[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
  IRS NATIONAL ADVOCATE ANNUAL REPORT AND IRS OVERSIGHT BOARD ANNUAL 
                                 REPORT

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                           FEBRUARY 28, 2002
                               __________

                           Serial No. 107-68
                               __________

         Printed for the use of the Committee on Ways and Means





                     U.S. GOVERNMENT PRINTING OFFICE
79-969                       WASHINGTON : 2002
________________________________________________________________________
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                      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 February 20, 2002, announcing the hearing............     2

                               WITNESSES

Internal Revenue Service, Nina E. Olson, National Taxpayer 
  Advocate.......................................................     6
Internal Revenue Service Oversight Board, Hon. Larry Levitan, 
  Chairman.......................................................    27

                       SUBMISSION FOR THE RECORD

Neal, Hon. Richard E., a Representative in Congress from the 
  State of Massachusetts.........................................    39











                  IRS NATIONAL ADVOCATE ANNUAL REPORT 
                 AND IRS OVERSIGHT BOARD ANNUAL REPORT

                              ----------                              


                      THURSDAY, FEBRUARY 28, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 2:00 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
February 20, 2002
No. OV-8

                     Houghton Announces Hearing on

              IRS National Taxpayer Advocate Annual Report

                 and IRS Oversight Board Annual Report

    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 annual reports of the Internal 
Revenue Service (IRS) National Taxpayer Advocate and the IRS Oversight 
Board. The hearing will take place on Thursday, February 28, 2002, in 
the main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Subcommittee and 
for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The position of National Taxpayer Advocate was established by the 
1996 Taxpayer Bill of Rights (P.L. 104-168), replacing the original 
Taxpayer Ombudsman that had been created by the IRS in 1979. Taxpayers 
who believe they are suffering significant hardships or long delays can 
appeal to the Taxpayer Advocate Service for assistance. The Taxpayer 
Advocate must submit a report each year to the House Committee on Ways 
and Means and the Senate Committee on Finance.
      
    Established by the IRS Restructuring and Reform Act of 1998 (P.L. 
105-206), following the recommendation of the National Commission on 
Restructuring the IRS, the IRS Oversight Board first convened in 2000. 
Its purpose is to oversee the IRS in its administration of the 
execution and application of internal revenue laws. Now, following its 
first full year of operation, the Oversight Board is submitting its 
first annual report to Congress.
      
    In announcing the hearing, Chairman Houghton stated, ``The reports 
of the IRS Taxpayer Advocate and the Oversight Board provide Congress 
with key insights into the operations of the IRS. In our efforts to 
improve IRS operations, we welcome the independent recommendations made 
in these reports.''
      

FOCUS OF THE HEARING:

      
    Congress will review the Taxpayer Advocate and Oversight Board 
annual reports in order to assess the mission and priorities for the 
upcoming year.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
202/225-2610 by the close of business, Thursday, March 14, 2002. Those 
filing written statements who wish to have their statements distributed 
to the press and interested public at the hearing should deliver their 
200 copies to the Subcommittee on Oversight in room 1136 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse messenger 
deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record, or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.

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

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

                                


    Chairman Houghton. Good afternoon everybody. Thank you very 
much for coming here and I appreciate the witnesses being at 
the witness table. We are going to hear from two obviously very 
hard working public servants in our government. They have got 
very tough jobs. Our first witness, Nina Olson, who is down 
here, navigates the tax laws on behalf of individual taxpayers; 
and then our next witness after Ms. Olson is going to be Larry 
Levitan who oversees the $10 billion agency that administers 
our tax laws.
    Each of you recently issued reports to provide us with key 
insights into the operation of the Internal Revenue Service 
(IRS), and also I would like to take this opportunity to thank 
all those employees of the Taxpayer Advocate's Office that 
helped write the report. Before coming to Washington, Nina 
Olson was a leader in assisting low income taxpayers through 
community tax law project enrichment. She has brought her 
passion for helping individual taxpayers to a role as National 
Taxpayer Advocate.
    Ms. Olson has made tax simplification the overall theme of 
her annual report, and we applaud you for that. She makes two 
dozen excellent recommendations to bring some reason to the 
areas of the law that most affect individual taxpayers. In 
addition, she details the most serious problems encountered by 
taxpayers and offers some great solutions as well.
    Like our first witness, Larry Levitan is eminently 
qualified for his role as Chairman of the IRS Oversight Board. 
Under Mr. Levitan's leadership, the IRS Oversight Board has 
become actively engaged in reviewing the IRS' computer 
modernization program and the budget needs. In the coming 
months, the Oversight Board will face the challenging task of 
identifying candidates to serve as the new IRS Commissioner, as 
Commissioner Rossotti's term expires next November. I would 
like to now yield to our Ranking Democrat, Mr. Coyne.
    [The opening statement of Chairman Houghton follows:]
    Opening Statement of the Hon. Amo Houghton, a Representative in 
  Congress from the State of New York, and Chairman, Subcommittee on 
                               Oversight
    Today we are going to hear from two of the hardest working public 
servants in our government. They have among the toughest jobs too: our 
first witness, Nina Olson, navigates the tax laws on behalf of 
individual taxpayers; our next witness, Larry Levitan, oversees the 10 
billion dollar agency that administers our tax laws. Each of you 
recently issued reports that provide us with key insights to the 
operations of the IRS.
    Before coming to Washington, Nina Olson, was a leader in assisting 
low-income taxpayers through the Community Tax Law Project in Richmond, 
Virginia. She has brought her passion for helping individual taxpayers 
to her role as National Taxpayer Advocate.
    Ms. Olson has made tax simplification the overall theme of her 
annual report. She makes two dozen excellent recommendations to bring 
some reason to areas of the law that most affect individual income 
taxpayers. In addition, she details the most serious problems 
encountered by taxpayers, and offers solutions as well.
    Like our first witness, Larry Levitan is eminently qualified for 
his role as Chairman of the IRS Oversight Board. He is a retired 
managing partner of Andersen Consulting, the well-known consultant to 
America's largest corporations, and an accountant by training.
    Under Mr. Levitan's leadership, the IRS Oversight Board has become 
actively engaged in reviewing the IRS' computer modernization program 
and budget needs. In the coming months, the Oversight Board will face 
the challenging task of identifying candidates to serve as the new IRS 
Commissioner when Commissioner Rossotti's term expires this November.
    I am pleased to yield to our ranking Democrat, Mr. Coyne.

                                


    Mr. Coyne. Thank you, Mr. Chairman. Welcome. At this 
Subcommittee hearing, I feel it is most appropriate that we 
receive the testimony of the IRS National Taxpayer Advocate and 
the Chairman of the IRS Oversight Board. The Congress enacted 
legislation in 1998 to reform IRS operations and to provide 
taxpayers with the more efficient tax administration system. I, 
along with Congressman Portman, served as a Member of the 
National Commission on Restructuring of the Internal Revenue 
Service and supported enactment of the substantial authorities 
we granted to both Taxpayer Advocate and the Oversight Board. 
Both oversight organizations have proven to be critical to the 
success of the IRS' ongoing restructuring efforts and 
continuing focus on taxpayer services.
    I want to thank both Nina Olson, the Taxpayer Advocate, and 
Larry Levitan, the Chairman of the Oversight Board, for their 
leadership and commitment to a better IRS. The Subcommittee has 
a lot of ground to cover today, and first we will consider the 
Advocate's 273-page report on the most serious problems facing 
taxpayers, advocacy efforts on behalf of taxpayers and 
legislative recommendations the Committee should consider.
    Next we will consider the Board's analysis of IRS 
operations, short and long term, to understand what the IRS 
must do to best meet the needs of taxpayers nationwide. I want 
to thank Chairman Houghton for continuing the tradition of 
holding annual Oversight hearings on the IRS. Thank you. I look 
forward to your testimony.
    [The opening statement of Mr. Coyne follows:]
  Opening Statement of the Hon. William J. Coyne, a Representative in 
                Congress from the State of Pennsylvania
    As the Oversight Subcommittee's first hearing in 2002, it is most 
appropriate that we receive the testimony of the IRS National Taxpayer 
Advocate and of the Chairman of the IRS Oversight Board.
    The Congress enacted legislation in 1998 to reform IRS operations 
and to provide taxpayers with a more efficient tax administration 
system. I served as a Member of ``The National Commission on 
Restructuring the Internal Revenue Service'' and supported enactment of 
the substantial authorities we granted to both the Taxpayer Advocate 
and the Oversight Board.
    Both oversight organizations have proven to be critical to the 
success of the IRS' ongoing restructuring efforts and continuing focus 
on taxpayer services. I want to thank both Nina Olson, the Taxpayer 
Advocate, and Larry Levitan, Chairman of the Oversight Board, for their 
leadership and commitment to a better IRS.
    The Subcommittee has a lot of ground to cover today. First, we will 
consider the Advocate's 273-page report on the most serious problems 
facing taxpayers, advocacy efforts on behalf of taxpayers, and 
legislative recommendations the Committee should consider. Next, we 
will consider the Board's analysis of IRS operations, short and long 
term, to understand what the IRS must do to best meet the needs of 
taxpayers nationwide.
    I want to thank Chairman Houghton for continuing the tradition of 
holding annual oversight hearings on the IRS.
    Thank you.

                                


    Chairman Houghton. Thanks very much, Mr. Coyne. Now I would 
like to ask Mr. Portman for his statement.
    Mr. Portman. Thank you, Mr. Chairman and thank you, Ms. 
Olson, for being here. Again, I want to join my colleague, Mr. 
Coyne, in congratulating both and you Mr. Levitan for your good 
work which is consistent with what we had envisioned in the 
Commission's report. Mr. Coyne and I spent a couple of years 
looking at the problems at the IRS, not all of which have been 
solved, but we made progress and came up with structures that 
we thought would be helpful. This hearing is, in a sense, one 
of them, but structures only work if the right people are in 
place and your commitment to this new expanded Taxpayer 
Advocate's responsibility, and the more independent role that 
Taxpayer Advocates have, and then a more comprehensive report 
to us here in Congress as to what the real problems are, is key 
to making all of this work.
    And Mr. Levitan, I will have a chance to talk to you later. 
I appreciate your work chairing the Oversight Board and again, 
being sure that these well-meaning structures and changes in 
law actually can be implemented in ways that help taxpayers 
receive the service that they deserve. So I thank you all and 
look forward to your testimony. Thank you, Mr. Chairman, for 
this oversight hearing, and all your commitment to this.
    Chairman Houghton. Thank you very much. I would like to 
call on Ms. Olson----
    Mr. Coyne. Mr. Chairman, if I might, Congressman Neal, our 
colleague, had a statement welcoming the Taxpayer Advocate 
here, Ms. Olson, today, and I would like unanimous consent to 
be able to insert it in the record.
    Chairman Houghton. Without objection, approved.
    Mr. Coyne. Thank you.
    [The statement of Mr. Neal follows:]
  Statement of the Hon. Richard E. Neal, a Representative in Congress 
                    from the State of Massachusetts
    Mr. Chairman and Mr. Coyne, I am pleased that you have invited the 
Taxpayer Advocate, Ms. Olson, to testify today on her annual report, 
which includes many suggestions for simplifying the Code.
    I can think of no more worthy cause than reducing Tax Code 
complexity, benefiting millions of taxpayers.
    You may be interested to know that the Advocate recently completed 
a particularly difficult case on behalf of one of my constituents.
    I look forward to working with her and the Members of the Committee 
to find a legislative solution to this case and other important 
taxpayer issues.

