[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





 2003 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 2004

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 8, 2003

                               __________

                           Serial No. 108-20

                               __________

         Printed for the use of the Committee on Ways and Means



90-816              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
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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               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    EARL POMEROY, North Dakota
JERRY WELLER, Illinois               GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado              MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida                  JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

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 April 1, 2003, announcing the hearing................     2

                               WITNESSES

Internal Revenue Service, Hon. Robert E. Wenzel, Acting 
  Commissioner, accompanied by John Dalrymple, Commissioner of 
  the Wage and Investment Division, and Todd Grams, Chief 
  Financial Officer..............................................     6
U.S. General Accounting Office, James R. White, Director of Tax 
  Issues.........................................................    46
Internal Revenue Service Oversight Board, Hon. Karen Hastie 
  Williams, Member...............................................    58

                                 ______

American Bar Association Section on Taxation, Robert E. McKenzie.    73
National Association of Enrolled Agents, Claudia Hill............    97
National Society of Accountants, and National Tax Consultants, 
  William Stevenson..............................................    93
Tax Executives Institute, Inc., J.A. (Drew) Glennie, as presented 
  by Timothy McCormally..........................................    83

                       SUBMISSIONS FOR THE RECORD

American Institute of Certified Public Accounts, Robert A. 
  Zarzar, letter.................................................   112
Scorse, Gerald E., New York, NY, statement and attachment........   116

 
 2003 TAX RETURN FILING SEASON AND THE IRS BUDGET FOR FISCAL YEAR 2004

                              ----------                              


                         TUESDAY, APRIL 8, 2003

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:05 a.m., in 
room B-318, Rayburn 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
April 01, 2003
No. OV-3

                     Houghton Announces Hearing on

                   2003 Tax Return Filing Season and

                  the IRS Budget for Fiscal Year 2004

    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 2003 tax return filing season 
and the Internal Revenue Service (IRS) budget for fiscal year 2004. The 
hearing will take place on Tuesday, April 8, 2003, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 9:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include IRS Acting Commissioner Robert Wenzel, U.S. 
General Accounting Office Director of Tax Issues James White, and IRS 
Oversight Board Chairwoman Nancy Killefer. However, any individual or 
organization not scheduled for an oral appearance may submit a written 
statement for consideration by the Committee and for inclusion in the 
printed record of the hearing.
      

BACKGROUND:

      
    The 2003 tax return filing season refers to the period from January 
1 to April 15 when U.S. taxpayers will file more than 175 million tax 
returns, including more than 50 million e-filed returns. During this 
period the IRS is expected to issue more than 104 million tax refunds, 
answer nearly 90 million telephone calls from taxpayers asking for 
assistance, and its homepage is projected to receive more than 3 
billion hits.
      
    The Administration's budget requests $10.4 billion to fund the IRS 
for fiscal year 2004. This level of funding will support approximately 
100,043 employees who will collect about $1.74 trillion in taxes (net 
of refunds), according to Administration estimates. Beyond supporting 
the traditional activities of the filing season, the fiscal year 2004 
budget request addresses the Administration's key strategic goals for 
the IRS.
      
    In announcing the hearing, Chairman Houghton stated, ``Every 
indication says that this year's filing season has progressed well and 
without serious problems, but that does not mean Congress can afford to 
be complacent, of course, about tax administration. The IRS has done a 
great job in the manner which it continues to handle the massive volume 
of tax returns. Our goal now is to work to improve the IRS's 
interaction with taxpayers and its core business systems.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the 2003 tax return filing season and the 
IRS budget for fiscal year 2004.
      

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, Tuesday, April 22, 2003. 
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 sealed-
packaged 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 Word Perfect 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. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      

    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. The hearing will come to order. Thank 
you very much, everybody, for being here this morning, a good 
early start.
    I am pleased to have before us today the Acting 
Commissioner, Robert Wenzel, who continues his dedicated 
service to our Nation, and I understand that you have delayed 
your retirement and are going to retire in 2050, is that right, 
Robert?
    [Laughter.]
    I hope so. By all accounts, this year's tax filing season 
is progressing smoothly, but that does not mean that Congress 
can afford to be complacent, of course, about tax 
administration. The Internal Revenue Service (IRS) has done an 
outstanding job in the manner in which it continues to handle 
the massive volume of tax returns. Yet taxpayers and 
professionals continue to report difficulty in communicating 
with the IRS, and the multi-billion-dollar business systems 
modernization program has yet to fully deliver on its promises.
    Now, our goals are to oversee the IRS, and yet also to 
challenge it to improve its interaction with taxpayers and its 
core business systems. One obvious way to improve the 
interaction with the IRS is to continue to encourage electronic 
filing of tax returns. As the Subcommittee heard in February, 
the IRS had entered into an innovative agreement with a 
consortium of software companies to provide free online 
electronic filing of tax returns for up to 60 percent of 
taxpayers. This partnership so far has been a success.
    The IRS, however, is still not on track to meet the 80 
percent electronic filing goal by 2007, and it is well 
understood that taxpayers, particularly those with a balance 
due in April, need a greater incentive to abandon the habit of 
filing on paper. The Administration's proposal to give 
electronic filers a few extra days in which to file their 
returns is one way to provide such an incentive, and I am 
pleased that the Committee on Ways and Means was able to report 
legislation including this proposal to the U.S. House of 
Representatives on Thursday.
    Another area that deserves our attention is the multi-
billion-dollar program to overhaul the computer systems of the 
IRS. The IRS has faltered in this area before, and although 
there are signs of progress behind the scenes, taxpayers are 
not yet experiencing the fruits of modernization. This year and 
next will be critical in determining whether the modernization 
effort will succeed. Many systems that have been under 
development for years, such as the new IRS database of tax 
records, are entering the final stages of development. We will 
hear an evaluation of the IRS' efforts to date from the U.S. 
General Accounting Office (GAO), from the IRS Oversight Board, 
and from the panel of tax practitioners who have generously 
volunteered their time to be here today.
    So, I am pleased now to yield to the Ranking Member, Mr. 
Pomeroy.
    [The opening statement of Chairman Houghton follows:]

   Opening Statement of The Honorable Amo Houghton, Chairman, and a 
         Representative in Congress from the State of New York

    Good morning. I am pleased to have before us today Acting 
Commissioner Robert Wenzel, who continues his dedicated service to our 
Nation.
    By all accounts, this year's tax filing season is progressing 
smoothly, but that does not mean Congress can afford to be complacent, 
of course, about tax administration. The IRS has done a great job in 
the manner which it continues to handle the massive volume of tax 
returns, but taxpayers and tax professionals continue to report 
difficulty in communicating with the IRS, and the multi-billion dollar 
business systems modernization program has yet to deliver fully on its 
promises. Our goals now must be to challenge the IRS to improve its 
interaction with taxpayers and its core business systems.
    One way to improve the interaction with the IRS is to continue to 
encourage electronic filing of tax returns. As this Subcommittee heard 
in February, the IRS has entered into an innovative agreement with a 
consortium of tax software companies to provide free online electronic 
filing of tax returns to up to sixty-percent of taxpayers. This 
partnership has so far been a success.
    Nevertheless, the IRS is still not on track to meet the 80% 
electronic filing goal by 2007, and it is well understood that 
taxpayers--particularly those with a balance due in April--need a 
greater incentive to abandon the habit of filing on paper. The 
Administration's proposal to give electronic filers a few extra days in 
which to file their returns is one way to provide such an incentive, 
and I am pleased that the Ways and Means Committee was able to report 
legislation including this proposal to the House of Representatives on 
Thursday.
    Another area that deserves our attention is the multi-billion 
dollar program to overhaul the IRS's computer systems. The IRS has 
faltered in this area before, and, although there are signs of progress 
behind the scenes, taxpayers are not yet experiencing the fruits of 
modernization. This year and next will be critical to determining 
whether the modernization effort will succeed. Many systems that have 
been under development for years--such as the new IRS database of tax 
records--are entering the final stages of development. We will hear an 
evaluation of the IRS's efforts to date from the General Accounting 
Office, from the IRS Oversight Board, and from the panel of tax 
practitioners who have generously volunteered their time to be here 
today.
    I am pleased to yield to our ranking Democrat, Mr. Pomeroy.

