and that during the legislative process, the tax-writing committees of
Congress should hear from front-line technical experts at the Internal
Revenue Service with respect to the administrability of pending
amendments to the Internal Revenue Code of 1986.'' As the Subcommittee
on Oversight reviews the results of the 2001 filing season, we urge the
panel to remain cognizant of the difficult task Congress imposes on the
Service through the enactment of complex and constantly changing tax
laws.
* * * * *
The AICPA appreciates this opportunity to offer our comments on the
2001 filing season. We would be pleased to discuss this letter with the
Subcommittee on Oversight. If you have any questions, please contact me
at (661) 663-8815 or [email protected]; Deborah J. Pflieger, Chair of our
Relations with IRS Committee, at (202) 414-1018, or
[email protected]; or Benson S. Goldstein, AICPA
Technical Manager, at (202) 434-9279 or [email protected].
Sincerely,
Pamela J. Pecarich
Chair, Tax Executive Committee
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