                                


    Chairman Houghton. Thanks very much. Now, Ms. Olson would 
you give your testimony.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
                    INTERNAL REVENUE SERVICE

    Ms. Olson. Mr. Chairman and Members of the Committee, thank 
you for providing me the opportunity to appear before you today 
to discuss the National Taxpayer Advocate's 2001 annual report 
to Congress. The report represents the work of many dedicated 
Taxpayer Advocate service employees. I am proud of their 
efforts and I would like to acknowledge those members of the 
report team who are attending the hearing today. The focus of 
my remarks today is tax law simplification. I will also be glad 
to answer any questions you may have about the top 20 taxpayer 
problems.
    Many pundits in the tax world say that tax simplification 
will never occur because there is no constituency for 
simplification. I am not sure what this phrase actually means. 
For example, making uniform the provisions that relate to 
family status would have simplified tax computations for 
taxpayers filing 44 million returns for tax year 2001. In a 
Universe comprised of approximately 130 million individual 
returns, that is a significant constituency.
    Simplification does not require complete revision of the 
Code. In fact, we can achieve simplification by identifying 
provisions in current law that create taxpayer or 
administrative burden for a significant number of taxpayers. We 
can focus our efforts on provisions that are actionable 
immediately while we work toward a consensus on more difficult 
issues. We can agree to focus on different groups of issues 
from one year to the next, even while we are addressing the 
pressing and immediate issues of the day. This year's annual 
report contains 28 legislative proposals, 19 of which are 
described in great detail as key recommendations. These 
proposals range from extending income averaging to commercial 
fishermen to a discussion of equitable relief factors for 
innocent spouse relief. They include recommendations as 
sweeping as permitting married taxpayers to allocate their 
separate items on the face of their jointly filed return, 
thereby eliminating joint and several liability.
    Some of our proposals have shown up in previous reports; 
for example, our proposals for expanding relief for the return 
of levy proceeds, including the ability to restore such 
proceeds to retirement accounts. Others are just plain common 
sense as with the first-time penalty waiver, also known as the 
One Time Stupid Act Exception.
    To my mind, the most important recommendations in this 
year's report are those concerning family status issues. Family 
status is most taxpayers' point of entry into the tax system. 
On a form 1040, before a taxpayer even enters $1 of wage or 
interest income, that taxpayer must determine whether his or 
her child qualifies as a dependent or entitles the taxpayer to 
claim head of household status or impacts the taxpayer's 
marital status determination. These provisions apply different 
tests for eligibility with respect to the same child. Further 
along in the form, the taxpayer must look up other definitions 
or limitations for the child tax credit, the child and 
dependent care credit, the earned income credit, and various 
education tax incentives.
    In order to learn about these provisions, the taxpayer must 
read through over 200 pages of IRS publications and 
instructions. We propose that for each of six-family status 
provisions, we adopt a common definition of qualifying child. 
We propose a uniform relationship, place of abode, and age test 
as a safe harbor for a type of familial relationship about 
which we can be reasonably certain, once this test is met, that 
we have correctly awarded a tax benefit.
    Under the safe harbor, once a taxpayer establishes that he 
or she has a biological, adoptive or stepchild or a descendant, 
we need only determine if that child or descendant lived with 
the taxpayer for more than half of the tax year, and if that 
child or his descendant is of the appropriate age. Both 
relationship and age are relatively easy for a taxpayer to 
demonstrate in an audit situation. It is easier for the 
taxpayer to prove that the child lived with him or her for more 
than half the year than it is for the taxpayer to prove that he 
or she met the support test or the home maintenance test.
    Thus, the key feature of this proposal is that the IRS 
would not have to make intrusive inquiries into the most 
intimate affairs of its citizens without due cause. It can rely 
on a set of verified third party statements that have an 
acceptable degree of accuracy and reliability. The IRS can then 
apply its limited compliance resources to taxpayers with a 
higher risk of error.
    We in the Taxpayer Advocate service take our congressional 
reporting responsibilities very seriously. As tax 
administrators, our focus is the administration of the tax 
laws, not the underlying policy considerations. We have limited 
our legislative proposals to provisions about which we have 
experience and which we believe will significantly simplify 
matters for many taxpayers.
    I hope you find this report helpful on behalf of the 
Taxpayer Advocate service employees. I thank you for this 
opportunity to report on these matters both in writing and 
before you in person today.
    [The prepared statement of Ms. Olson follows:]
   Statement of Nina E. Olson, National Taxpayer Advocate, Internal 
                            Revenue Service
    Mr. Chairman and Members of the Committee:
    Thank you for providing me the opportunity to appear before you 
today to discuss the National Taxpayer Advocate's 2001 Annual Report to 
Congress. The Report represents the work of many dedicated Taxpayer 
Advocate Service employees, and it is my distinct honor to come before 
you today to discuss their work. I am truly grateful for and proud of 
their efforts.
    Today marks the completion of my first year of service as the 
National Taxpayer Advocate (NTA), and it has been a very interesting 
year, indeed. The National Taxpayer Advocate is fortunate, in that both 
the position and the elements of her two Annual Reports to Congress are 
established and described in the Internal Revenue Code. Section 7803(c) 
clearly establishes that the Annual Reports are considered a direct 
communication between the National Taxpayer Advocate and Congress. In 
order to preserve the NTA's independence, Congress mandated that the 
Reports be delivered to it prior to delivery to the Secretary of the 
Treasury or the IRS Commissioner.
    While the focus of my remarks today is tax simplification, I would 
like to make a few preliminary comments about the Annual Report's 
methodology. As you know, when I first assumed this position, I met 
with many of the Members of this subcommittee and the Senate Finance 
Committee in order to learn, more specifically, what Congress expected 
from the Annual Report to Congress. From these discussions I learned 
that you view the Annual Report as providing certain information that 
will help you resolve taxpayer problems either through legislation or 
by oversight of the Internal Revenue Service. You view the Taxpayer 
Advocate Service (TAS) as a credible source of this information, given 
our unique role within the IRS as an independent and impartial advocate 
for taxpayers who are trying to resolve their tax problems.
    The independence, impartiality and confidentiality that the 
Taxpayer Advocate Service offers is critical to our ability to deliver 
this information to you. Without these assurances, taxpayers will not 
come to TAS to discuss their problems. In my upcoming June 30th Report 
to Congress, I will describe in detail the efforts we have made to 
enhance independence, impartiality, and confidentiality in TAS' 
operations.
    With respect to the Annual Report to Congress, I am pleased to 
report to you today that I will soon be recruiting and hiring two 
Senior Advisors to the National Taxpayer Advocate. One Senior Advisor 
will serve as an advisor for legal matters pertaining to the Annual 
Report to Congress, including assisting my employees with development 
of legislative proposals.
    The second Senior Advisor will oversee all research activities and 
establish a research agenda for the Taxpayer Advocate Service, 
including the Annual Report to Congress. I hope to fill these positions 
in the next four months. Next year's Annual Report will be enhanced by 
these additions to the NTA's staff.
    I view the information provided in the Annual Report as a 
continuum. First, we identify taxpayer problems. Our focus is the 
administration of the tax laws, not the underlying policy 
considerations. This year, we have developed two lists of ``Top 23'' 
taxpayer problems--one derived directly from the TAS database of cases 
and one that reflects TAS employees' judgement, as informed by their 
conversations and outreach with individual and business taxpayers, 
practitioners, and other IRS employees. Some of these problems surface 
again in our analysis of the ten most litigated issues.
    Many of the top taxpayer problems can be addressed administratively 
by the Service. Indeed, in many instances the Service has detailed, 
long-term plans for addressing these problems. Some solutions require 
issuance of guidance, or a different allocation of resources, or even 
greater resources. But some problems cannot be fully resolved unless 
there is legislative change.
    In making our key legislative recommendations, we narrowed our 
focus to issues that have the potential to achieve simplification or 
reduce taxpayer or administrative burden with respect to a significant 
number of taxpayers. We have also focused on proposals that are 
``actionable''--that is, with the exception of one proposal, they do 
not require major reform of the Code and can be enacted, in one form or 
another, immediately.
    For each recommendation, we describe the problem, illustrate it 
with examples derived from TAS cases (some of which were referred by 
Congressional offices), and provide a description of current law and an 
explanation of our proposed legislative change. Although others have 
suggested some version of these proposals, our recommendations reflect 
the viewpoint, experience, and pragmatism of TAS employees who wrestle 
with the underlying problems daily in their case inventories.
The Constituency for Simplification
    During the past year, I have spoken at many taxpayer, tax 
practitioner, and IRS employee meetings about some of our legislative 
proposals and the complexity of the Internal Revenue Code. All too 
often, I have heard people say that tax simplification will never occur 
because there is ``no constituency for simplification.'' I am not sure 
what this phrase actually means.
    If the lack of constituency refers to the fact that individual 
taxpayers do not have special interest groups speaking on their behalf 
or are not flooding Congressional switchboards demanding tax 
simplification, the statement may be true. But if, for example, we 
consider the number of taxpayers positively affected by developing a 
uniform definition of a ``child'' for purposes of the Internal Revenue 
Code, the statement is false. Making uniform the provisions that relate 
to family status would have simplified tax computations for taxpayers 
filing 44 million returns for tax year 2001. In a universe comprised of 
approximately 130 million individual returns, this is a significant 
constituency.
Family Status Issues
    Family status is most taxpayers' point of entry into the tax 
system. And yet, Treasury Secretary O'Neill has noted, only within the 
confines of the Internal Revenue Code would one find five different 
definitions of a ``child.'' \1\ On a Form 1040, before a taxpayer even 
enters one dollar of wage or interest income, he or she must determine 
whether his or her child qualifies as a dependent or entitles the 
taxpayer to claim head of household status or be considered not 
married.\2\ These provisions apply different tests for eligibility with 
respect to the same child. Further along in the form, the taxpayer must 
look up other definitions or limitations for the child tax credit, the 
child and dependent care credit, the earned income credit, and various 
education tax incentives.
---------------------------------------------------------------------------
    \1\ O'Neill Claims Simplification, Stimulus Top Priorities, 2002 
TNT 36-1.
    \2\ IRC Sec. 7703(b).
---------------------------------------------------------------------------
    At the end of the day, the taxpayer or his or her preparer is 
woefully confused about a subject that is fundamental to one's economic 
and tax existence. Each element of variance increases the likelihood of 
an honest mistake. In some instances, the differences provide 
opportunities for deceit. In all instances, the differences increase 
the administrative burden on the IRS to fairly implement the tax laws. 
Further, the IRS must conduct intrusive inquiries into the lives of 
taxpayers in order to monitor compliance with these non-uniform 
provisions.
    The Taxpayer Advocate Service's recommendation is really very 
simple. However, as with all simplification, the details require 
careful attention. We propose that for each of six family status 
provisions we adopt a common definition of ``qualifying child.'' Our 
proposed definition focuses on a type of familial relationship about 
which we can be reasonably certain, once certain tests are met, that we 
have correctly awarded a tax benefit, at least with regard to the 
``child'' element. Thus, we propose a uniform relationship, place of 
abode, and age test. Once a taxpayer has established that he or she has 
a child (biological, adoptive, or step) or a descendant, we need only 
determine if that child (or descendant) lived with the taxpayer for 
more than half of the tax year and if that child (or descendant) is of 
the appropriate age.
    We suggest that this definition be placed in the definitional 
sections of the Code so that it can be easily cross-referenced in the 
current tax provisions. As new family status provisions are enacted, 
this definition will become the norm.
    This definition has several advantages over the current state of 
the law. First, both relationship and age are relatively easy for a 
taxpayer to demonstrate in an audit situation. Second, it is easier for 
the taxpayer to prove that the child lived with him or her for more 
than half the year than it is for the taxpayer to prove that he or she 
provided more than half the support of the child or more than half the 
cost of maintaining a home in which the taxpayer and the child lived 
for more than half the year. Finally, by limiting these tests to the 
proposed family relationship grouping (parent/child/descendant), we 
significantly lessen the chances that the ``wrong'' taxpayer would 
receive the tax benefits.
    Our proposal differs from the Joint Committee on Taxation's 
proposal that the uniform definition of a qualifying child completely 
replace the support and household maintenance tests. We do not propose 
substituting this relationship/abode/age test for all family 
relationships. We believe that there are other family and household 
arrangements that should qualify for the various family status 
benefits. Yet those family and household arrangements require the 
Service to make additional inquiry into the household circumstances in 
order to ensure that the special tax benefits are awarded to the 
appropriate party.
    We also propose to extend a version of the recently amended EITC 
``tie-breaker'' rule to the uniform definition of a qualifying child. 
That is, where two or more taxpayers having a qualifying relationship 
with the child live in the same household, the parental relationship 
would trump others. A grandmother, mother, and child may live together, 
and the mother may not want to claim the child as dependent or for head 
of household status. That is, the mother wishes to ``opt-out'' of the 
uniform definition of a qualifying child safe harbor. In these 
situations, as under current EITC law, the mother simply does not claim 
the child on her return and the grandmother will be able to claim her 
grandchild. In other household arrangements outside the relationship 
safe harbor, the cohabitator would still have to satisfy the current 
statutory tests, including the appropriate support or household 
maintenance tests.
    Our sensitivity to non-nuclear family arrangements is best 
evidenced in our proposed expansion of the definition of ``foster 
child.'' Under present law, we have at least three different 
definitions of foster child--one for dependency exemptions, one for 
head of household status, and one for the Earned Income Tax Credit. We 
propose establishing a uniform foster child definition between these 
provisions. The foster child must meet either a relationship or 
custodial test and must also live with the taxpayer for more than half 
the year.
    In order to provide more certainty sooner in the administrative 
process, we propose a rather narrow relationship test. We define the 
term ``child'' as an individual who bears one of the following 
relationships to the taxpayer:

     LA son/daughter or descendent (e.g. grandchild or great-
grandchild);
     LA stepson/stepdaughter or descendent (e.g., step-
grandchild or step-great-grandchild);
     LAn adopted child; or
     LAn eligible foster child.