                                 

    Mr. POMEROY. Mr. Chairman, thank you for convening this 
hearing. We are well into the tax filing season, about 7 days 
remaining, an estimated 175 million tax returns to be filed 
through the 2003 tax season. During this filing season, the IRS 
will issue over 100 million tax refunds and answer nearly 100 
million telephone calls from taxpayers seeking assistance.
    Now, the reports we have been getting show that, so far, so 
good this tax season. I would be interested to hear from the 
Acting Commissioner in terms of how that continues to proceed.
    Of particular interest to the Subcommittee is the proposed 
budget for the next year, including an increase of 5 percent 
over that enacted for 2003. While I think this is a much more 
positive indication that--this bipartisan agreement that the 
IRS needs to have the competencies to do its job effectively, 
and that takes budget dollars.
    I was interested that the Oversight Board recommended an 
additional $287 million as required in order to keep up to the 
very important tasks you have been charged to perform, so I 
will be interested in your comments on that.
    I have also had called to my attention some concerns 
regarding the process, the speed, and the outcome of the pre-
certification form being designed for those wishing to claim 
the Earned Income Tax Credit (EITC). I will be interested this 
morning in hearing and getting more information on that, as 
well.
    I think that we have turned an important corner in terms of 
Congressional interaction with the IRS. Just a few years ago, 
they were talking about pulling the tax code out by the roots 
and attacking the IRS as a way to achieve that objective. 
Obviously, let us debate tax reform, but let us not take it out 
on the professional men and women charged to answer those 100 
million phone calls, get those 100 million refunds out the 
door, and discharge the responsibilities they have been tasked 
to perform under the Federal Code.
    So, I commend you for your long public service. I echo the 
Chairman's appreciation that you have continued to play a 
guiding hand during this interim and after the new Commissioner 
is on board. It is our pleasure to hear from you again. Thank 
you, Mr. Chairman.
    [The opening statement of Mr. Pomeroy follows:]

 Opening Statement of The Honorable Earl Pomeroy, a Representative in 
                Congress from the State of North Dakota

    Once again this year, the Subcommittee on Oversight is holding a 
hearing on the current tax return filing season and pending IRS budget. 
I thank Subcommittee Chairman Houghton for conducting this important 
annual oversight review of the Internal Revenue Service.
    More than 175 million tax returns will be filed during the 2003 tax 
return filing season which ends in seven days. During the filing 
season, the IRS will issue over 100 million tax refunds and answer 
nearly 100 million telephone calls from taxpayers seeking assistance.
    Reports indicate that the 2003 tax return filing season is 
progressing smoothly. I want to commend all IRS employees for a job 
well-done.
    Of particular interest to this Subcommittee is the proposed IRS 
budget for fiscal year 2004 of $10.4 billion. (This is an increase of 
5% over the enacted fiscal year 2003 budget level of $9.9 billion.) 
Importantly, the IRS Oversight Board recommends $287 million more than 
the Administration requested for fiscal year 2004. I look forward to 
the witnesses' discussion of whether the proposed amount is sufficient 
and how such resources can be used to provide a fair and balanced 
approach to administering our tax laws.
    Thank you.

                                 

    Chairman HOUGHTON. Thank you very much, Mr. Pomeroy. We are 
honored to have once again Robert E. Wenzel, who is the Acting 
Commissioner of the IRS. Mr. Wenzel?

      STATEMENT OF THE HONORABLE ROBERT E. WENZEL, ACTING 
  COMMISSIONER, INTERNAL REVENUE SERVICE; ACCOMPANIED BY JOHN 
DALRYMPLE, COMMISSIONER, WAGE AND INVESTMENT DIVISION, INTERNAL 
   REVENUE SERVICE; AND TODD GRAMS, CHIEF FINANCIAL OFFICER, 
                    INTERNAL REVENUE SERVICE

    Mr. WENZEL. Mr. Chairman, thank you for this opportunity to 
testify on the 2003 tax filing system, our 2004 budget request, 
and some of the other initiatives we are undertaking on behalf 
of America's taxpayers.
    Accompanying me today are Mr. John Dalrymple, the 
Commissioner of our Wage and Investment Division, and Mr. Todd 
Grams, the IRS's Chief Financial Officer. Mr. Dalrymple, as I 
mentioned, is the Commissioner of the Wage and Investment 
Division and has principal lead responsibility inside the IRS 
for the filing season and a number of the other programs that 
you have already stated that you have an interest in.
    Mr. Chairman, the 2003 tax filing season has been smooth. 
Returns are being processed on time, electronic filing is still 
increasing, and our telephone service is more accessible and 
accurate. Projected net collections for calendar year 2003 will 
be approximately $1.74 trillion. We also project we will 
receive 175 million returns during the calendar year, which 
will include over 132 million individual returns, and we expect 
to issue over 104 million individual refunds. As of March 28, 
the average dollar amount per refund, $2010, is up a little 
over 2 percent from last year.
    Mr. Chairman, e-file continues to be the preferred method 
of filing for a growing number of taxpayers. This filing 
season, all individual e-file is up by 10 percent and e-filing 
online has grown by 27 percent. E-filing now approaches 41 
percent of individual returns filed.
    Part of the recent surge can be attributed to the 
innovative Free File program. As of March 26, the Free File 
Alliance Members have processed and transmitted more than 2.1 
million Free File tax returns. This represents approximately 22 
percent of the total online e-file returns. I would urge 
passage of legislation that extends to April 30 the deadline 
for e-file returns. This incentive could further prompt e-file 
growth.
    The IRS website continues to be extremely popular with 
taxpayers. For fiscal year 2003 through March 30, there were 
2.4 billion website hits, up 24.5 percent over the same period 
last year.
    Our telephone service is also improving. Through March 22, 
approximately 83.8 percent of taxpayers who wanted to talk to a 
customer service representative got through, which compares to 
69.4 percent last year.
    Once connected, taxpayers must get prompt, accurate, and 
courteous answers to their account and tax questions. The 
telephone correct response rates for tax law and tax account 
questions are about even with last year.
    Taxpayers needing face-to-face help solving individual or 
business tax problems can get it every day at IRS's Taxpayer 
Assistance Centers. For this filing season, through March 22, 
we served over 3.15 million taxpayers at all of our centers. 
The customer satisfaction rate was 88 percent satisfied and 7 
percent dissatisfied, which is right on schedule as it relates 
to our 2003 performance plan.
    Mr. Chairman, let me very briefly describe the President's 
2004 budget request. Simply put, it keeps us on track. The 
funding provided will help us to build on the improvements we 
have made in enforcement, in service, and productivity while 
continuing to make longer term investments in our business 
systems modernization program.
    The principal strategic focus of the budget is 
strengthening our enforcement activities. The additional 
funding will help us carry out our new strategy that focuses on 
key areas of noncompliance, such as offshore credit card users 
and the promoters of abusive schemes and scams.
    The second focus of the proposed budget is reinvestments. 
By reinvesting $166 million, primarily from increased 
productivity, we will be able to deliver increases in the 
performance of key tax administration programs. Now, these are 
significantly higher than the additional dollar and manpower 
increases requested in the budget.
    The third and final focus is business systems 
modernization. Increased funding is requested for the coming 
fiscal year, and over the course of the business systems 
modernization program, these investments will benefit the IRS 
and taxpayers by reducing operating cost, increasing cost 
avoidance, reducing taxpayer burden, and boosting tax receipts.
    Mr. Chairman, in conclusion, we are producing yet another 
successful filing season and trends in customer service and 
compliance are pointing us in the right direction. The 
President's budget will help us to maintain this upward course 
to succeed in achieving our mission. Thank you.
    [The prepared statement of Mr. Wenzel follows:]

   Statement of The Honorable Robert E. Wenzel, Acting Commissioner, 
                        Internal Revenue Service

                              INTRODUCTION

    Mr. Chairman, thank you for this opportunity to testify before the 
Subcommittee on the 2003 tax filing season, our FY 2004 budget request 
and some of the initiatives we are undertaking on behalf of America's 
taxpayers.
    Let me also thank you for your continued leadership and guidance as 
we work to provide quality service to America's taxpayers, ensure 
compliance with the tax laws and seek greater efficiencies throughout 
the agency.
    Mr. Chairman, I am pleased to report that we are gradually 
improving our performance across the board. As demonstrated by the 2003 
filing season results, we are seeing further improvements in key areas, 
such as e-filing growth and telephone service.