    We also propose that the taxpayer could demonstrate the ``foster'' 
relationship by proving that the child was placed in his or her home by 
an authorized placement agency as under current law or by showing 
custodianship through some other means. We contemplate that the law 
would permit a taxpayer to claim a foster child when the taxpayer could 
prove that some other Federal, State, or local governmental agency (or 
its agent) had made a determination that the child lived with the 
taxpayer. Depending on the circumstances, this ``certification'' could 
take the form of food stamp certification, of school placement, or of 
an award of temporary custody by a family court.
    The key feature of this proposal is that the IRS would not have to 
make intrusive inquiries. Rather, it is relying on a set of verified 
third-party statements that have an acceptable degree of reliability. 
This approach--accepting reliable third-party documentation--should be 
extended administratively to all family status audits, including those 
involving the Earned Income Tax Credit. Such an audit approach removes 
the government from having to pry into the most intimate affairs of its 
citizens without due cause. I have stated elsewhere how humiliating 
such an audit can be. That these audits are routinely visited upon the 
poorest and least represented portion of our population represents a 
fundamental flaw in the design of the law as well as in our tax 
administration system. Middle class and wealthy taxpayers would not 
tolerate such intrusions.
Individual Alternative Minimum Tax
    Increasingly, middle class taxpayers face a different type of 
problem--the individual alternative minimum tax (the AMT). A minimum 
tax was first introduced into the Internal Revenue Code in 1969 as a 
means to tax high income taxpayers who had gross income and yet paid no 
taxes because of various provisions. The first minimum tax listed 14 
preferences that were to be added back in to taxable income. In 1978, 
the minimum tax was expanded to include additional deductions, 
exemptions, and credits; all typically claimed by middle class 
taxpayers.
    The design of the minimum tax has not achieved its original goals. 
The number of high-gross income earners who pay no tax has increased 
slightly since 1978. The Alternative Minimum Tax does enhance revenue, 
largely by subjecting increasing numbers of middle-income taxpayers to 
its requirements. These unintended targets are drawn into the 
alternative tax system because they have large families, live in high-
tax cities or states, or earn their income in a variety of ways other 
than direct compensation, such as stock options. Today, 1.5 million 
taxpayers pay the AMT. The Joint Committee projects that 35.5 million 
taxpayers will be subject to the AMT by the year 2010.\3\
---------------------------------------------------------------------------
    \3\ U.S. Congress, Joint Committee on Taxation, Estimated Effects 
of the Conference Agreement for H.R. 1836 [1] (JCX-51-01) p. 8.
---------------------------------------------------------------------------
    As a tax administrator, I view these numbers with concern. Many of 
the taxpayers do not even know that an alternative minimum tax system 
exists. Thus, in 2010 the Service could be faced with sending out 35.5 
million letters to taxpayers who believed they filed a perfectly 
accurate tax return and who will learn that they did not.
    To avoid this situation, we propose three alternatives to the 
recommendation that the individual AMT be repealed. I personally favor 
the alternative proposal of establishing a gross income threshold, 
below which a taxpayer will not be subject to the AMT. This proposal 
has the advantage of providing relief to those taxpayers who must 
dedicate 12 hours to simply determining whether they are subject to the 
tax at all. Under the gross income proposal, a taxpayer need only look 
to a line on his or her return and check it against the threshold for 
his or her filing status. The taxpayer will learn from the face of his 
or her return whether he or she is subject to the AMT. This proposal 
also provides relief to middle income taxpayers who would otherwise be 
subject to the AMT because they exercised incentive stock options. If 
their gross income was below the threshold, the exercise of these 
options would not be subject to the AMT.
Worker Classification
    One of the most difficult areas of law within which to strike a 
balance between competing interests is worker classification. This 
difficulty is in large part attributable to the variety of workers and 
type of work that would be affected by any guidelines.
    I believe that both the tax law and the tax administration system 
can do a far better job addressing this issue. Most businesses and 
their workers are capable of reaching agreement on employment 
arrangements by themselves. There are, however, groups of workers who 
have limited ability to understand and pay self-employment tax.
    One such group of workers is known as home-based service workers. 
These workers provide home care and services for persons who are 
disabled or elderly and who need assistance in daily living activities. 
The workers themselves are often low income. Usually these workers are 
paid with some combination of State and Federal funds. Most 
commentators agree that, under common law, the workers are employees of 
the service recipients. And yet the service recipients are usually not 
in the position of issuing W-2 forms or 1099-MISC statements. In some 
instances, states or localities undertake the issuance of 1099 forms; 
some states and localities actually withhold FICA tax from the workers' 
pay and issue them W-2 forms.
    In the case of home-based service workers, we have proposed deeming 
the payor agency to be the ``employer'' solely for purposes of tax 
withholding and income reporting. Alternatively, these workers could be 
deemed independent contractors but subject to a flat withholding rate 
sufficient to pay self-employment tax. Either approach addresses the 
critical failures of the current system--where workers receive a 1099 
form and have no tax withheld; where they are unable to pay a lump sum 
of quarterly or year-end taxes; and where the Service ends up placing 
the workers in ``currently not collectible'' status because the workers 
cannot afford to pay a pyramiding tax liability.
    Removing the burden of tax reporting and withholding from the 
service recipients relieves them of the need to file a separate 
Schedule H, Household Employment Taxes. This is appropriate because 
most service beneficiaries do not have a filing requirement.
Taxpayer Rights
    The National Taxpayer Advocate's taxpayer rights proposals include 
provisions relating to partial payment installment agreements; the 
return of levy proceeds under IRC section 6343(b) and (d); the 
realignment of underpayment interest rates simultaneous with the repeal 
of the late payment penalty; and a first-time penalty waiver (also 
known as the ``one time stupid act'' waiver). Each of these proposals 
is discussed in detail in the Annual Report.
    I would like to identify, here, two themes that run through these 
taxpayer rights proposals. The first is that it is very difficult, in 
practice, in a tax system that relies on voluntary compliance to draft 
laws and develop procedures that differentiate between habitual or 
chronic offenders and taxpayers who simply make a mistake. If the law 
is written so broadly that IRS personnel have significant discretion in 
implementation, taxpayers may experience disparate results and even 
face abuse of that discretion. On the other hand, if we do not permit 
IRS personnel to exercise common sense and good judgement--and give 
them the tools to help honest taxpayers who have made a mistake get 
back into compliance with the system--taxpayers will feel that they are 
caught within an ``Alice in Wonderland'' or Kafka-esque system.
    The second consideration is how to remedy situations where the IRS 
has done something wrong. In many instances, it takes a while for 
either a taxpayer or the IRS to figure out that the IRS was wrong in 
taking a certain collection action. The usual period for protesting 
such actions may have passed--in the case of levies, that period is 
nine months from the date of levy. In these instances, should the 
Commissioner be permitted to grant relief? Our proposal regarding the 
return of levy proceeds is our first attempt to address this issue; we 
were unable to develop a proposal that was broader in application.
Joint and Several Liability
    The proposal to eliminate joint and several liability on jointly 
filed individual income tax returns grew from the awareness that 
``innocent spouse'' relief under IRC section 6015 threatens to become 
an exception that swallows the rule. Almost 1 percent of the Service's 
workforce in 2001 processed innocent spouse cases. I am skeptical of 
the IRS projections that show the number of full-time equivalents 
(FTEs) dedicated to innocent spouse will drop significantly over the 
next two years. As current case law becomes part of the mainstream and 
future case law develops under this provision, I believe more taxpayers 
will request relief.
    It is for these reasons that the Taxpayer Advocate Service took the 
bold step of proposing that taxpayers receive all the benefits of a 
joint return without incurring joint and several liability for any tax 
debt attributable to that return. We developed a prototype Form 1040 M 
on which married taxpayers can allocate between themselves their items 
of income, deduction, adjustments, credits, and payments. If such an 
election is made, it will be dispositive for any later adjustments 
relating to those items. Under this proposal, ``innocent spouse'' 
relief will no longer be available to married taxpayers. However, 
taxpayers will still be able to challenge even an allocated liability 
under the common law defense of duress.
    It is our experience that married couples in fact do allocate items 
between themselves, even if not consciously. The advantage of our 
proposal is that the allocation occurs at the front end of the filing 
process, when the information is fresh in everyone's minds, rather than 
years after the filing, when documentation is missing and the married 
couple has separated. We also acknowledge that it may be simpler to 
require the allocation on joint returns, rather than permitting an 
election to allocate. Since we were addressing this problem from an 
administrator's point of view, we proposed the narrower solution to the 
administrative problem. We believe that requiring married couples to 
allocate is a policy decision and beyond the scope of our report.
    We recognize that this proposal is the one key legislative 
recommendation that cannot be enacted overnight. It amounts to a 
significant change to our filing system. We intend to explore the issue 
of taxation of married couples from several different perspectives over 
the next few years. We will review State community property laws and 
their impact on Federal tax law as well as the treatment of tenancy by 
the entireties property. Each of these topics raise the truly thorny 
question of whether there should be, in this arena, a subset of 
property rights that are defined by the Internal Revenue Code and that 
trump State property law for purposes of the Code. We are taking a 
long-term view and hope to address a different aspect each year, which 
will allow for a full development and discussion of the issues.
The Causes of Tax Complexity
    Clearly, no one in Congress or in the IRS sat down and said, 
``let's try to make the Code so complicated that no one will ever be 
able to figure out even basic provisions like family status by 
himself.'' Tax complexity creeps up on us--we try to eliminate a 
perceived abuse (as with the minimum tax in 1969), or carve out relief 
for one special set of circumstances (as with innocent spouse). We keep 
adding exceptions, limitations, and rules as other inequities reveal 
themselves. Certainly revenue considerations play a role. Sometimes we 
actually think we've solved a problem--as with the dependency exemption 
between divorced or separated parents under IRC section 152(e) in 
1984--only to find that forces outside the Federal tax universe--here, 
State courts' interpretation of their domestic relations jurisdiction--
have foiled all our best efforts.
    Tax simplification is anything but simple. It requires discipline 
and persistence. It really requires us to admit that we tried a 
solution that seemed the best at the time, but that it turned out to 
need some more tinkering. Perhaps over time, as with the AMT, we will 
discover that our first solution missed the mark completely. We need to 
keep an open mind, view these provisions as controlled experiments, and 
learn from our misjudgements. Above all, we must have a firm resolve 
that while we are simplifying current law we do not enact new laws that 
further complicate the Code.
    The National Taxpayer Advocate's Annual Report to Congress is one 
source of information about complexity and simplification. We have 
limited our proposals to provisions about which we have experience and 
which we believe are ``actionable'' and will significantly simplify 
matters for many taxpayers. I hope you find this Report helpful. On 
behalf of all the Taxpayer Advocate Service employees, I thank you for 
the opportunity to report on these matters, both in writing and before 
you in person today.
                               __________
                               [GRAPHIC] [TIFF OMITTED] T9969A.001
                               
                         MOST SERIOUS PROBLEMS
                        ENCOUNTERED BY TAXPAYERS
 1. LAccess to Customer Service Toll-Free Telephone Service
 2. LMultiple Definitions Of ``Qualifying Child''
 3. LDetermining Earned Income Tax Credit (EITC) Eligibility
 4. LAnswers to Questions on Customer Service Toll-Free Lines
 5. LDocumenting Earned Income Tax Credit (EITC) Eligibility
 6. LRefund Inquiries
 7. LEarned Income Tax Credit (EITC) Examinations
 8. LUnderstanding Estimated Tax Payments
 9. LExplanations on Math Error Notices
10. LProcessing Claims for Refund
11. LRecertification for Earned Income Tax Credit (EITC)
12. LComputing Income Tax Using Schedule D (Capital Gains & Losses)
13. LAwareness and Understanding Federal Tax Deposits Requirements
14. LObtaining Employer Identification Numbers (EINs)
15. LMisapplied Payments
16. LLack of Access to Free Tax Preparation for Low-Income Taxpayers
17. LProcessing Offer in Compromise Applications
18. LComputing the Alternative Minimum Tax (AMT)
19. LDetermination and Notification of Revised Tax Liability
20. LCost of Electronic Filing for Low-Income Taxpayers
21. LAutomated Underreporter (AUR) Tax Assessments
22. LStatus of Innocent Spouse Claims
23. LDelay in Receiving Requested Documents

                                


    Chairman Houghton. Thanks very much, Ms. Olson. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman. I was wondering, has 
Treasury reviewed your report and expressed support for any of 
the legislative recommendations that are made?
    Ms. Olson. Well, as you know, in the statute that governs 
the writing of the annual report, we are not supposed to submit 
this report either to the Commissioner or to Treasury prior to 
delivering it to you. But immediately after we delivered it to 
Congress on January 2 this year, I met with various members of 
Treasury as well as with the Commissioner and discussed these 
provisions in detail. They were very supportive of our 
provisions, and since that time, both the Commissioner and the 
Secretary have come out talking in particular about the 
uniformed definition of a qualifying child.
    I would also note that in the President's budget, there is 
language discussing their interest, their dedication to 
simplification, and they do discuss the uniform definition of 
the qualifying child. They do say that they are looking at 
provisions about alternative minimum tax (AMT) relief and 
various other items. So I can say that there is definitely 
support for our proposals.
    Mr. Coyne. Are any of your recommendations included in the 
Administration's fiscal year 2003 budget?
    Ms. Olson. Not as line items is my understanding.
    Mr. Coyne. How about the Commissioner? Has he taken any 
administrative action as a result of your report?
    Ms. Olson. The Commissioner read my report in full, and I 
have been told by my peers in the IRS senior leadership team 
that they have all received e-mails from him directing them to 
look at certain provisions and act upon them. So I think that 
judging from the ripple effect throughout the Internal Revenue 
Service leadership team, that there has been quite an amount of 
attention paid to the report.
    Mr. Coyne. Do you have any recommendations to this 
Subcommittee and the full Committee relative to reforming the 
Earned Income Tax Credit (EITC)?
    Ms. Olson. I have to say that I think at this point, the 
problems with the earned income credit are primarily 
administrative. We need to figure out what to do about our 
audit situation. The legislative changes I believe that need to 
be made have to do with conforming the other family-related 
provisions to the definition of a qualifying child in the 
earned income credit, and I do think that there are things that 
we can do administratively much better with the earned income 
credit.
    The Commissioner today is testifying that he is convening 
with Treasury a team, a task force, and a steering committee, a 
high-level steering committee on which I will serve together 
with the Commissioner and the Assistant Secretary for Tax 
Policy, Mark Weinberger, to look at the entire earned income 
credit process, the audit process, and come up with ways in 
which we can streamline this process, get better results at it 
and intrude less on taxpayers who have a right to claim the 
credit. And I think that is really where our attention needs to 
be right now.
    The only fix that I would say that I would like to see is a 
more expanded definition of foster child in terms of the 
placement agency requirement. You know, we changed the law a 
year ago, I believe, to say that a foster child could be one 
that was placed in a home by a licensed or certified placement 
agency, and I believe that in the households of people who are 
eligible for that earned income credit, that does not happen 
very often. Placement is more informal, and what I would like 
to see is that we expand that definition to say where there is 
some sort of governmental agency, third party agency 
certification, that that child is living in the home, where we 
can rely on a local or State agency that has looked at that 
household arrangement, that we should be able to say yes, that 
child is a foster child in an informal sense. I think we can 
get there with that kind of certification, but we need a 
legislative change to fix that.
    Mr. Coyne. Are you far enough along with this 
recommendation relative to EITC to put a price on it, price 
tag?
    Ms. Olson. We are currently looking at that right now.
    Mr. Coyne. What are the problems that taxpayers face in 
calculating capital gains tax?
    Ms. Olson. Well, there are several different rates and the 
form itself is very complicated and what we noted in our report 
was that 2 of the top 10 most common errors on the 1040 form 
are attributable to the schedule D, which is the capital gains 
schedule. Those errors are that people use the wrong 
percentage, the wrong tax rate, to calculate the tax, and then 
interestingly, the other error is that they are transferring 
one number to another line or form and they make an error in 
the transfer. If you have ever looked at the schedule D, there 
are a lot of lines there in addition to a worksheet and it is 
easy to get confused about the instructions for those lines.
    Now, the service went back this past year and eliminated 12 
or 14 lines off of the return and so they made it a simpler 
return in terms of that, but it still is a very complicated 
calculation.
    Mr. Coyne. Thank you very much. Thank you.
    Chairman Houghton. Thank you, Mr. Coyne. Mr. Portman.
    Mr. Portman. Mr. Chairman, thank you very much. And Ms. 
Olson, I think you have provided us a great service. First just 
to clarify one issue that might be confusing to some, and that 
is, why you did not talk to the Treasury Department, tax policy 
people, or to the Commissioner in preparation of your report. 
It is because we asked you not to, and the reason we asked you 
not to is because we want this to be an independent appraisal 
by the Taxpayer Advocate. Sometimes there are tax policy 
reasons, some driven by complexity concerns, some different 
driven by political concerns that lead the Treasury Department 
down one path or another, and we wanted to be sure this was the 
unvarnished view of the Taxpayer Advocate as to what the major 
problems were, and I am delighted that this year you have 
focused not just on that, but on simplification ideas for the 
Tax Code that would make sense.
    You have given us, I think, 23 of them and they are related 
and it is obvious in your report. We appreciate the way that 
you laid it out. For example, when you were talking about 
problems, problem number two was the multiple definitions of 
qualifying child and you described why that was a problem for 
people, that 44 percent over 3 million people who had math 
errors had them attributable to 5 Code provisions that provide 
basic benefits to taxpayers with children.
    So clearly, there is a nexus between Tax Code complexity 
and problems that people are bringing to you and your Taxpayer 
Advocates out in the field around the country.
    So I think this is a very appropriate way for us to get 
into the simplification issues. I will say that you have done 
two things with your report that came out in January. One is 
you have inspired the Treasury to be more focused on 
simplification than it might have otherwise been, and we have 
learned recently through this Committee that the Treasury 
Department is likely to send us some specific examples, if not 
legislative recommendations, over the next several months. 
Perhaps not all at once, Mr. Chairman, but they are going to 
give us some specific ideas.
    You have also inspired some of us to get to work, and I 
have put together legislation, as you know, working with you 
and with Treasury. We have 36 items in our bill right now and 
almost each of your 23 is in here, not precisely the way you 
had them, but very close in almost every case, including the 
uniform definition of a qualifying child. I know this 
Subcommittee, Mr. Houghton and Mr. Coyne, are interested in 
this because there is not the issue of the flat tax or sales 
tax, which are very difficult political issues, frankly, to get 
through the system. It is very important to taxpayers to just 
take the Code as we have it, and get under the hood and look at 
the mess that we have created through legislation over the 
years where you have, for example, several definitions of child 
when you could greatly simplify it for taxpayers by having one. 
So I really appreciate the service you have given, and I am 
glad you did it independently.
    I do have some questions for you, but I will wait and see 
if we get a second round as my time has now expired. Thank you, 
Mr. Chairman.
    Ms. Olson. Thank you.
    Chairman Houghton. Thank you, Mr. Portman. Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman. Ms. Olson, we 
welcome you back and certainly appreciate the work that you 
have done, and as always, my district staff thanks your office 
for the work they do for our constituency and the information 
that you have provided us, in fact, to help folks out there. So 
we do appreciate that being an arm of it.
    So again, we thank you. Maybe to follow up on Mr. Coyne's 
issue on the EITC, and particularly from a standpoint that, you 
know, the numbers we hear up here, a lot of people don't even 
know about it, don't file for it. Are we making any headway at 
all with employee/employer opportunities for the employee to 
sign up with an employer? Are we seeing any changes in numbers 
there at all?
    Ms. Olson. With the advanced EITC, I would have to say we 
are not. The IRS did, several years ago, do an intensive 
campaign and having represented taxpayers in this population 
and tried to talk them into utilizing, you know, face to face. 
I have had very intensive conversations about the benefits and 
how doing the calculations and saying this could go toward 
rent, there is a really strong behavioral urge to using the IRS 
as a bank. Taxpayers want that lump sum at the end of the year, 
and I am not sure what it would take to get that behavioral 
change.
    I think that tendency would be very interesting to study, 
and I know that the IRS is beginning to do some behavioral 
economic types of studies, what drives taxpayers to do a 
certain thing, and certainly one of the most perplexing things 
has been people over withholding using the IRS as a bank. You 
see it very much in the earned income credit population.
    The other thing I don't know about is that people in that 
population tend to be transient in their jobs, and they may be 
nervous that because they change jobs so much or they hold more 
than one job at one time, that they may end up owing at the end 
of the year, which I am not sure whether that could happen or 
not, but they may be afraid. So there is probably a chilling 
effect from that as well.
    Mrs. Thurman. And I know you talk about tax simplification, 
which always is something we talk about, and I guess even in 
your report, there were some that said there is no constituency 
out there for that. Could you give me some ideas about what we 
might--could do? I mean, you simply just talk about definition 
of a child for the purposes of making some things easier. Where 
are some other things that we can look at that would be just as 
easy?
    Ms. Olson. I don't think--I don't know whether this would 
be as easy, but we are starting to look at the education 
incentives in the Code, and we listed that as one of our 
additional issues, that there are right now eight different tax 
incentives for education, and they have all sorts of different 
requirements. I am not sure whether you couldn't simplify them 
down to at least maybe a pot of three or four that would serve 
very different things.
    So a taxpayer--I think many taxpayers feel frankly like 
chumps because they go through this list of things and they 
can't really tell whether they have got the right provision 
that would work the best for them, and maybe there is something 
else out there that would be better, but they just don't know 
and they can't figure it out, and I think sometimes it is an 
example of giving people too many choices is not a good thing. 
Giving them some choice is, and where the choices are discrete 
and they serve very clear purposes, that is very helpful, but 
when they serve shades of purposes, that adds complexity that 
taxpayers, as a rule, can't deal with.
    Other areas we are looking at are the phase ins, phase 
outs, and again, the education incentives are a good example. 
There are different phase ins and phase outs for those 
provisions, and how does somebody walk their way through that?
    I will say something about the uniform definition of a 
qualifying child. I decided to sit down with my return for the 
2000 year. I have an adult son who is living with me right now. 
He is medically disabled right now, and I claimed him, as a 
head of household, for a dependent and I said well, I will just 
go through the forms that someone would have to do. It took me 
8 hours one day to add up all my expenses in order to entitle 
me to those provisions, and it took me 6 hours the next day to 
fill out the form, and the documentation that would have been 
required of me in an audit and that is how long it took someone 
who has a Master's of Law in Taxation and a few other things 
under her belt.
    So if you want the big ticket item on simplification, it 
really is the uniform definition of a qualifying child. You 
have the area of the alternative minimum tax which is a big 
area and really needs to be looked at. We had a phone call from 
someone the other day who had a son who was 8 years old, his 
father had died, and the son was receiving his father's pension 
benefits, and because the child was under 14, that pulled him 
into the alternative minimum tax under the kiddie tax system, 
so he ended up paying AMT on this income that was coming to him 
in that situation and you just--what can I say?
    Mrs. Thurman. Thank you.
    Chairman Houghton. Thanks. Mr. Foley.
    Mr. Foley. Thank you, Mr. Chairman. Some of my colleagues 
have made a sport out of bashing the IRS and at times it may be 
warranted, but it seems like we have a responsibility as well. 
Where do you think Congress has failed or at least how have 
they created some of the complexities that you described?
    Ms. Olson. I take the point of view, and I have spoken 
about this, that complexity isn't necessarily a failure. It 
creeps up on us. You know, that when these new provisions, for 
example for a child, come in there is a reason why Congress did 
these differences, whether it was a revenue reason, or that you 
were trying to target it for a particular population, but it 
does create that complexity, and then there is no moment in 
time where you stand back and say what have we done here to the 
rest of the Code?
    And I think that there needs to be some sort of device that 
is built into our system where we just sit back and say whoa, 
Nelly, let us take the overview and just see whether over a 
period of 5 years we have created some things that are having 
unintended consequences. I think the unintended consequences of 
tax law are the greatest source of complexity, and we have no 
mechanism built in to review these tax laws and come together 
like a hearing here to say what have we done, and do we need to 
regroup.
    Mr. Foley. That is an interesting suggestion because in the 
legislature, we always had sunset provisions on laws that we 
would establish, so at least in 5 year periods, we could 
reflect on the need for it at the time and does that need still 
exist, but there is no mechanism, and it seems like every week 
we are adding some new dilemma to the Tax Code by changing 
something, maybe beneficial for some, maybe not.
    I was noticing in your report, though, you had some very 
significant recommendations on AMT and we all, again, on this 
Committee, talk about AMT, and yet we never really seem to 
figure out how to really fix it. You have what I think is a 
very significant and simple way to do it. Would you elaborate?
    Ms. Olson. Well, we approached the AMT from the Tax 
Administrator point of view, which I think I identified pretty 
well in the report which was looking at the Joint Committee on 
Taxation's estimate that 35\1/2\ million taxpayers would become 
subject to it in 2010. And the people who will become subject 
are middle class taxpayers, most of whom do not know that the 
AMT exists, and so what I was looking at as a Tax 
Administrator, was we are going to be sending out 35\1/2\ 
million notices to people saying you thought you filed your 
return correctly but surprise, you owe more tax. That is not 
going to sit well with these people, and it is going to really 
foul up our system in trying to collect that.
    So we thought, well, if you cannot repeal the AMT in full, 
there may be three ways that you could go at it to peel off 
some taxpayers without quite the large price tag that a full 
repeal would have, and the first one was to say that the 
exemptions on the AMT had not been indexed for inflation 
really, since they were first enacted in the 1980s, and if you 
indexed them for inflation, you peeled off about anywhere from 
400 to 500,000 taxpayers based in 1998. If there were about 
900,000 taxpayers paying AMT in 1998, you could peel off about 
4- or 500,000, and that only had a revenue impact of about 25 
percent of the AMT revenue.
    The other one that I particularly liked because it went to 
simplification in two ways was to say could we take a number 
off the face of the return, and just say if your income was 
under this amount, then you are not into the AMT?
    And we took a look at where the people who were paying AMT 
in 1998 were clustered, and it seemed like there was a 
threshold of about 200,000 of gross income where we could peel 
off people. The interesting thing about the AMT is that it was 
originally designed to get the very wealthy who were not paying 
taxes, and in fact, we have as many, if not more, of that 
category of people today who are not paying taxes, and we are 
not catching them in the AMT.
    So what we are doing with the AMT is we are catching the 
middle class, and we are not catching the people it was 
originally enacted to catch back in the 1970s.
    Mr. Foley. So you basically have a bracketing approach? You 
look at a number and decide whether you are eligible?
    Ms. Olson. Yes.
    Mr. Foley. Let me ask one other question, because our time 
will expire, and I will have a chance to ask others. The IRS is 
planning to implement the National Research Program (NRP), 
which is a nice academic name for plain old random audits. 
Given past taxpayers' complaints about the random policing, if 
you will, how can we make sure that this area of audits aren't 
going to be subjected to the harassment aspect that some 
taxpayers view it as?
    Ms. Olson. I am very sensitive to this issue because as a 
tax practitioner, I have sat through and represented taxpayers 
in the old Taxpayer Compliance Measurement Program (TCMP) 
audits, and they were, in fact, excruciating. They were no fun 
for the taxpayer, for myself or for the auditor for that 
matter. I was briefed early on in the NRP program and raised 
several concerns which the Service did, in fact, address in 
their current proposal. The truly random audits are limited to 
a very small number, and I think where you can avoid the--what 
might feel like harassment is to do reviews of those as they 
are going along so that there is no trailing time between when 
the audit is completed and a review is done. Someone, a 
disinterested person is looking at what happened and can stop 
it if something is going on that would look like harassment.
    I am comfortable, and I say this with some thinking about 
it, that the Service has really listened to what Congress and 
practitioners have said about the old TCMP audits, and has 
really tried to come up with an approach that will give us some 
current data without doing the invasive techniques that we did 
before.
    Mr. Foley. Thank you.
    Chairman Houghton. Thanks, Mr. Foley. I have got sort of a 
broad question here. You say on page 8 of your testimony that 
it is a very difficult practice, and the tax system relies on 
voluntary compliance to draft laws to develop procedures that 
differentiate between habitual or chronic offenders and the 
taxpayers who simply make a mistake. Elaborate on that a little 
bit, will you.
    Ms. Olson. Well, we really need to have a better approach 
to our audit approach, and I think that complexity lets people 
make easy mistakes and then they are easy also for us to catch 
and we put our resources to those easy mistakes rather than to 
the ones that are causing people to feel like you are catching 
me, and I know so and so down the block is doing something even 
more egregious, and you are not even finding him. That really 
is a backwards way of administering our tax system, and I think 
complexity to some degree breeds that.
    Chairman Houghton. Okay. We will have another chance to get 
another question.
    Mr. Coyne. No.
    Chairman Houghton. No questions. All right. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I can't leave our Tax 
Advocate without talking about telephone assistance. You did 
list it as, I think, the first and fourth most serious problems 
still facing taxpayers. This has been a huge frustration for 
many of us including me. In our Commission report, we focused a 
lot on the fact that you are never going to get an IRS that 
works well until you deal with that frontline taxpayer issue, 
calling on the phone, which is the way most taxpayers access 
the system.
    You also need to simplify the Tax Code which we talked 
about a lot in our report, but we have got to figure out a way 
to get these phone trees to work better and so on. I know we 
have made improvements in the last 3 or 4 years, in fact, 
fairly dramatic improvements, but still there is a huge problem 
when such a high percentage of taxpayers can't get through. I 
have seen the U.S. General Accounting Office (GAO) study and I 
have seen other studies and I don't know if I should throw a 
number out, but it is close to half of the taxpayers are having 