2003 FILING SEASON

    Mr. Chairman, the 2003 tax filing season has been smooth, with 
returns being processed on time, electronic filing increasing, and 
improved accessibility and accuracy of telephone service. It continues 
to demonstrate how we can build on positive trends, especially as our 
major technology and organizational initiatives take effect.
    Projected net collections for CY 2003 will be approximately $1.74 
trillion. During CY 2003, we also project to receive 175 million 
returns, including over 132 million individual returns, and expect to 
issue over 104 million individual refunds. As of March 28, 2003, the 
average dollar amount per refund is up almost 2.33% over last year, and 
the average refund is $2,010.

Electronic Tax Administration

    E-file continues to be the preferred method of filing for a growing 
number of taxpayers. Faster refunds, positive acknowledgement of 
receipt and fewer errors are key benefits. Indeed, the American 
Customer Satisfaction Index shows a very high satisfaction rate among 
electronic filers. For 2002, it was 78 points (out of 100), compared 
with a mark of 53 for individual paper tax filers.
    In 2002, more than 46.7 million taxpayers (36 percent) filed 
electronically--a 16.4% rise over the previous year. This filing 
season, all individual e-file is up by 10% and e-filing online has 
grown by 27%. It is projected for CY 2003 that e-filing will constitute 
approximately 41% of individual returns filed. Part of the recent surge 
can be attributed to the innovative Free File program that was the 
subject of the Subcommittee's February 13, 2003 hearing.
    Free File reports are most encouraging. As of March 19, Alliance 
members have processed and transmitted more than 2.1 million tax 
returns. This represents approximately 22% of the total 9.2 million 
online e-filed returns.

Key Statistics

    The following are key 2003 filing season e-file statistics that 
provide greater detail about individual e-file components and programs. 
All are through April 3, 2003, unless noted.

     Nearly 31 million taxpayers have e-filed their tax 
returns electronically through an IRS-authorized Electronic Return 
Originator (ERO), a 8.51% increase over the same period last year.
     Approximately 9.2 million taxpayers have filed their tax 
returns on-line via their home computer through a third party 
transmitter. Online filing is running 27 percent ahead of last year and 
is near the 2002 total volume of 9.4 million.
     Almost 27 million individual taxpayers have chosen to use 
the Personal Identification Numbers (PINS) in lieu of a written 
statement when e-filing on-line.
     Over 3.4 million taxpayers have filed their returns over 
the telephone using the TeleFile system.
     Nearly 30 million taxpayers have chosen direct deposit of 
their federal tax refund, a 12.6% increase from the year before.
     Over 18 million taxpayers have chosen to file both their 
federal and state tax returns simultaneously in a single electronic 
transmission, up 16% from last year's 16.2 million.
New And Popular Options Help Spur E-File Growth For Individual 
Taxpayers

    The enormous popularity of e-file and its continued growth can be 
attributed to both its value to taxpayers and our efforts to make it 
simpler, more attractive and available to more taxpayers.
    Since its modest beginnings as a pilot in 1986, we have added more 
options each year, ranging from payment by credit card, direct deposit 
of refunds, self-select PINs to adding more forms and joint filing of 
federal and state returns. Free File is a natural outgrowth of this 
approach. For the 2003 filing season, we kept many of the options 
popular with taxpayers and added some new ones.

                        Seven New Forms for 2003

    For 2003, taxpayers are able to electronically file seven new forms 
related to their Individual Income Tax Returns:

     Form 970--Application to Use LIFO Inventory Method
     Form W-2G--Guam Wage and Tax Statement
     Form 1099-G--Certain Government and Qualified State 
Tuition Program Payments
     Form 1310--Statement of Person Claiming Refund Due to a 
Deceased Taxpayer
     Form 8594--Asset Allocation Statement Under Sections 338 
and 1060
     Form 8880--Credit for Qualified Retirement Savings 
Contributions
     Form 8885--Health Insurance Credit for Eligible 
Recipients

                Check Your Refund Status Electronically

    Taxpayers have several options for checking on the status of a 
refund, including a new Internet-based service available on the IRS web 
site, called ``Where's My Refund?'' Taxpayers can get the information 
they need quickly, efficiently and safely. For FY 2003, we expect 15 
million uses of ``Where's My Refund?''
    Simple online instructions guide taxpayers through a process that 
checks the status of their refund after they provide identifying 
information shown on their tax return. Once the information is 
processed, results can include one of several responses, including:

     That a return was received and is in processing;
     The mailing date or direct deposit date of the taxpayer's 
refund; or
     Whether a refund has been returned to the IRS because it 
could not be delivered.

    The results also include links to customized information that is 
based on the taxpayer's specific situation. The links guide taxpayers 
through the next steps needed to resolve any issues that may be 
affecting their refund.
    Mr. Chairman, the ``Where's My Refund?'' service meets stringent 
IRS security and privacy certifications. Taxpayers enter identifying 
information that includes their Social Security Number, filing status 
and the exact amount of their refund. The information must be entered 
exactly as it appears on the tax return filed with the IRS, especially 
the expected refund amount. The exact information verifies that the 
person is authorized to access that account and avoids an unsuccessful 
response. As of April 2, 2003, the volume for ``Where's My Refund?'' is 
10.6 million.
    ``Where's My Refund?'' is accessible to visually impaired taxpayers 
with the Job Access with Speech (JAWS) screen reader used with a 
Braille display and is compatible with different JAWS modes.
    Taxpayers without access to the Internet can check the status of 
their refund by calling the toll-free IRS TeleTax System at 1-800-829-
4477. It must be approximately four weeks (3 weeks for e-file and 6 
weeks for paper, on average) since a return was filed for the 
information to be on the system. If the refund information is not 
available, the taxpayer is prompted to wait at least six weeks. The 
taxpayer is told to call a different number the following week where he 
or she can speak to a Customer Service Representative about the refund. 
Taxpayers must provide the first Social Security number shown on the 
return, filing status and the amount of the refund. If the IRS has 
processed the return, the system will state the date the refund will be 
sent. TeleTax's refund information is updated each weekend.
    In FY 2002, more than 27 million taxpayers used TeleTax to check on 
the issuance of their refund checks. As of March 22, 2003, the number 
stands at over 15.2 million--down 3.9 million from this time last year.
    Another option is the IRS Refund Hotline. This service is available 
to Form 1040-type Individual and Joint Filers who want to check the 
status of their current year refund. It offers Automated Refund Self-
Service Interactive Applications. The toll-free hotline number is 1-
800-829-1954.

                       E-Payment Options For 2003

    Taxpayers can pay taxes electronically by authorizing an electronic 
funds withdrawal from a checking or savings account, or by using a 
credit card. E-payments can be used to: (1) pay taxes owed on a 2002 
income tax return; (2) pay projected tax due when requesting an 
automatic extension of time to file; (3) pay estimated taxes for Tax 
Year 2003; and (4) make a credit card payment on an active installment 
agreement for past due tax owed for years 1999 and after.
    The IRS entered into partnerships with private industry, including 
credit card processors and tax preparation software developers, to make 
these electronic payment options available.
    Electronic funds withdrawal is free and the taxpayer decides when 
the tax payment is withdrawn from the bank account. Electronic funds 
withdrawal is only available to those who e-file, either by computer or 
by phone. A taxpayer may file early and, at the same time, schedule the 
withdrawal as late as April 15, 2003. For returns filed after April 15, 
the payment is effective on the filing date.
    A 2003 estimated tax payment can be made through electronic funds 
withdrawal only when filing a 2002 tax return via computer, whether or 
not there is a balance due on the return. The estimated tax payment may 
be the one due in April, June or September. Only one estimated tax 
payment can be made through electronic funds withdrawal. This payment 
cannot be made by phone.
    Last calendar year, 454,278 taxpayers paid their taxes through 
electronic funds withdrawal, an increase of 24% over the prior year. So 
far this filing season, 207,688 taxpayers have used this option, a 
48.7% increase over the same period in 2002.
    Taxpayers can also make credit card payments whether they file 
electronically or file a paper return. Credit card payments can be 
submitted via the tax software when filing electronically. Credit card 
payments can also be made over the telephone. Last year, 313,385 
taxpayers paid by credit card, an increase of 10 percent over the prior 
year. This filing season, 116,810 taxpayers have used this option.
    The IRS does not set or collect any fees for credit card payments, 
but the private sector companies the IRS authorized to process these 
payments do impose convenience fees. The tax payment sent to the U.S. 
Treasury and the convenience fee are listed separately on the 
cardholder's credit card statement.
    Some tax software developers offer integrated e-file and e-pay 
combinations for those who want to pay a balance due with a credit 
card. The software accepts both the electronic tax return and the 
credit card information. Subsequently, the tax return and tax payment 
data are forwarded to the IRS and the credit card data is forwarded to 
the payment processor.
    For the 2003 filing season, the IRS awarded contracts to two 
companies to accept credit card charges from both electronic and paper 
filers. Each company has its own fee schedule and each offers both 
phone and Internet payment services. The two companies are:

     Official Payments Corporation, 1-800 2PAY-TAX (1-800-272-
9829) 1-877-754-4413 (Customer Service) www.officialpayments.com, and
     Link2Gov Corporation, 1-888-PAY-1040 (1-888-729-1040) 1-
888-658 5465 (Customer Service) www.PAY1040.com.

    Anyone may use these services to charge taxes to an American 
Express Card, Discover Card, MasterCard or VISA account. VISA joined 
the IRS credit card program in March 2002.

      Electronic Signatures_Personal Identification Numbers (Pins)

    For the 2003 filing season, taxpayers are able to select one of two 
options for signing their e-filed return. The Self-Select PIN and 
Practitioner PIN methods allow taxpayers to electronically sign their 
e-filed return by entering a five-digit PIN. The five-digit PIN can be 
any five numbers except all zeros. Receipt of the taxpayer's PIN 
eliminates the requirement for Form 8453 (U.S. Individual Income Tax 
Declaration for an IRS e-file Return). The Self-Select PIN method 
requires the entry of each taxpayer's date of birth and prior year 
original Adjusted Gross Income (AGI), which are used to authenticate 
the taxpayer. By contrast, the Practitioner PIN method does not require 
the entry of the taxpayer's date of birth or prior year AGI.
    Paperless filing is available to those who prepare their own 
returns using tax preparation software or those who use a tax 
professional. On a joint return, two PINs are required, acting as 
electronic signatures for both people.
    The Self-Select PIN Program began in 2001, and by 2002, PINs were 
used to e-file 9.8 million returns. For 2003, certain taxpayers under 
the age of 16, and those who are filing on behalf of a deceased 
taxpayer, can sign the return using a Self-Select PIN.
    The Practitioner PIN is an additional electronic signature option 
for taxpayers who use an Electronic Return Originator. Those using the 
Practitioner PIN method are required to complete Parts I and II of Form 
8879, IRS e-file Signature Authorization, which the ERO retains. In 
2002, Practitioner PINs were used in e-filing 14.9 million returns. So 
far this filing season, the number stands at 18.4 million.
    For 2003, the Practitioner PIN is open to all electronic return 
originators (no agreement required). First time filers and taxpayers 
under the age of 16 are eligible to use the Practitioner PIN method.

                             Web-Based Help

    The IRS web site at www.irs.gov continues to be extremely popular 
with taxpayers. For the week ending March 15, 2003, our web site was 
listed as Number 2 in the Lycos Top 50 searches. In FY 2002, it posted 
3.11 billion hits with more than 437 million forms and publications 
downloaded. For FY 2003 through March 30, there were 2.4 billion web 
site hits, up 24.5% over the same period last year.
    A user-friendly format allows even novice users to quickly find the 
information they need. For 2003, taxpayers will notice improvements in 
the ``Search'' features and capabilities. The embedded thesaurus within 
the search engine has been expanded to contain an updated repository of 
the most-frequently searched words, phrases, and variations.
    With the help of the site's interactive features, taxpayers can 
also calculate proper withholding amounts. There is also information 
about if the interest they pay is fully deductible or determine whether 
they are eligible to claim the child and dependent care credit.
    In addition, the site provides instructions for obtaining copies of 
prior-year tax returns and has a useful tax event calendar. Taxpayers 
can even get help with a particular tax question.

ETA Also Easing Business Taxpayer Burden

    A strong ETA program may be even more important for reducing burden 
for businesses than for individual taxpayers. In addition to their 
annual income tax returns, businesses also have to file various 
employment tax returns and information returns. Businesses also make a 
lot of payments to the Federal Government, such as withholding and 
unemployment taxes. In fact, payments are a business' most frequent 
transaction with the IRS.
    We want to convert all of these transactions to fast, accurate, 
paper-free electronic methods. And we are making progress on a number 
of fronts.
    During FY 2002, over 3.2 million taxpayers made $1.5 trillion in 
electronic tax payments through the Electronic Federal Tax Payment 
System (EFTPS), which now includes an online option. For 2003, IRS 
expects more than 4 million taxpayers to pay their taxes using the 
EFTPS System.
    In FY 2002, we also received more than 2.5 million 941 e-file 
program returns (Employer's Quarterly Federal Tax Return) and 855,000 
returns for 941 TeleFile and On-Line Filing Programs. In CY 2002, over 
320,000 businesses used the 940 e-file Program (Employers Annual 
Federal Unemployment Tax Return), and more than 24,000 partnerships 
chose 1065 e-file (U.S. Return of Partnership Income) in FY 2002.
    In 2003, the IRS plans to make even further progress serving 
business' electronic tax administration needs. For example, tax 
professionals are able to file employment taxes for business clients 
for the first time as part of a new Employment Tax e-filing System.
    We also expect that coming e-file upgrades will continue to reduce 
the paperwork burden on small businesses. The enhanced e-file system is 
part of an ongoing effort to reduce small business burden and barriers 
to electronic filing. This e-file option will replace outdated 
technology that was a burden to both businesses and the IRS. Key 
benefits of the new system are:

     More flexible filing--Forms 941 and 940 can be filed in a 
single transmission;
     More specific error conditions--New error conditions 
pinpoint the location of the error and provide complete information for 
each error identified;
     Faster acknowledgements--Transmissions are now processed 
upon receipt and acknowledgments are returned in near real-time; and
     Integrated payment options--Eligible filers may submit a 
required payment along with their return, subject to limitations 
imposed by the Federal Tax Deposit Rules.

    Businesses will also soon be able to apply for an employer 
identification number (EIN) by using our new on-line EIN Application at 
irs.gov. When a business applies, its EIN will display on the SS-4 for 
printing and record keeping and they will receive their formal 
validation letter within 7 days.

New E-Services for Practitioners

    We must make it not only technologically possible, but also 
attractive to both practitioners and taxpayers to make a permanent 
change from paper to electronic filing. To build practitioner interest, 
the IRS will offer later this year a suite of electronic services, such 
as disclosure authorization, transcript delivery and account 
resolution, to tax practitioners who file a certain number of returns 
electronically.
    E-Services are web-based products for third parties to use over the 
Internet. Third parties include electronic return originators, software 
developers, transmitters, reporting agents, service providers, tax 
practitioners, payers, and states. There are two releases related to e-
Services.