some frustration when they call, they can't get through or they 
are getting responses that are not accurate. Your report, 
again, highlights it as a problem both in terms of access and 
responses.
    Can you give us just your personal view this afternoon as 
to what the IRS needs to do right now in terms of enhancing its 
phone service?
    Ms. Olson. Well, we have created an advocacy project to 
monitor this, and we have decided to take pieces of the phone 
service to see what we can learn from it and then make 
recommendations. So I am speaking a little prematurely about 
where we may come out as a result of that advocacy project. I 
have talked to a lot of people about this. They tell me that we 
have, you know, new technology that is in place or is going to 
be in place that will help us get to a better response rate, 
accuracy rate, you know--well, response rate on the phones.
    The second thing they tell me is that the specialization of 
training the assistors will help so that when you do get to 
somebody on the phone, you are dealing with someone who knows 
the answer or can find it. Historically, what they did was they 
had a big book in front of them and they needed to know every 
answer to everything, and now we are trying to make sure that 
the people who are answering the phone are being--they are 
receiving the calls that they are trained specifically to 
answer, so that there is a greater chance that you will get a 
correct answer.
    I think it has got to be that we stay on course with what 
we are doing now, and not let up, and frankly the oversight 
function of you all and of GAO does serve a purpose because it 
drives us forward on that. I think Chairman Levitan can speak 
to a greater depth about the kinds of additional resources that 
we might need, but what I see is we need the wherewithal to 
stay on course, keep training those people and keep watching, 
not letting up.
    Mr. Portman. What do you believe the percentage is of 
taxpayers who do not get through?
    Ms. Olson. I don't know whether I can--the percentage, I 
have pulled some numbers and it varies from day-to-day. 
Taxpayers who get through averages 70, 69 percent. Last Monday 
we had 1.2 million calls. The only day in the history, since we 
have been recording this, of the IRS where we had over a 
million calls, was last summer when there was an announcement 
about the advanced payment of taxes. This filing season, we 
have had 2 days, a Monday and Friday, where we have had 1.2 
million calls, and that response rate went down for a while in 
the 20's because we just can't deal with that kind of volume, 
and what you also see is that the wait time is a very long 
time, and then your abandon rates go up.
    What we did with that advanced rebate, those calls, when we 
realized that there was some confusion about the advanced 
payment and people were calling us on our refund line, huge 
numbers of people calling us on our refund line, was we put out 
a press release, but we also changed the script on the refund 
line so we could explain very clearly before they had to go 
anywhere further into the system, and maybe get their answer 
just right up front, and we found that, in fact, that made a 
big difference once you started tracking those numbers.
    Mr. Portman. If the Chair would indulge me, I think that is 
an important issue to get your perspective on because there is 
a lot of confusion out there over the $300, $500, $600 checks 
that went out last summer. These were rate reduction credits. 
Some people are now believing that this will result in their 
having to pay higher taxes on their 2001 income tax returns. 
That is not true. They will retain the benefit of those credits 
for the 2001 taxes. In fact, their taxes will remain lower and 
continue to be lower because of the tax relief we put in place. 
It is an advanced payment that went into effect January 1 of 
last year.
    Can you explain this afternoon to just set the record 
straight so that taxpayers who might be watching this or those 
of us who might be in a position to get out there and talk 
about it can understand it better as to what the real story is, 
and what those taxpayers should be doing with those returns?
    Ms. Olson. Well, that line on the return is only to be used 
by those taxpayers who did not receive that credit earlier in 
2001 mailed out to them as a separate check.
    Mr. Portman. And again, this is the $300 for individual or 
$500 for household or $600 for couples checks that went out 
last summer.
    Ms. Olson. Right. And so it is an opportunity for them to 
claim it on this year. They are not required to put what they 
received in 2001 as an advanced payment on that line and add it 
back in as a payment and have it subtracted out from their 
refund. If they received the money earlier, they are not to put 
anything on that line. One of our press releases says 
specifically that your tax return preparer may ask for that 
information, but that is only to make sure that you either 
received it or they need to put an entry on that line, don't 
get confused by that.
    So we have tried very hard to explain what it is, but it is 
a new line and there has been a lot of misinformation out about 
there. What we do see is people filling this out incorrectly, 
and we have had to pull returns off line and do adjustments, 
spend our staff time to deal with these.
    The Taxpayer Advocate Service, since the checks first 
started going out last fall, have had about 3,400 cases dealing 
with the advanced payment, and we currently have 228 open cases 
where people are confused, they haven't gotten it, they don't 
know what is happening with their payment, whether they claimed 
it on their return and they shouldn't have or they didn't claim 
it on their return and they should have, and they have already 
filed their return.
    Mr. Portman. But it is clear that does not need to be 
filled out----
    Ms. Olson. It does not.
    Mr. Portman. If somebody indeed did receive it and that is 
line 47 on the 1040?
    Ms. Olson. Correct.
    Mr. Portman. Thank you very much. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you. Mr. Foley.
    Mr. Foley. Thanks again, Mr. Chairman. One further question 
relative to the IRS service. It seems they have made 
significant progress, and one thing I feel terrible for is some 
of the agents in the field and those who make a great living 
working for the U.S. Government and the taxpayers but are 
somewhat put upon because of the constant finger pointing, 
again, at whatever. I sense there has been reform, I sense we 
are making progress, I know we are not perfect, but have you 
noticed that their response to inquiry from taxpayers, their 
helpfulness in the 800 numbers, the weekend opportunities 
people can go to the IRS, is that starting to take effect with 
the culture?
    Ms. Olson. I think it is making a difference. You know, 
everyone has recognized that we need to work harder on our 
field assistance. I think what people are seeing, though, that 
the two really important initiatives have actually started 
working now, which are TEC (Taxpayer Education and 
Communication) and SPEC (Stakeholder Partnerships, Education 
and Communication), which are the prefiling educational 
function of the wage and investment division and the small 
business self-employed, and they are really geared to going out 
to taxpayers even before they walk into walk-in centers with 
problems, to tell them how they should be going about ordering 
their affairs to avoid problems later on, and it is very 
important in the small business community to have that kind of 
proactive approach rather than wait until the return filing 
day, and I think just being out there among taxpayer groups, 
practitioner groups, helps enormously in terms of when you 
actually do have a problem, you are not feeling that you have 
been attacked necessarily, that maybe there is someone that you 
can call up, it is part of a continuing--the IRS wants to help 
you rather than the IRS wants to get you.
    Mr. Foley. Another issue that came up recently is from the 
private sector the entrepreneurial businesses that prepare 
things like Quicken Books and things that help taxpayers 
prepare their taxes. They use automation, they use computer 
models and what have you, and they help you expeditiously 
prepare your own taxes. There has been a proposal, I 
understand, by the IRS, to do that themselves in-house, and of 
course, that reaches and causes hackles amongst those who are 
in the entrepreneurial sector.
    As they say, it has been done in Europe before and they 
were fraught with error problem, the system was unable to 
really process, there was no user fee services where they can 
call up that 800 and get help with it.
    Do you think that is the right course for the IRS to 
compete against these companies and create their own online 
filing service?
    Ms. Olson. Well, the approach that I would like us to take 
is that we are not competing, that we are actually partnering 
with them. I had a very interesting briefing with some folks 
from Oklahoma, the Oklahoma State Tax Agency, and what they 
have done is that they have decided that they want to make on-
line filing available to the citizens of Oklahoma for their 
State returns, but they have contracted that out with the 
private sector. So they are not creating the software, the 
private sector is, in fact, creating it and they are paying a 
fee per return.
    They just contracted out an agreed amount for the original 
return and then X amount for each additional page that is 
submitted through these portals that are basically coming into 
the agency. So the agency gets the benefit of electronically-
filed returns, the taxpayers get the benefit of not paying a 
fee to file, and then the private entities are actually the 
people who are delivering the software.
    I think that there are combinations of that kind of 
service. If we did a bare bones return like that, I think that 
that would appeal to a group of taxpayers, but there are always 
going to be people that want the tax preparation services and 
the ongoing relationship with the preparers.
    The Commissioner and folks from Treasury did meet with 
Members of the software community last week, a couple of weeks 
ago, and I was told it was a very, very productive meeting 
where we talked about how we could partner together rather than 
looking at it as competition, and I will do everything I can to 
encourage that because I think that that will drive us again to 
that goal of achieving electronic filing.
    Mr. Foley. I think that is helpful because I think if we 
endeavor to do it ourselves in-house in the IRS, then there 
will be a lot of problems where at least in these other 
sectors, they can call and get backup and software updates and 
all the things. So I urge you to make that recommendation to 
Treasury. The final question, and I see it in your package 
here, your presentation, joint and several liability, and it 
was unusual, but I got a call on Monday on this very issue 
where a woman I have known for years, who will remain nameless, 
her husband had a business, an ongoing business, and incurred 
significant liabilities for whatever reasons. I don't know all 
the background. But she is in tears because she was told by the 
agent who she was talking to relative to these payments that 
the only way to separate herself was to go ahead and get a 
divorce.
    Now, she has been married 30 years, and that was not the 
intention when she was making the inquiry. I don't want to get 
out of my relationship. I would like to keep my relationship, 
but why am I being brought into this arrangement since I am not 
a shareholder of the company and my husband has had problems, 
yes, but now you are talking about garnishing my wages. You 
mentioned the innocent spouse provision, relief under IRC, 
Internal Revenue Code, section 6015, threatens to become an 
exception that swallows the rule.
    How in theory or practice can we assure that men or women, 
regardless, it could be the other way around, the woman could 
own the business, how do we ensure that that spouse who is 
doing everything they are supposed to be doing, they are making 
their payroll taxes, they are doing all, isn't brought into 
that kind of web because of the other spouse's negligence, 
failure to remit?
    Ms. Olson. The proposal that we came up with, which was an 
attempt to avoid all the inquiry into whether the tax--the one 
spouse knew or had constructive knowledge about this business 
or that they didn't report all the income that they had, which 
are truly intrusive inquiries, was to go to the front-end and 
let us allocate out the items on a joint return. What we are 
doing with the divorced and separated spouses under current 
innocent spouse relief, going back after the fact and saying 
okay, you can allocate it out and we will only hold you liable 
for this portion of it, that is very difficult to do because 
you are usually years down the road, and it is a result of the 
divorce, so sometimes you don't have records and things like 
that.
    But we have talked about this a great deal and really felt 
that if you gave taxpayers the option, that those taxpayers 
actually do think about well, this is his sole proprietorship, 
this is my W-2, and they would be--most taxpayers really would 
be able to fill out two columns, and in fact, many States have 
those two columns on their forms and taxpayers have the option 
of filling out two columns and then combining their payment at 
the end of--their taxes at the end of the day.
    The big issue in that kind of filing system is if you are 
getting rid of joint and several liability in that way, by 
saying that you get to, on the form, allocate out your items 
just on the tax return, is what do you do about jointly held 
property and tenancy by the entireties property, and we 
basically punted on that and said that's a big issue, the 
Supreme Court is hearing a case this session, you know, maybe 
that will be answered; if not, we will take a stab at it. It is 
a big issue and it is a hard one, but we didn't think that it 
was something that should stop us from discussing this----
    Mr. Foley. I am sure certain there are issues where a 
spouse has been actively engaged in the business and probably 
deserves to be held liable for their tax due, but----
    Ms. Olson. Right. If you have been engaged then maybe that 
should be on your column.
    Mr. Foley. Right. But is that now our fault at the IRS for 
not having that documentation early enough where they are able 
to discern up front what their liabilities will be, because it 
seems if you file jointly as a couple and don't predetermine 
this, and that then you are falling into a trap not set by 
yourself but set by the form.
    Ms. Olson. It is set by the law because the law says joint 
filing, and we really have no authority to allocate it out, and 
currently the only relief we could give a married taxpayer 
under innocent spouse, under 6015, is if that taxpayer had no 
actual knowledge of what was either underreported or over-
deducted on the return or had no reason to know.
    Mr. Foley. That is an area, I hope Mr. Portman, as he looks 
at his bill and talks about that, this is a significant area 
and hope you will consider that.
    Chairman Houghton. Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman.
    Ms. Olson, I noticed in your document that one of the 
things you also talk about is penalty and interest issues, and 
we know about those from hearings from before, and you had 
suggested maybe to have the ability to waive penalties for a 
first time offender. Over the course of the years, we all get 
constituent cases, and I had--you may remember this case, but 
whatever.
    What about having the ability to provide refunds for 
innocent mistakes or when 1040's have been lost through no 
fault of their own, like hurricanes and some other things? We 
had an awful case that we had just been working on and working 
on, and we have never been able to resolve it. His papers were 
destroyed, although he had some information that he should have 
been able to receive the dollars back of what he had paid in, 
and they have just said no. Would we also look at those 
penalties being waived but in this case, look at ways where 
somebody could prove that they deserved a refund, that that 
would be an opportunity for them to ask for some kind of a 
waiver as well?
    Ms. Olson. Well, you know, to me, that is less a waiver 
question than it is how we are training our employees, because 
as a person who formerly represented taxpayers, and took, 
often, many cases like that to Tax Court, you would go through 
audit and you would come up with the worst result possible. The 
answer was, well, I can reconstruct these records, or I can 
sort of demonstrate it by third party evidence or my mileage--
and they would say no, no, no.
    And when you would get to court and you would be sitting 
opposite an attorney who had settlement authority, you know, 
you would work out some deal and often it would come out that 
maybe the taxpayer was entitled to a refund, and you could get 
it that way. I would like to see that approach moved further 
down along the administrative system so people aren't having to 
go to court because many don't.
    Mrs. Thurman. They can't.
    Ms. Olson. They fall out. They can't afford it, they are 
scared, they give up. How can we get to that, to the front line 
employee who is handling those things? And there is probably a 
break-even point where that kind of discretion should rest, but 
you need that.
    So I don't know that we need a waiver then, just that we 
need better guidance to our employees about how to handle those 
kinds of cases.
    Mrs. Thurman. Thank you.
    Chairman Houghton. Thanks. I have just got a couple of 
questions to wrap this up. You, in your previous life, were 
founder of a thing called Community Tax Law Project, which was 
really interested in low income tax payers, and I wonder 
whether some of the low income tax payers are being caught 
here, people who do not speak English, and particularly ones 
who are exposed to our complex tax laws. Do you want to 
elaborate on that a little bit?
    Ms. Olson. I think, particularly for the low income tax 
payers, the family status provisions are the big playing item 
for them. They may have so little income that they cannot, in 
an audit situation, prove that they provided more than half the 
support, and many of them keep paying things in cash. They 
don't have checking accounts. They don't have documentation.
    For the ESL, English as a second language, taxpayers, some 
of them have immigration issues. So there is this basic fear of 
the Internal Revenue Service, and we see nonfilers or we see 
that they can't get Social Security numbers, and they are 
making up Social Security numbers.
    It is very difficult to deal with these populations and 
bring them in the fold. And complexity for them, I mean, you 
have someone who is able--if you live in Mexico and you can 
claim your child as a dependent, if you are working in the 
United States and your child is in Mexico and you are sending 
every dollar you make down to Mexico, you can claim your child 
as a dependent, but your co-worker may be from El Salvador, and 
he may be sending every penny down too, but he can't claim his 
child as a dependent because that is the way our law is 
written. That leads to mistakes. Their co-workers, they will 
talk about it, they will go to their tax preparer. The El 
Salvadorian will say I want to claim my child. Now you have got 
a mistake and we have to audit it. We have to pick it out and 
deny it. And in many instances, those people have gotten loans 
against their refunds, you know.
    Chairman Houghton. This was a 501(c)(3) operation that you 
had----
    Ms. Olson. Yes.
    Chairman Houghton. But is there anything you feel the 
government should do more in that regard?
    Ms. Olson. Yes. With regard to----
    Chairman Houghton. With regard to helping the low income--
--
    Ms. Olson. Yes. Absolutely.
    Chairman Houghton. People who were totally buffaloed by the 
complexity of the system.
    Ms. Olson. Absolutely. The Taxpayer Advocate Service has 
been doing a research project to find out what are the best 
ways for us, ourselves, to do outreach to that community, and I 
mentioned SPEC, Stakeholder Partnership Education and 
Communication, earlier today, the outreach part of wage and 
investment. They are truly focusing on that and working with 
Health and Human Service agencies in the State and local level 
to find ways to get information out to welfare populations, 
working with various Hispanic groups and other immigrant groups 
to get information out. So I think there is very much a 
consciousness of that.
    Chairman Houghton. Okay. Well, thank you very much. I have 
got just one last question. We have kept you too long here and 
I appreciate it. I have got a piece of paper here that says the 
most serious problems encountered by taxpayers--it came out 
from your office, and there are 23 issues but if you were to 
give us the top three, what would they be?
    Ms. Olson. Well, you know, we have said the phone service, 
we have said the earned income credit eligibility, and I guess 
even though I say I don't want to say it, but the complexity of 
the tax law, the uniform definition of a qualifying child, it 
just trips everybody up. That is a legal issue. The earned 
income credit eligibility I think is an audit procedure issue. 
It is something we can fix, and the phone service is something 
we can fix.
    Chairman Houghton. Right. Well, thanks, Ms. Olson, very 
much.
    Ms. Olson. Thank you.
    Chairman Houghton. We appreciate your time and you have 
been very helpful to us and hope to see you again. Now what I 
would like to do is ask Mr. Levitan to come up and testify. Mr. 
Levitan, as everyone knows, is Chairman of the Oversight Board. 
Thank you for coming, and you can begin your testimony anytime 
you want.