     Release 1 includes, Registration, Preparer Tax 
Identification Number (PTIN) Application and Interactive Taxpayer 
Identification Number (TIN) Matching. (Scheduled to be released in the 
Spring 2003)
     Release 2 includes, e-file Application, Disclosure 
Authorization, Electronic Account Resolution, Transcript Delivery 
System and Bulk TIN Matching. Disclosure Authorization, Electronic 
Account Resolution and Transcript Delivery System are incentives 
available for authorized e-file providers who e-filed 100 or more 
individual returns. (Scheduled to be released in the Summer 2003)

    The following are the processes and key components of the e-
Services program:

     Registration--the first online process a tax professional 
completes to begin conducting business with the IRS electronically. All 
tax professionals must register as individuals. Transacting business 
over the Internet allows practitioners to complete applications 24 
hours a day/ seven days a week. Furthermore, an on-screen 
acknowledgment confirms that the firm has successfully completed the 
application. Registration is free and easy to use and also enables 
subsequent access to e-Services products in Release 2 with approved 
application.
     PTIN Application--the online alternative to the paper 
Form W-7P, Application for Preparer Tax Identification Number. This 
automated system enables a preparer to request a new or replacement 
PTIN card and is quick, convenient, and easy to use.
     TIN Matching (For Payers Only)--a pre-filing service 
offered to payers of income subject to backup withholding. Payers can 
match the payee's TIN and name combinations against the IRS records 
prior to submitting an information return for up to 25 TINs and name 
combinations per session. TINs include Social Security number, employer 
identification number, adoption taxpayer number, and individual 
taxpayer identification number. Results are provided during the 
session, within 5 seconds.
     On-Line e-File Application--the new online, integrated 
application to complete for participation in both individual and 
business IRS e-file programs. This on-line process permits users to 
update their records and supplements the paper Form 8633 and Form 9041. 
Applications are acknowledged via e-mail. This application also offers 
a delegation of authority feature that allows principals and/or 
responsible officials of the firm/organization to delegate e-services 
(Disclosure Authorization, Electronic Account Resolution and Transcript 
Delivery System) access to their employees.
     Disclosure Authorization--allows for the electronic 
transmission of most Forms 2848, Power of Attorney (POA) and 
Declaration of Representatives, and Form 8821, Tax Information 
Authorizations (TIA) to the Centralized Authorization File. This 
transmission also provides the capability for authorized, 
authenticated, and registered users to create, update, revoke, inquire 
and delete POA and TIA records via the Internet.
     Electronic Account Resolution--a new method for improving 
the process of receiving and responding to account related-inquiries 
from practitioners over the Internet, e.g., account problem, complex 
refunds, installment agreement, notice and payment tracers). 
Practitioners are provided with immediate confirmation of receipt of 
inquiry and have the capability to make follow-up requests. Responses 
are provided within 3 business days.
     Transcript Delivery System--will provide secure, online 
transmission of return and return information (e.g., account 
transcripts, return transcripts, records of account, wage and income 
documents and verification of non-filing letters) in professional, 
standardized formats to authorized users, such as a tax practitioner.
     Bulk Taxpayer Identification Number (TIN) Matching--a new 
service to payers that allows for the matching of up to 100,000 TIN and 
name combinations. TINs include Social Security number, employer 
identification number, adoption taxpayer number, and individual 
taxpayer identification number. Results provided electronically within 
24 hours. Responses are sent to requestor's secure electronic mailbox 
address.

                          Telephone Assistance

    The IRS provides various services through its toll-free telephone 
lines. Taxpayers can call the IRS Tax Help Line for Individuals, 1-800-
829-1040, to get answers to their federal tax law and account 
questions. They can also order tax forms, instructions and publications 
by calling 1-800 TAX-FORM, and listen to pre-recorded tax information 
on over 100 topics by calling our TeleTax number at 1-800-829-4477.
    Help for small businesses, corporations, partnerships and trusts 
who need information or help preparing business returns is also 
available at the Business and Specialty Tax Line at 1-800-829-4933. 
Customers calling this number can apply for a new EIN and receive help 
on employment, partnership, corporation, estate, gift, trust and excise 
taxes,as well as issues related to Federal Tax Deposits.
    These toll-free numbers are available from 7:00 a.m. to 10:00 p.m. 
(local time) weekdays. In addition, the 1-800-829-1040 customer service 
line is available from 10:00 a.m. to 3:00 p.m. (local time) on 
Saturdays from January 25 though April 12 and on Sunday, April 13.
    Telephone service is improving. Through March 22, 2003 
approximately 83.8% of taxpayers who wanted to talk to a customer 
service representative got through, compared to 69.4% percent last 
year. We set a goal of 72% for FY 2003.
    We are also providing better service by identifying taxpayers' 
needs through our tax law screening and then getting them to the right 
person to answer their question. Our process has reduced the abandoned 
rate from 13.8% to 7.8%. In addition, the transfer rate was reduced 
from 21.6% to 17.5%. These two indicators illustrate that a higher 
percentage of taxpayers are reaching the right Customer Service 
Representative (CSR) without being transferred and/or having to call 
back while waiting to speak to a CSR.
    Once connected, taxpayers must get prompt, accurate and courteous 
answers to their account and tax questions. The telephone correct 
response rates for tax law and tax account questions are about even 
with last year--81.1% and 87.9% respectively--as compared to 83.5% and 
88.4% over the same period last year.
    In addition, 26.7 million taxpayers (includes ``Where's My Refund'' 
through 3/22) used our automated services to get information, including 
refund status, a 5.5% increase since last year, and the upward trend 
continues.

                      Taxpayer Assistance Centers

    Taxpayers needing face-to-face help solving individual or business 
tax problems can get it every business day at every IRS Taxpayer 
Assistance Center (TAC). Taxpayers can receive assistance with issues 
such as, IRS notices, payment plans, federal tax liens and levies, 
innocent spouse claims and offers in compromise. For the fiscal period 
beginning October 01, 2002 through March 22, 2003, we served over 4.53 
million taxpayers at all TACs. For the 2003 filing season beginning 
January 01, 2003 through March 22, 2003 we served over 3.15 million 
taxpayers in all TACs. The customer satisfaction rate is 88% satisfied 
and 7% dissatisfied, which is on target for our FY 2003 performance 
plan.
    At many sites, walk-in service is being offered on 12 Saturdays 
through April 12. The Saturday Service sites were selected based on 
their weekend accessibility, year-round operational status, and high 
traffic volume. They include non-traditional locations, such as 
shopping malls, community centers and post offices.
    We encourage taxpayers to call ahead for appointments at their 
convenience or to hear a recorded message with office hours and 
locations. Local phone numbers for TACs are available in telephone 
directories and are posted on the IRS web site under ``The Newsroom'' 
and other pages. Look for ``Contact My Local Office'' under the 
``Resources'' section.
    Individual taxpayers with incomes of $35,000 or less can also 
receive free income tax return preparation and e-file help at our TACs. 
We extend this courtesy return preparation service to all taxpayers 
qualifying for the Earned Income Tax Credit, without placing the 
government in competition with private industry. All of these returns 
are e-filed; we do not deal with paper individual returns.
    Free tax preparation and e-file are also available in many 
communities through the Volunteer Income Tax Assistance (VITA) and Tax 
Counseling for the Elderly (TCE) programs. Volunteers help prepare 
basic tax returns for low-income taxpayers, persons with disabilities, 
the elderly, and non-English speaking people. This filing season 
through March 22, 2003, return preparation at VITA and TCE sites has 
increased approximately 28% over the same period on 2002. Taxpayers can 
call 1-800-829-1040 to find their nearest VITA or TCE site. They may 
also call AARP--the largest TCE participant--at 1-877-227-7669 to see 
if there is a Tax Aide site in their community.
    To better serve low-income taxpayers, the IRS's Stakeholder 
Partnership, Education and Communication (SPEC) organization is 
establishing extensive partnerships with external groups such as local 
governments, non-profit organizations, private for-profit businesses, 
and others to create community coalitions. We are focusing our limited 
resources on providing technical expertise and training while 
encouraging the community partners to supply resources such as 
volunteers, space and computer equipment. This business model has 
rapidly gained national recognition and acceptance.
    Our goal is to make our partners as self-sufficient as possible and 
to identify those organizations that could make available needed 
resources. This new approach allows the IRS to expand access to low-
income taxpayers, provide greater free tax return preparation and 
filing, and sustain these services over time.

                Tax Materials And Assistance In Spanish
                           (Ayuda en Espanol)

    Taxpayers needing federal tax information in Spanish can find it in 
the form of our recorded tax topics, free tax publications and toll-
free telephone assistance.
    TeleTax, the toll-free automated service, is also offered in 
Spanish, providing helpful tax topics and refund information.
    Free Spanish publications are available by calling toll free 1-800-
TAX-FORM (1-800-829-3676) or on the IRS Web site, www.irs.gov, under 
``Forms and Publications.'' Some of the more popular ones are:

     Publication 1SP, ``Derechos del Contribuyente'' (Your 
Rights as a Taxpayer)
     Publication 579SP, ``Como Preparar la Declaracion de 
Impuesto,'' which explains who has to file a federal tax return and 
other important topics, such as which form to file, who are dependents, 
what income is taxable and nontaxable, and what some of the more common 
tax credits are
     Publication 596SP, ``CreditoporIngreso del Trabajo,'' 
which provides details on the Earned Income Tax Credit

    Taxpayers can also talk with a Spanish-speaking IRS representative 
by calling toll free 1-800-829-1040 between the hours of 7:00 a.m. and 
10:00 p.m. on weekdays and 10:00 a.m. and 3:00 p.m. (local time) on 
Saturdays through April 13. Spanish-speaking taxpayers can also go to a 
special Spanish section on our web site. Spanish and English services 
are available too at all IRS kiosks, as well as Russian, Korean and 
Chinese at our Flushing, NY kiosk in the Queens Public Library.
    In addition, we offer Spanish language services in areas with high-
density Spanish-speaking populations and include employees recruited 
from these same communities. We offer this in-person service as a 
matter of routine.
    In these and at all other offices, we also have contract telephone 
interpreter services available to help us to provide service to any 
customers who do not speak English. These interpreter services include 
Spanish as well as almost every other common language in the world.
    To improve outreach and service to Spanish-language taxpayers, the 
IRS also joined with the nationwide Spanish-language Telemundo Network 
to host a special, one-hour tax program on March 8. The program, called 
``Los Impuestos y Usted'' focused on practical tips for claiming tax 
credits, preparing the federal income tax return, free electronic 
filing and other helpful topics.

                                CD-ROMs

    Joining our small catalogue of taxpayer CD-ROMs, the Small 
Business/Self Employed Electronic Marketing Card is an exciting and 
innovative product designed to help the Small Business owner and the 
Self-Employed taxpayer learn more about the IRS Small Business/Self 
Employed Division. The CD-ROM is the size of a business card and 
contains our mission, interactive information on outreach products, e-
filing and e-paying, stakeholder groups, contacts, and live links to 
our web site. Taxpayers may order the CD-ROM by visiting www.irs.gov/
smallbiz and ordering Publication 4115.

                          Braille Tax Material

    A variety of Braille material may be ordered at no charge by 
calling the IRS at 1-800-TAX-FORM (1-800-829-3676). This can also be 
downloaded from the ``Accessibility'' portion of the IRS Web site at 
IRS.gov. The Braille print files are in .brf format and can be sent 
directly to an embosser for high-quality Braille output.
    Included in this offering of accessible materials are 50 of the 
most popular individual tax forms in accessible PDF format. Also called 
``Talking Tax Forms,'' these files may be opened, filled-in, and 
printed for filing purposes by blind taxpayers using screen readers. 
The Alternative Media Center prepares accessible versions of IRS tax 
materials for disabled employees and taxpayers alike. Inquiries 
regarding accessible IRS documents and materials may be sent via email 
to [email protected].

MODIFICATIONS TO THE IRS RESTRUCTURING
AND REFORM ACT OF 1998 (RRA 98)

    Mr. Chairman, in the FY 2004 budget submission, the Administration 
again proposed modifications to RRA 98. Last year, the House passed 
legislation that contained five of these proposals; the Senate did not 
act before adjourning. We commend the House for its actions and believe 
that these modifications preserve the intent of the Act while allowing 
us to administer it more efficiently and effectively. We urge the 
Congress to take similar action this year.
    There are six parts to the Administration's proposed modifications. 
The first modifies infractions subject to Section 1203 of RRA 98 and 
permits a broader range of available penalties. Our ability to 
efficiently administer the tax code is currently hampered by a strong 
fear among our employees that they will be subject to unfounded 1203 
allegations, and perhaps lose their jobs as a result. This proposal 
will reduce employee anxiety resulting from unduly harsh discipline or 
unfounded allegations.
    The second part adopts measures to curb the large number of 
frivolous submissions and filings that are made to impede or delay tax 
administration.
    The third permits the IRS to enter into installment agreements with 
taxpayers that do not guarantee full payment of liability over the life 
of the agreement. It allows the IRS to enter agreements with taxpayers 
who desire to resolve their tax obligations but cannot make payments 
large enough to satisfy their entire liability and for whom an offer in 
compromise is not a viable alternative.
    The fourth allows the IRS to terminate installment agreements when 
taxpayers fail to make timely tax deposits and file tax returns on 
current liabilities.
    The fifth streamlines jurisdiction over collection due process 
cases in the Tax Court, thereby reducing the cycle time for certain 
collection due process cases.
    The sixth and last provision would eliminate the monetary threshold 
for IRS Chief Counsel reviews of offers in compromise.
    The Administration also has two proposals to improve IRS efficiency 
and performance from current resources. The first would modify the way 
that Financial Management Services (FMS) recovers its transaction fees 
for processing IRS levies by permitting FMS to retain a portion of the 
amount collected before transmitting the balance to the IRS, thereby 
reducing government transaction costs. The offset amount would be 
included as part of the 15-percent limit on levies against income and 
would also be credited against the taxpayer's liability.
    The second proposal would encourage growth in electronic filing by 
extending from April 15 to April 30 the return filing and payment date 
for the filing of individual income tax returns, if the return is filed 
electronically and any balance due is paid electronically.

FY 2004 RESOURCE REQUEST

    For FY 2004, the IRS is requesting resources totaling $10.437 
billion and 100,043 FTE (full time equivalent). This represents an 
increase of $521 million (5%) over the President's FY 2003 request.
    Mr. Chairman, the FY 2004 budget request can be best viewed through 
its three strategic drivers that are derived from the IRS performance-
based budgeting process.
    First is Compliance. The principal strategic focus of the 
President's FY 2004 IRS budget is strengthening compliance activities, 
especially in the area of high-income, high-risk taxpayers and 
businesses, and abusive tax avoidance schemes and offshore trusts. A 
legislative proposal would also authorize the IRS to contract with 
private-sector collection agencies to supplement current IRS tax 
collection efforts. The budget further includes a major initiative to 
reduce erroneous payments in the Earned Income Tax Credit (EITC) 
Program.
    Second is Reinvestments. We are committed to better utilizing the 
resources the IRS already has by ``reinvesting'' base resources. By 
reinvesting $166 million, primarily from increased productivity within 
the base budget, the IRS will be able to deliver increases in the 
performance of key tax administration programs that are significantly 
higher than the additional dollar and FTE increases requested in the 
budget.
    Third is Business Systems Modernization. Investments in 
modernization through the BSM program would continue with a total 
request of $429 million, an increase of $65 million above the FY 2003 
appropriation. Over the course of the BSM program, these investments 
will benefit the IRS and taxpayers by reducing operating costs, 
increasing cost avoidance, reducing taxpayer burden and increasing tax 
receipts.
    Mr. Chairman, I also want to draw the subcommittee's attention to a 
new task that was added to the IRS's traditional tax administration 
duties and operations. In August 2002, the President signed Public Law 
107-210, the Trade Adjustment Assistance Act of 2002. Title II of this 
statute provides a refundable tax credit for the cost of health 
insurance for certain individuals who receive a trade readjustment 
allowance or a benefit from the Pension Benefit Guaranty Corporation 
(PBGC). The tax credit is equal to 65% of the health insurance premium 
paid by eligible persons to cover them and qualifying family members. 
The IRS must implement the Health Coverage Tax Credit provisions.
    We are requesting $35 million for Health Insurance Tax Credit 
Administration. The amount provided in the Consolidated Appropriations 
Resolution, 2003 ($70 million) will be used to provide software, 
hardware, and contract services to develop the system mandated by 
Public Law. The IRS will oversee the contractor's work.
    Let me now provide the highlights of our proposed FY 2004 budget.