STATEMENT OF THE HON. LARRY LEVITAN, CHAIRMAN, INTERNAL REVENUE 
                    SERVICE OVERSIGHT BOARD

    Mr. Levitan. Mr. Chairman and Members of the Subcommittee, 
thank you for holding this hearing and inviting me to testify. 
It is an honor to appear before you today on behalf of the IRS 
Oversight Board and to discuss our first annual report. Let me 
preface my remarks by acknowledging the role that this 
Committee had in the passage of the IRS Restructuring and 
Reform Act 1998. That legislation created the IRS Oversight 
Board, and more importantly established a strong foundation for 
a new and greatly improved IRS.
    Since its inception in September 2000, the Oversight Board 
has acted to meet its responsibilities as defined in that 
landmark legislation. The report I am discussing today reflects 
what the Board has learned during its first year of operation. 
I would like to summarize my written statement and focus on 
areas that are particular interest to this Subcommittee. Two 
major topics addressed in our annual report were an evaluation 
of the current state of the IRS and an assessment of how the 
IRS got into that state.
    To briefly summarize the Board's finding on the state of 
the IRS, we found that it is still not effectively and 
efficiently serving the needs of the American taxpayers, 
although it has made significant progress since 1997.
    For example, customer service, although improved, has not 
risen to desired levels, and enforcement activity has fallen 
for many years to what we now believe is a dangerous level. 
These problems are compounded by outmoded computer systems that 
handicapped IRS workers and prevent effective service from 
being delivered. On the positive side, we found that the IRS is 
making progress and has put in place several key elements that 
establish a foundation for further progress, including a 
commissioner with a fixed term and a management background, a 
major reorganization designed to better focus on customer needs 
and provide clear accountability, a strengthened senior 
management team and a business systems modernization program 
that will eventually provide modern business processes and 
tools for employees and taxpayers.
    I want to dwell a moment on modernization, because the 
Board believes that the IRS cannot continue to operate with its 
current technology and methods of doing business. These 
problems cannot be fixed with short-term improvements. Real and 
lasting improvement will only be realized with the successful 
implementation of the modernization program. The Board is 
pleased that the modernization effort is being conducted in 
accordance with the logical and well-thought out strategic 
plan. The challenge for the IRS, and I am afraid that it is a 
significant challenge with many risks, is to execute that plan 
effectively.
    The Board's report presented data on four factors that 
influenced how the IRS got into this current state of 
operations: Number one, growth of the number of transactions, 
especially complex transactions, complex tax returns; decline 
in the number of IRS employees; past failures to modernize its 
outdated technology; and finally, the complexity and the 
growing complexity of the Tax Code.
    I know that this Subcommittee is particularly interested in 
Tax Code complexity and its impact on tax administration. 
Although the Board's charter is tax administration, not tax 
policy, there is clearly a relationship between the two. 
Although it would be inappropriate to say that complexity is 
the cause of the IRS's performance problem, it is fair to say 
that Tax Code complexity is the enemy of efficient tax 
administration. Complexity negatively impacts customer service, 
enforcement and public attitudes.
    One way that complexity affects customer service is by 
increasing the need of taxpayers to contact the IRS and 
lengthening the duration of their calls. It can affect 
enforcement by delaying the resolution of cases, stretching IRS 
resources, and adding interest and penalty costs to taxpayers. 
The effect of complexity on taxpayer attitudes can be 
insidious. The infamous Forbes Magazine of last year entitled 
``Are you a Chump?'' identifies complexity as a causative 
factor in the rise of aggressive tax shelters and erosion of 
public confidence in our tax system.
    To test taxpayer attitudes, the Board had a survey 
conducted last year. The results are in our report, but the 
bottom line was that a significant drop in attitudes about the 
acceptability of cheating occurred from 1999 to 2001. My 
comments on the complexity of the Tax Code and the need for 
simplification is not new news, and I am sure not a surprise to 
anyone.
    Every taxpayer in the country knows that the Tax Code is 
ridiculously complex. Every Member of Congress knows the same 
thing. Many of you speak frequently and eloquently about the 
need to fix this serious problem. Despite this widespread 
understanding, the problem remains and grows worse every year. 
Only Congress can fix it. The IRS Oversight Board strongly 
supports Tax Code simplification. It will be good for the IRS, 
it will be good for the overburdened taxpayers, and it will be 
good for the country. The time for meaningful action is long 
overdue. I want to thank you again for this opportunity to 
testify, and I would be pleased to answer any questions.
    Chairman Houghton. Thanks very much, sir.
    [The prepared statement of Mr. Levitan follows:]
Statement of the Hon. Larry Levitan, Chairman, Internal Revenue Service 
                            Oversight Board
    Mr. Chairman, and Members of the Subcommittee, thank you for 
holding this hearing and inviting me to testify. It is an honor for me 
to appear before your Committee today on behalf of the IRS Oversight 
Board to discuss our first annual report to Congress.
    Let me preface my remarks by acknowledging the role that this 
Committee had in the passage of the IRS Restructuring and Reform Act of 
1998. Since its inception in September 2000, the Oversight Board has 
acted to meet its responsibilities as defined in that landmark 
legislation. The report that I am discussing today reflects what the 
Board has learned after its first year of operation.
    The Oversight Board has found that the IRS is still not effectively 
and efficiently serving the needs of the American taxpayers, although 
it has made significant progress since 1997. Customer service, although 
improved, has not risen to desired levels and enforcement activity has 
fallen for many years. These problems are compounded by outmoded 
computer systems that handicap IRS workers and prevent effective 
service from being delivered. It is not surprising that this 
environment has resulted in dissatisfied taxpayers and inadequate job 
satisfaction among IRS employees.
    On the positive side, the IRS is making progress and has put in 
place several key elements that establish a foundation for further 
progress, including a Commissioner with a fixed term and a management 
background, a major reorganization designed to better focus on customer 
needs and provide clear accountability, a strengthened senior 
management team, and a business systems modernization program that will 
eventually provide modern business processes and tools for employees 
and taxpayers. The entire modernization effort is being conducted in 
accordance with a strategic plan that has been approved by the 
Oversight Board, and monitored by balanced performance measures that 
will provide Congress, the Administration, the Oversight Board and 
other stakeholders a quantitative means to evaluate progress.
    Neither the IRS nor the Oversight Board is satisfied with the 
current state of IRS' performance. The Board's report presents data 
that indicate the IRS needs to improve its performance in three 
dimensions: productivity, customer satisfaction, and employee 
satisfaction.
    Performance measures for the key areas of customer service and 
enforcement were troubling to the Oversight Board. Customer service 
metrics pertaining to both level of service and quality associated with 
toll-free telephone operations need considerable improvement. Quality 
levels at IRS walk-in sites are just being baselined and need 
attention. Because of the link between employee and taxpayer 
satisfaction, employee satisfaction levels for these and other 
operations also need improvement.
    An effective IRS is an important part of our government, and the 
IRS can ill afford to fall behind. Old technology, a growing economy 
with more tax transactions, reduced IRS staffing levels, and an 
increasingly complex Tax Code have created a situation where the IRS 
must make up a lot of ground. The Board believes that a private sector 
company that fell behind this dramatically would find its very survival 
threatened. However, failure is not an option for the IRS. Our society 
depends on a tax administration agency that can help taxpayers 
understand and meet their tax obligations and effectively enforce the 
tax laws.
    I know that this Subcommittee is particularly interested in Tax 
Code complexity and its impact on tax administration. My fellow 
panelist, Nina Olson, the IRS Taxpayer Advocate, has made a compelling 
case in her annual report that Tax Code complexity negatively affects 
the American taxpayer.
    The Oversight Board is concerned that the broad decline in 
enforcement activity increases our reliance on voluntary compliance, 
and fears that the public's attitude towards voluntary compliance is 
beginning to erode. Because of this concern, the Oversight Board 
initiated a survey to obtain data on taxpayers' attitudes regarding 
their obligations to report and pay their fair share of taxes. The 
survey, taken in August 2001, asked two questions from an earlier 1999 
IRS survey and three new questions.
    The survey results are included in the annual report, but the most 
troubling result was in response to a question that asked how much, if 
any, do you think is an acceptable amount to cheat on your income 
taxes. In 1999, 87 percent of the respondents replied ``not at all.'' 
In 2001, the percentage of respondents who selected that answer fell to 
76 percent.
    The Oversight Board is reluctant to assign too much importance to a 
single survey, but intends to repeat the survey in 2002 using the same 
questions. There is cause for alarm if this trend continues.
    To better understand compliance issues, the Oversight Board 
believes there is an urgent need for the IRS to increase its research 
on taxpayer compliance so it can identify and correct broad areas of 
taxpayer noncompliance. The IRS is developing a new program, the 
National Research Program (NRP), that will provide the necessary 
research. Past approaches were viewed by Congress and taxpayers as too 
intrusive, and the IRS is designing the NRP to lessen taxpayer burden 
while still obtaining a sample sufficient to produce meaningful 
results. The Oversight Board supports the NRP and requests 
Congressional support for this program.
    The long-range solution to many of the IRS' problems is to 
modernize its business processes and information technology. The IRS' 
Business Systems Modernization (BSM) program is designed to transform 
both IRS' business processes and information technology into modern, 
efficient processes and systems that incorporate world-class best 
practices. The BSM program has been progressing slowly, limited 
primarily by IRS' capacity to manage the program. Efforts from 
inception to date have focused on establishing an enterprise life 
cycle, a standard architecture, and low-risk projects. In 2002, 
however, several major deliverables are scheduled, and the upcoming 
year will be a test of the IRS' ability to manage this program.
    The longer it takes the IRS to modernize, the longer taxpayers will 
be deprived of the benefits of improved IRS processes and systems, and 
be forced to endure the inadequacies of antiquated systems in place 
today. Even under the best of circumstances, it will take the IRS far 
too long to complete its modernization program. The Oversight Board 
recommends that BSM be accomplished as quickly as possible, consistent 
with the IRS' ability to manage the program and absorb change. The 
private sector has already learned that accomplishing programs in as 
short a period as practical actually lessens overall cost and risk. To 
increase the pace of modernization, all organizations involved in BSM 
must do a better job. The Oversight Board's recommendations for key 
organizations include:

     LThe IRS must improve its program management ability, work 
more effectively with the PRIME Contractor, and manage/implement change 
more effectively.
     LThe PRIME Contractor must understand and achieve its 
responsibilities to deliver business results within budget and on 
schedule and improve its breadth and depth of skills.
     LThe Administration must understand the importance and 
critical nature of the situation, support the long term plan, including 
increased investment levels, and hold the IRS responsible for meeting 
the plan.
     LThe Congress must accomplish the same tasks as the 
Administration, and, in addition, speed up the process for review and 
release of BSM funding.

    Oversight organizations must rationalize their roles to the extent 
possible and eliminate unnecessary overlap, leverage assets to advise 
in a more effective manner; and recognize that quality cannot be 
achieved by repetitious, and at times, inefficient inspection.
    Notwithstanding the need for a long-term modernization program, the 
IRS must also improve in the short term. Potential means of realizing 
short-term improvements may be organizational changes, process 
improvements, or modifications to the legacy technology base.
    An IRS that performs better requires adequate funding as its 
workload continues to increase. As discussed in our interim report on 
the FY2002 budget, inadequate funding and resources will make it 
impossible for the IRS to meet any of its strategic objectives. The IRS 
still has a long way to go to reach the level of performance envisioned 
by both the IRS Restructuring Commission and the IRS Restructuring and 
Reform Act. Failure to provide adequate funding will deprive the IRS of 
resources it needs to make improvements in customer service and 
compliance.

                                