                               Compliance

Additional Funds Requested to Strengthen Tax Administration Compliance 
                        (+$133M and +1,700 FTE)

    The Internal Revenue Service is realigning its audit resources to 
focus on key areas of noncompliance with the tax laws. The strategy 
represents a new direction for the agency's compliance effort. 
Following months of research and planning, the new approach is focusing 
on high-risk areas of noncompliance: (1) the promotion of abusive tax 
schemes; (2) the misuse of devices such as offshore accounts to hide or 
improperly reduce income; (3) the use of abusive corporate tax 
avoidance transactions; (4) the underreporting of income by higher-
income individuals; (5) non-filing by higher-income individuals; and 
(6) the Earned Income Tax Credit program.
    Our effort will generally focus first on promoters and then on 
participants in these various schemes. The initiative will feature new 
and enhanced efforts on these most serious compliance problem areas.
    Our Small Business/Self-Employed (SB/SE) Operating Division will 
handle the new effort in these key areas affecting individuals and 
businesses. Compliance efforts will continue in other parts of the 
agency, such as the tax shelter initiative in the Large and Mid-Sized 
Business (LMSB) Division.
    To strengthen compliance programs across the board, the IRS budget 
request includes $133 million to fund numerous compliance initiatives. 
Key examples of these initiatives are:
    Address Complex Enforcement Issues of Small Business/Self Employed 
Taxpayers
(+$56M and 887 FTE): Additional staff will be provided to all major 
compliance programs in SB/SE and new workload selection systems and 
case building techniques will be employed. New revenue agents (exam 
work) and revenue officers (collections work) will be applied in the 
field to address offshore credit cards, abusive trusts and shelters, 
high-risk/high-income taxpayers, and other priority work. Additional 
staff at call sites will be employed to specialize in out-going calls 
and offset levies. Greater resources in the Automated Substitute for 
Return (ASFR) program will allow us to focus on high-income taxpayers 
who do not file returns. Also, staff devoted to frivolous returns and 
frivolous refund claims will be increased to counteract recent growth 
and aggressiveness by promoters in this area.
    Address Passthrough Entities and Abusive Trusts of Large Business 
Taxpayers
(+$22M and 258 FTE): This increase will allow the IRS to apply the most 
experienced revenue agents to the highly complex and technical issues 
of passthrough entities--such as partnerships, trusts and S-
corporations--and abusive corporate tax shelters while maintaining 
minimum coverage of other priority exam work.
    Counterterrorism (+$6M and 24 FTE): The IRS is heavily involved in 
the fight against both global and domestic terrorism. Demand for the 
financial investigative skills of Criminal Investigation (CI) special 
agents remains high. After September 11, 2001, over 273 FTE in FY 02 
and 206 FTE projected in FY 03 were redirected from CI tax enforcement 
activities to counterterrorism related activities. CI is working on 
counterterrorism with the Treasury Executive Office of Terrorism 
Financing and Financial Crimes and is an integral part of the nation's 
war on terrorism.

Use of Private Sector Contractors for Collection of Taxes Due

    There is a significant and growing backlog of cases involving 
individual taxpayers who are aware of their tax liabilities but are not 
paying them. We believe that many of these individuals are capable of 
paying their outstanding tax liabilities. This is unfair to every hard-
working American who pays his or her fair share of taxes. To address 
this problem, the President's budget proposes to support the IRS's 
collection efforts with private collection agencies (PCAs) that will 
engage in specific, limited activities, allowing the IRS to concentrate 
its resources on more complex cases and issues.
    By eliciting the assistance of PCAs, the IRS expects to be able to 
address this important part of the existing backlog of collection 
cases. Over time, the IRS expects that PCAs would assist the IRS in 
handling more collection cases at an earlier stage in the process--
before the accounts become stale and uncollectible. PCAs have proven 
successful with over 40 states and have been used for many years with 
other federal programs. PCAs would hold no enforcement power and their 
employees would be subject to the same rules that apply to the IRS 
governing taxpayer rights and confidentiality. Consequently, taxpayer 
protections would be unaffected. The IRS would be required to closely 
monitor the activities and performance of the PCAs to ensure these 
rules are followed.

Reduce Inappropriate Payments in EITC Program (+$100m and +650 FTE)

    The EITC program benefits millions of low-income workers. The EITC 
lifts nearly 4 million people, especially single mothers, out of 
poverty each year. However, the current error rate for the EITC program 
is too high. In 1999, between 27 and 32 percent of EITC claims--or 
between $8.5 billion and $9.9 billion--were paid in error. EITC has 
been consistently listed among high-risk federal programs. Congress has 
recognized this by providing a separate appropriation that has been 
used for EITC compliance enforcement.
    The FY 2004 Budget requests an additional $100 million to begin a 
new strategy for improving the EITC program. This approach, suggested 
by the Department of Treasury EITC Task Force, concludes that the IRS 
must obtain additional information on certain EITC eligibility criteria 
before payment of the EITC-portion of refunds. A major portion of the 
request will be used to invest in suitable information technology and 
develop business processes.
    The IRS will begin to use an integrated approach to address 
potential erroneous claims by identifying cases that have the highest 
likelihood of error before they are accepted for processing and before 
any EITC benefits are paid.
    A key part of this strategy is to begin certifying taxpayers who 
claim qualifying children on the relationship and residency 
requirements. In addition, the IRS will use limited additional taxpayer 
information, in combination with taxpayer-specific IRS historical data, 
third party data and error detection systems to detect and freeze the 
EITC-portion of refunds that pose a high risk or filing status errors 
or income misreporting. The IRS will seek to minimize the burdens on 
taxpayers by using existing databases and other sources of information 
to verify eligibility in advance. This integrated approach is designed 
to provide far greater assurance that EITC payments go to the 
individuals who qualify for the credit, without sacrificing the goals 
of the EITC program.

                             Reinvestments

   Resources Freed-Up within the Base Budget for Reinvestment (-$166 
                        million and -2,145 FTE)

    The President's budget submission states, ``In FY 2004, the IRS 
will improve performance primarily through better management and 
fundamental reengineering of business processes, and secondarily by 
increases in resources.''
    Through the IRS's Strategic Planning and Budget process, the 
agency's senior managers identified significant potential for the more 
effective and efficient use of current resources. A total of $166 
million and 2,145 FTE were identified for reallocation within the base 
budget in FY 2004. Examples of sources for reallocations include:

    Submissions Processing/Electronic Filing (-$13.5M and -366 FTE): 
IRS's continued success with electronic filing provides a great 
opportunity to reduce and reallocate resources from submission 
processing to strengthen compliance and improve customer service. The 
FY 2004 budget reflects the first-ever closing of a submissions 
processing pipeline (Brookhaven, NY) as the labor-intensive processing 
of paper filings decreases across the system.
    Compliance Support Reengineering (-$26M and -394 FTE): 
Reengineering of the compliance program in SB/SE will improve 
operational efficiency and workload selection, and reduce taxpayer 
burden. Business process improvements and centralization of the 
Compliance Support Organization will generate FTE that can be reapplied 
in front-line activities.
    Remittance Transaction Research (-$9M and -199 FTE): Creating a 
central data repository (taxpayer payment data and related images) for 
all individual taxpayer payment documents will increase efficiency, 
improve accuracy of posting payments, and reduce the time it takes to 
resolve payment issues.
    Information Technology (-$46M and -39 FTE): Efficiencies through 
reengineering and other efforts will reduce expenditures in end-user 
support, computing center support, and network operations and 
maintenance.

Reinvestment of Reallocated Funds within the Base Budget (+$166 million 
and +649 FTE):

    Resources reallocated within the base budget would be used to 
improve Customer Service and strengthen Compliance programs. The 
specific initiatives include:

    Reduce Compliance Staff Support of Filing Season (+$13M and +154 
FTE): Due to lower-than-needed staff levels in Field Assistance 
Programs for individual taxpayers, the IRS must detail compliance staff 
from SB/SE to field assistance during the filing season to meet 
taxpayer demand. Under this initiative, we would hire additional staff 
in field assistance so that the level of service in assistance is 
maintained while the number of compliance details can be reduced, and 
compliance staff can devote more time to compliance activities.
    Improve Telephone Service to Small Business/Self Employed Taxpayers 
(+$11M and +184 FTE): Additional resources are needed to assist SB/SE 
taxpayers in Accounts Management phone services. These staff members 
assist taxpayers with a broad range of issues concerning taxpayers' 
accounts.
    Information Technology (+$33M and 0 FTE): IT investments will 
expand web services to taxpayers, replace aging servers, purchase 
needed software, and expand high speed and secure access for revenue 
agents at remote sites.