    Chairman Houghton. Mr. Portman.
    Mr. Portman. I thank you, Mr. Chairman and thank you, Mr. 
Coyne, for allowing me to go first. I have another meeting I 
have to go chair, and I apologize I can't stay for your entire 
question and answer period, but I want to start by, again, 
thanking you for stepping up to the plate and be willing to 
take on this arduous task. It is a very important task as well 
as difficult, and frankly I am a little discouraged by your 
report. I am an eternal optimist and I had hoped that by this 
time, having passed the legislation in 1998, hoping that the 
Oversight Board would have gotten in place a year and a half 
before it did, that we would have better news. At the same 
time, you did point out two things that are interesting.
    One is that there is restructuring going on that is a 
positive, and there are a number of positive management or 
reorganizations efforts taking place; second, that 
modernization is taking place. We have made huge strides there. 
At the same time you acknowledge we have a long way to go. 
Second, you talk about some of the external factors that are 
affecting this, and it is almost as if as we are beginning to 
get the IRS back up on its feet and as we are getting some 
better feedback back from taxpayers as to service, additional 
problems are arising that make it even more difficult to stay 
above the course, and just stay above water. One is, just the 
number of returns we are getting and the amount of money coming 
in.
    I think in the last 10 years the amount of money has almost 
doubled that comes in from taxpayers in a period of time of 
just 2 years. I think you point out in your report 1998 to 
2000, we had an increase of 18 percent on the number of tax 
returns, and during that same time, the number tax returns 
examined decreased by 60 percent. And that is partly because we 
put more funding into taxpayer service, front line activities 
as well as a modernization efforts which are extremely 
important, and that is the only way, long term, we are going to 
see the kind of improvements you would like to see is through 
modernization.
    Then you also talk about complexity, and I am glad you have 
added your voice to that this afternoon. We don't expect you to 
give us the answers. That is more in our bailiwick Treasury and 
Taxpayer Advocate, perhaps, given the nexus we talked about 
earlier. We need you to tell us how to make this thing work 
with the bad system we have but your voice is appreciated, and 
it is heard by this Subcommittee, and as I said, we are working 
on legislation to try to at least get through what we can in 
this budget environment because a lot of that complexity, 
simplification of those complex rules will result in additional 
revenue being needed and that is difficult to find.
    Obviously, the best example of that is alternative minimum 
tax which may be $300, $400, or $500 billion in lost revenue 
over a 10-year period we look at. My question to you is this: 
Given what I view as your kind of mixed picture of results at 
the IRS, first in general, are we on the right track, at least 
given all these external factors and the other things that I 
discussed, number one; and number two, is the Board working? 
Again it got in place because of some foot-dragging, I believe, 
by the Clinton Administration and perhaps the Senate to a 
certain extent, but once you got in place, it seems to me you 
found the right people, you have got a great Board, you have 
got people with experience and knowledge and commitment 
including yourself.
    Is the Board working as you envisioned it, and as was 
envisioned in the report that Mr. Coyne and I were a part of? 
If you can answer those two questions, I know they are general, 
but it would be most appreciated.
    Mr. Levitan. Mr. Congressman, the IRS is on the right 
track. The first thing that they have put into place, and I am 
very pleased with this, is a very logical, very thorough, and 
very meaningful strategic plan. I have dealt with troubled 
organizations my entire career, and typically they fall into a 
number of categories. Many of them don't even know they are in 
trouble. Others know they are in trouble but don't know how to 
fix it.
    Others are developing a plan to fix their problems and then 
finally executing the plan. The IRS knows they are in trouble, 
knows what the problems are, has an excellent plan to fix it 
and is in the process of executing that plan. We have seen and 
we monitor that 
execution on a continuous basis. We would like to see it move fa
ster.
    We would like to see more results more quickly and one of 
the things that I have learned during our year and a half in 
office, is that we have to be patient. It does take a long time 
because of the size and complexity of things we are talking 
about. But the IRS should be held to strict standards of 
executing that plan. We think they are doing that. As it 
relates to the Board, I am obviously not completely objective 
in this matter, but I think we are doing a fine job.
    We went into business September 2000. I am very pleased 
with my fellow Board Members. They are bright, hard-working, 
dedicated and interested. We have been very much involved in 
all of the elements of the IRS operations, their strategic 
plan, their budgeting process, their modernization, the ongoing 
and daily operations. We provide oversight of that. We are in 
constant communication with the Commissioner and with his other 
senior executives. We think we have a good relationship with 
all of them. We believe they listen to us and we believe that 
that communication is effective.
    So I think we are making progress. I am also convinced that 
as the Board gains additional experience, learns more and more 
about the operations of this very complex organization that we 
will become even more effective in the future.
    Mr. Portman. Again, I thank you, Chairman Levitan. And let 
me make one final comment, if I might. The purpose of this 
unique public/private Oversight Board of a Federal agency was 
to bring continuity, expertise, and accountability to the 
system and I know you are focused on all three of those. The 
continuity comes in now because as Chairman Houghton said, we 
are nearing the end of the Commissioner's term. My own view is 
that he has been an excellent Commissioner, because he is 
focused on management and the real problems that underlie the 
lack of good taxpayer service, but my understanding is that he 
will not seek an additional term. I wish he were seeking an 
additional term.
    But this puts you in two positions. One is the position of 
recommending to the President under our statutory framework 
this Committee reported out, a recommendation to the President 
as to who the Commissioner ought to be. So you have a role in 
finding somebody who is good. But second is that continuity 
function. The reason we wanted these 5-year staggered terms was 
that somebody knew what the heck was going on, because as we 
looked back over the last 30 and 40 years at the IRS, we found 
that every 2 years there was a great reorganization, a great 
reform effort, but then it just kind of got lost in the shuffle 
without that continuity and accountability that comes with 
that.
    So we appreciate the fact that you are, as you say, gaining 
that experience and knowledge, we will be in a better position, 
but also you have that continuity to be able to do to be there 
after this commissioner has left and continue to promote the 
reforms that we have finally begun starting really in late 
1997. Thank you for being here and thank you for your service.
    Chairman Houghton. Thank you, Mr. Portman. Mr. Coyne.
    Mr. Coyne. Thank you. Thank you, Mr. Chairman. Mr. 
Chairman, I would just like to follow up on Congressman 
Portman's questioning relative to the Commissioner, and wonder 
what official role does the Board play in selecting or 
recommending a successor to Mr. Rossotti?
    Mr. Levitan. We are very actively involved in the process 
of finding Commissioner Rossotti's replacement. We started on 
this process a number of months ago. The Board is very 
concerned that we get an individual who has the right 
qualifications. We felt it was important to start the process 
quickly and to get everybody working together. We went to 
Treasury, and we said we want to do a search for a set of 
candidates together with Treasury. They agreed to work with us 
and that partnership has now been ongoing a number of months.
    The first thing we did is we developed a detailed set of 
specifications for the job and you probably won't be surprised 
to know that they were patterned to a great degree around some 
of the--many of the qualifications that Commissioner Rossotti 
has. We had complete agreement on those specifications between 
Treasury and the Board. We then went out and jointly hired an 
executive search firm to do a search for candidates and the 
Board is paying for that executive search firm. That search 
firm has now been working for about a month and a half. They 
have started to bring us a preliminary list of names of 
individuals who they believe are both qualified and have 
expressed some interest in the position. I will tell you that 
it is very hard to find someone qualified. It is even more 
difficult to find someone qualified who is willing to take on 
this very difficult job. That process is ongoing. We hope to in 
a relatively short time have a list of qualified names to pass 
on to the White House.
    Mr. Coyne. Will you and the Board be able to interview 
prospective candidates?
    Mr. Levitan. Absolutely.
    Mr. Coyne. You will?
    Mr. Levitan. Yes.
    Mr. Coyne. As you pointed out in your testimony, the 
results in your report are not entirely satisfactory as you 
would like to see them relative to the improvements in the IRS. 
What budget level do you recommend for the IRS in fiscal year 
2003?
    Mr. Levitan. The budget process for 2003 was quite 
different from 2002. In this case also, we worked very closely 
with Treasury in evaluating the budget needs of the IRS and 
determining what budget to recommend. The recommendation that 
we made was for a 2003 budget of $10,056,000,000. That number 
is really not completely comparable to the Administration's 
budget. There are a whole series of reconciling items but the 
bottom line is that we are recommending $92 million more than 
the Administration. This is significantly less of a difference 
than the 2002 budget and we feel much better about both the 
process that has been gone through this year and the end 
results.
    Mr. Coyne. So the difference between your budget, your 
request, and what the Administration has budgeted is about $92 
million?
    Mr. Levitan. Ninety-two million dollars, yes.
    Mr. Coyne. Thank you.
    Chairman Houghton. Thanks, Mr. Coyne. Mr. Foley.
    Mr. Foley. Thank you very much. Welcome to the hearing. 
Commissioner Rossotti's term ends in November 2002, and I 
understand you are engaged in a search for candidates for new 
IRS commissioner. What skills do you believe the new 
commissioner should have?
    Mr. Levitan. First and primary are leadership skills, very, 
very strong leadership skills. We would like to see that having 
been demonstrated in an individual who has run a very large 
organization. The IRS is an organization of 100,000 people 
spread over the entire country in a very complex organization. 
We are looking for a person who knows how and has the 
experience in managing and providing leadership to an 
organization like that.
    Second, one thing that is going on at the IRS at the 
present time and will go on for a long time to come is change. 
Change is difficult, large and complex change is very 
difficult. So therefore, we are looking for an individual who 
understands the process of change, who has managed change in a 
large and complex organization. Much of that change will come 
through technology. While we feel that the IRS was very 
fortunate in having a technologist in its present Commissioner 
and that would be a plus, we don't think that it is an absolute 
necessity, but we feel that the individual does have to have an 
understanding of how to use technology to change an 
organization.
    We believe the individual needs to have very strong 
communication skills to communicate down through an 
organization that needs constant communication and at the same 
time communicate effectively up through the Administration, 
Treasury, OMB or Office of Management and Budget, the White 
House, as well as the very important communication to Congress.
    And finally, we think it is critical that whatever 
individual we find have a lot of patience. This is a job that 
requires patience and I have talked about this to people and 
they have chuckled at that and they have said that this one is 
a little difficult because an awful lot of the very effective 
Chief Executive Officers (CEOs) of this country, who I worked 
with over the years, very often get to their position because 
they don't have a lot of patience and that job does demand that 
in addition to all of those other qualifications.
    Mr. Foley. I guess it is finding somebody that fits the 
profile, if you will, and it is difficult because I view the 
IRS much like a utility company. I mean you have to get the 
power from them. You don't have a choice. They bill you, tell 
you what you have used. You have got to assume they are 
correct. And if you take another model, not a utility company, 
but a CEO from a service company like Home Depot, for instance, 
where service and quality and satisfaction are the hallmarks in 
order to get repeat customers, that is the two different models 
you operate under.
    One can guide the company through sheer power and 
determination, and one has to adapt to the consumer's 
preferences and decide what is best and where we are heading. 
It would be interesting if you found somebody who had a little 
hands-on experience with customers because I think one of the 
fallbacks is--and the complaints we get isn't necessarily--and 
it is the complexity.
    I mean, everybody complains about that, but they more often 
talk about the hostility that seems to be from the get-go. It 
is adversarial and sometimes it seems when you review their 
files, you find out it may have been an interpretation error. 
It wasn't an attempt to be noncompliant, it was simply they 
mistakenly assumed that was the right response in that box. Do 
you find the IRS is moving toward a more--and I seem to see it 
but I am wondering your advocacy there, if you think it is 
starting to be more consumer friendly?
    Mr. Levitan. I think the IRS is definitely making progress 
and definitely has goals and very quantified objectives in 
order to go that way. If you look at the initiatives in what 
they are trying to accomplish through both their recent 
reorganization, through the measurements they have put in place 
throughout the organization, customer service is a major focus. 
And if you look at some of the statistics over the past few 
years, they have made some meaningful progress in the customer 
service area. They have a long way to go, but they are getting 
better at it, and they are very much focused on accomplishing 
that.
    Mr. Foley. Mr. Chairman, will you indulge another question?
    Chairman Houghton. Yes.
    Mr. Foley. Thank you. I guess my conflict at government at 
times, the structure of government, is the difficulty in which 
to gather information. It may relate to immigration, finding 
out if somebody is legally here, and they are going to work, 
and we are finding out if they are taxpayers and if they have a 
Social Security number. I can put my debit card in a machine in 
Europe and find out if I have money available. They will 
convert it to the currency in the country I am in and do it all 
within 7 seconds.
    And it seems like every computer model or any system we 
have in government you never get that answer that quickly. How 
do you find their internal abilities via computer technology? 
Is it up to date? Are we making progress? Because it seems like 
we could clear up a lot of these unintended consequences, 
whether they are Medicare over-reimbursement. There are just so 
many things that technology seems to have a better model and it 
is not used often in government.
    Mr. Levitan. You are exactly right. If you look at the 
foundation of the IRS' systems, they were built when John F. 
Kennedy was President. They are old, they are outdated, they 
are outmoded, they are inefficient to operate and maintain. 
They are extremely difficult to utilize. And many of the issues 
with the poor service that the IRS provides is because of that 
old and outmoded technology.
    As you are, I am sure aware, the IRS has made previous 
attempts to update and modernize that technology, and those 
attempts in the past have failed at the cost of billions of 
dollars. Three years ago a new modernization program was 
started. There is a detailed strategy and plan and blueprint to 
carry out the modernization, to replace all of that old 
technology and to provide the kinds of service that you 
describe, the kinds of service that can be provided through 
updated technology. That program, as I said, has been under way 
for 3 years. Some progress has been made. It has not been 
without bumps and stops and starts and some issues and 
problems. However, they are on the right track and they need to 
be supported in the execution of that modernization program. 
The strategy, the approach, the design of that program is 
excellent. The need to execute the plan effectively is their 
major challenge at this point in time.
    Mr. Foley. Why is that? I mean corporate America couldn't 
exist under the way we do these rubrics. Every Member now has a 
Blackberry. We carry around the latest technology. Because we 
wanted them, we got them. So why aren't we fulfilling our 
mission for the IRS by giving them the money necessary for the 
upgrade?
    Mr. Levitan. I would not say you are not giving them the 
money that they need. You have given them a lot of money to do 
the modernization. Unfortunately, things have gotten so bad 
over such a long period of time and these systems are so large 
and so complex that they cannot be replaced in 1, 2, 3, or even 
5 years. Unfortunately, it will take a long time and a lot of 
money to get this change fully in place. They have made 
progress but it is going to take a long time.
    If you just think of the complexity of it--let me start--
think of the complexity of the Tax Code and then translate that 
into the complexity of a set of commuter systems. Think of the 
size of the number of tax returns that come in, multiply that 
by the complexity of the systems. This is a more complex 
computer environment than virtually any environment of any 
business in this country. And where you find modern, even large 
complex corporations like General Motors or Citicorp spending 
large amounts on technology, they are updating their technology 
on a continuous basis. They never have to completely replace 
everything that they have at the present time. And that is the 
position that the IRS has found itself in and is trying to work 
its way out of. But the objectives are clearly to get to the 
point that technology is doing what you described.
    Mr. Foley. One more?
    One more quickly. The situation with the bank in 
Pennsylvania where the returns were basically set aside, have 
we had more instances of that kind of subcontractor problems?
    Mr. Levitan. If we are talking about the specific situation 
with processing of payments, this is the only problem that I am 
aware of. I am not aware of any problems with any of the other 
contractors who are processing payments.
    Mr. Foley. Have you pursued an audit claim on all the other 
vendors to make certain that that is not a typical----
    Mr. Levitan. We know there is an ongoing review and 
evaluation of all of the contractors. We know that TIGTA, the 
Treasury Inspector General for Tax Administration, has looked 
at this. The Board itself has not gotten into the issue of 
other contractors and what they are doing.
    Mr. Foley. Thank you, Mr. Chairman.
    Chairman Houghton. Thank you, Mr. Foley.
    I am interested in trends. And what I think you are saying 
is despite the fact that the IRS has had difficulty in 
organizing itself, getting enough money, getting the right 
people, getting the right equipment, that you feel this 
modernization program is on track, is that right?
    Mr. Levitan. I feel the modernization program is on the 
right track. Now it is a question of the speed in which it can 
move down that track.
    Chairman Houghton. Given the resources they have got and 
that we have given to them, what do you think is a reasonable 
terminal point for being up to date and modernized?
    Mr. Levitan. Unfortunately, it is going to take a long 
time. Exactly how long I don't know, probably close to 7 to 10 
years. But during that period it is not that we won't see any 
improvements until the end, we should see fairly continuous 
improvements.
    One way you might think about it is building these new set 
of systems is somewhat like building a huge building. And if 
you watch someone build a huge building for a long time you 
don't see anything. You know, people are just digging a big 
hole in the ground and filling it full of cement, and that is 
necessary. That is most of what they have been doing over the 
past 3 years is getting the foundations built. And now just in 
this year we are starting to see applications being delivered 
that will provide some improvements in customer service.
    Chairman Houghton. Let me try to interrupt here just a 
minute, so I understand that. You are building the base, you 
start from the cellar on up, and you really haven't seen an 
awful lot of improvements yet but you will. I think the issue 
that I am interested in is as you move along here, let's say it 
takes 7 to 10 years, by that time a lot of the stuff you put in 
know will be, well, obsolete. What are the crisis points that 
we are going to be meeting because we do not have or have not 
had the amount of funds to modernize this program earlier?
    Mr. Levitan. I think the risks that we face, and there are 
significant risks with the existing systems, I think that the 
IRS does a yeoman job in keeping the existing systems running 
on a day-to-day, week-to-week basis. In getting us through the 
filing season every year. As we add changes to the Tax Code and 
new requirements on top of that on a continuing basis, it does 
add risk on the ability of those systems to handle it.
    In addition, we are very dependent on a relatively small 
number of aging employees who are maintaining those old systems 
that are written in computer languages that aren't even taught 
in the schools today. So there is a risk of keeping that 
infrastructure running. And that is one of the major reasons 
why we need to keep this program moving ahead as quickly as 
possible.
    Chairman Houghton. Let me put words in your mouth, and you 
correct me. What you are saying is that we have a good program, 
we are going to do a good job on it, but, Congress, do not 
further complicate our mission as we go along.
    Mr. Levitan. I wouldn't put it that way. In our report we 
laid out what we thought were the major things that different 
players needed to do to make modernization effective and make 
it successful more quickly.
    Number one, the IRS needs to improve its ability to manage 
the program. You have heard from GAO on what the status of the 
IRS' management capability is. We think GAO's reports are very 
accurate and very helpful. Again, they have made progress here. 
They need to continue that progress. They have strengthened 
their capability. They need to strengthen it further.
    The prime contractor who has significant responsibility to 
build and implement the technology needs to get better on 
delivering product on schedule, on budget, and with the right 
level of quality. We think that the prime contractor also is 
addressing this, has strengthened their team.
    We believe that the Administration and Congress needs to 
understand that this is a difficult program, it is not going to 
be all successes. There are going to be some bumps in the road. 
You need to understand it. You need to hold the IRS responsible 
for doing a quality job, but also have some patience and to 
provide adequate funding for them to get the job done.
    Chairman Houghton. Let me switch the subject matter. I want 
to talk about attitude. There is some disturbing evidence that 
you brought up that 25 percent of the people who file returns 
now feel that it may be acceptable to cheat on those returns? 
And also, from an internal standpoint, that was an indication 
that the attitude of the people in the IRS was not up to what 
you would hope it to be.
    Mr. Levitan. Well, first let me talk about taxpayer 
attitudes. We did a survey last summer where we had a survey 
organization go out and ask four questions. Two of those 
questions had been asked in prior surveys by the IRS.
    Chairman Houghton. One of the survey questions indicated 
that a number of taxpayers who believe it is not at all 
acceptable to cheat on income tax declined from 87 percent in 
1999 to 75 percent in 2001.
    Mr. Levitan. That was the most concerning result of that 
questionnaire. This was a one-time survey. We are not sure that 
it is a real trend but we are concerned about it. We are going 
to repeat this survey this summer. If that trend continues then 
we think it is a concern.
    It is a well-known fact that enforcement activity at the 
IRS has declined significantly. We believe that there very well 
may be an attitude that, hey, I can cheat, the guy down the 
street is cheating, you know, the IRS isn't doing much 
checking, maybe I can try to do this. We are concerned if that 
is the case and we think that it needs to be looked at and 
addressed.
    Chairman Houghton. Do you think the lack of checking has 
something to do with the fact that we are not doing the audits 
the way we used to?
    Mr. Levitan. I think there are a lot of factors that may be 
causing this attitude. I think the complexity of the Tax Code 
certainly doesn't help it. I think the fact that we are doing 
less auditing, and it is well known that we are doing less 
auditing, may have an impact on it.
    We believe that the IRS should be doing more auditing than 
they are doing now and that they need additional resources to 
do that. In addition, we feel that they should be doing smarter 
auditing. We believe that they should be doing more and better 
document matching. For example----
    Chairman Houghton. That can be done all within the confines 
of their present budget?
    Mr. Levitan. No. The level of what they do is to a great 
extent impacted by their budget. They get an amount of money, 
there are certain things that they have to do. They have to 
process the tax returns. They need to provide some level of 
service and do enforcement. But when there is more and more 
work and less people and limited new technology to make them 
more efficient, what happens is they get less of the work done. 
That will be greatly helped as we get new technology to make 
them more efficient. But that will take time. They also can do 
more and better document matching with such things like K-1s in 
a more budget effective manner. But the number of people they 
have to do this work, which has been declining for the past 
decade, has certainly impacted it.
    Chairman Houghton. Okay. Mr. Foley, would you like to ask 
another question? I have got one more question. This is an 
important Board. It is a brand new Board. You are the head of 
it. What is the most important thing you can do this next year?
    Mr. Levitan. The most important thing that we can do this 
next year is to assist in choosing a new Commissioner that can 
lead this organization in the way that it needs to be led.
    Chairman Houghton. Thank you very much, Mr. Levitan. Thank 
you very much for your patience.
    Thank you, Mr. Foley. Good to be with you. Hearing 
adjourned.
    [Whereupon, at 3:42 p.m., the hearing was adjourned.]
    [A submission for the record follows:]
  Statement of the Hon. Richard E. Neal, a Representative in Congress 
                    from the State of Massachusetts
    Mr. Chairman and Mr. Coyne, I am pleased that you have invited the 
Taxpayer Advocate, Ms. Olson, to testify today on her annual report, 
which includes many suggestions for simplifying the Code.
    I can think of no more worthy cause than reducing Tax Code 
complexity, benefiting millions of taxpayers.
    You may be interested to know that the Advocate recently completed 
a particularly difficult case on behalf of one of my constituents.
    I look forward to working with her and the Members of the Committee 
to find a legislative solution to this case and other important 
taxpayer issues.

                                
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