         Continued Investment in Business Systems Modernization
                        (+65 million and 0 FTE)

    The BSM program request totals $429 million, an increase of $65 
million over the current FY 2003 level. The BSM account provides for 
modernizing IRS-wide business practices and acquiring new technology.
    We use a formal methodology to prioritize, approve, fund and 
evaluate our portfolio of BSM investments. This methodology enforces a 
documented, repeatable and measurable process for managing investments 
throughout their life cycle. The IRS Core Business System Executive 
Steering Committee, chaired by the Commissioner, approves investment 
decisions. This executive-level oversight ensures that products and 
projects delivered under the BSM program are fully integrated into IRS 
Business Units.
    Highlights in BSM for FY 2004 include: (1) modernized e-File will 
provide electronic filing for large and small businesses; (2) 
implementation of the Integrated Financial System will replace the 
current antiquated administrative core accounting system; (3) the first 
release of the Custodial Accounting Project will put individual 
taxpayer data in a data warehouse for easier access and analysis; and 
(4) the Customer Account Data Engine and Internet Refund Fact of Filing 
will be revised for tax law changes to support the 2004 filing season. 
Given the changes in the FY 2003 and FY 2004 BSM funding totals, we are 
currently reviewing the FY 2004 allocation project-by-project to 
determine the optimum plan. They are discussed in greater detail below.

Achievements and Benefits

    In FY 2002, the BSM Program provided real benefits, including a 
secure online system and system management capability and the 
aforementioned Internet Refund/Fact of Filing pilot program. In FY 2003 
and FY 2004, additional supporting infrastructure services will be 
added, and an increasing number of business and internal applications 
will be delivered, creating benefits for taxpayers and practitioners 
and enabling internal efficiencies.
    The FY 2003 delivery plan will move the BSM Program into a wide 
spectrum of critical new areas:

     Customer Account Data Engine (CADE) R1. In July 2003, 
CADE will begin processing single 1040EZ filers (both electronic and 
paper). Taxpayers covered under CADE will receive their refunds about 
40% faster than under Master File processing, if they use direct 
deposit. More importantly, we will have taken the first of many steps 
to replace the 40-year-old Master Files.
     Custodial Accounting Project (CAP). We will continue 
development and testing of CAP Release 1 scheduled for deployment in 
the first quarter of FY 2004. CAP will create a repository for 
modernized Individual Master File data and will address documented 
financial material weaknesses.
     Enterprise Architecture (EA) and Tax Administration 
Vision and Strategy (TAVS). TAVS focuses on creating a long-term vision 
of how the agency should work in the future. Delivery and acceptance of 
EA Release 2.0 was a significant achievement. We also conducted a 
planning effort called ``TAVS Refresh'' to identify gaps and outdated 
information in TAVS which we plan to address in FY 2003.
     e-Services. e-Services sub-releases will provide: 
registration of electronic return originators, Taxpayer Identification 
Number (TIN) matching, initial partner relationship management 
capabilities, electronic account resolution, transcript delivery, 
secure e-mail, and bulk TIN matching.
     Infrastructure (STIR and Infrastructure Shared Services 
[ISS]). This project provides the basic secure infrastructure necessary 
to support the modernization effort including e-Services R1, IR/FoF, 
Internet Employer Identification Number (EIN), and subsequent FY 2003 
releases.
     Integrated Tax Administration Business Solutions (ITABS). 
Projects to ensure we understand requirements and select COTS 
(commercial off-the-shelf) solutions that can effectively integrate 
business processes in IRS functions.
     Internet EIN. This application will automate Employer 
Identification Number (EIN) requests over the Internet. Currently, the 
EIN request process is cumbersome and people-intensive, often resulting 
in unacceptable delays for those starting new businesses.
     Integrated Financial System (IFS). Although the first 
release of the new financial system will not go live until October 1, 
2003 (therefore, an FY 2004 delivery project), it is likely to be our 
most work-intensive project during FY 2003.
     Modernized e-file. The Modernized e-file project will be 
in pre-deployment testing for all of FY 2003, with initial deployment 
in early CY 2004, with Forms 1120 and 990 e-file capabilities.

BSM benefits delivered in FY 2004 will include:

     Modernized e-file will provide electronic filing for 
large and medium-sized businesses (Forms 1120 and 990), as well as a 
new Tax Return Data Base, which will greatly improve customer service 
and issue resolution.
     e-Services will provide support for the 2004 Filing 
Season as well as implement support structures for modernized e-file 
planned for implementation later in the fiscal year.
     IFS will develop the detailed functional requirements to 
support internal management requirements for financial and management 
planning, execution and reporting.
     CAP will provide an integrated enterprise data warehouse 
to support organizational data needs, performance measurement, and tax 
operations process improvements.
     CADE will allow for electronic processing of selected 
Form 1040 Wage & Investment returns with additional taxpayer segments 
that have increasingly more complex tax returns and/or balance due 
returns.
     ISS will establish a program whose goal is to deliver a 
fully integrated shared information technology infrastructure to 
include hardware, software, shared applications and data, 
telecommunications, security and an enterprise approach to systems and 
operations management. This approach results in overall reductions in 
time and dollars to develop, deploy, and maintain the infrastructure 
and the business applications that use the infrastructure.

IMPACT OF UNFORESEEN COSTS ON STAFFING LEVELS

    Although staffing increases were supported in recent budgets, they 
could not be realized because of unexpected cost increases. The IRS is 
labor intensive; salaries and benefits make up 71% of our Operations 
Budget. Therefore, any unexpected major cost that the agency must 
absorb will have a negative effect on staffing levels, despite efforts 
to reduce non-labor costs.
    For FY 2003, the President proposed a budget for the IRS that 
included 98,727 FTE (less EITC). However, the total FTE for FY 2003 
(less EITC) is currently expected to be 96,802, which is 1,925 FTE less 
than the President's request. The following are examples of what drove 
projected FY 2003 FTE down below the President's request by 1,925.

     The unfunded increase in the FY 2002 annual pay raise 
from the President's 3.6% request to the 4.6% enacted level (Cost: $43 
million).
     Postage increases above initial budget projections (Cost: 
$22 million).
     Unfunded increase in security costs after 9/11 (Cost: $20 
million).

    Let me put the staffing problem in even greater perspective. Over 
time, the current FY 2003 FTE projection is 1,249 FTE less than what 
was requested in the President's FY 2001 Budget. It is also important 
to note that the FY 2003 appropriation bill created a $68 million 
unfunded pay increase and an across-the-board cut of $64 million. These 
actions will further reduce our staffing levels and directly affect our 
ability to deliver on performance projections included in the FY 2003 
budget request.

CONCLUSION
    Mr. Chairman, in conclusion, we are making progress. Although there 
is great room for improvement, we are providing better service to 
taxpayers and are hitting more of our performance goals. The 
President's proposed FY 2004 budget for the IRS keeps us on track and 
will allow us to provide both the short-term and longer-term benefits 
to taxpayers, which has been the hallmark of our modernization program 
from its inception. Once again, I thank the President and his 
Administration for their continued support of our program and their 
confidence that we can get the job done, and at the least cost to 
America's taxpayers.

                                 

    Chairman HOUGHTON. Thanks very much. Let me just ask a 
question or two, and then we will pass it along here. I think 
the 2007 year and 80 percent was sort of an arbitrary figure, 
as far as a goal. Are we anywhere near on track to reaching 
that figure or is this more of a generational problem?
    Mr. WENZEL. As you mention, it was a goal that was set by 
Congress in the Internal Revenue Service Restructuring and 
Reform Act of 1998 (P.L. 105-206), that 80 percent of all 
individual and business returns would be filed electronically 
by the year 2007, and we set out to achieve that goal. As I 
mentioned, we have had considerable initial success in the 
individual income tax return area, but some additional progress 
needs to be made in the business tax returns area. Right now, 
it doesn't look like we will achieve the 80 percent goal.
    We proposed new ideas to achieve this goal. For example, 
this year, the Free File that I mentioned was an example of 
trying to get us to the 80 percent goal. Free File fits in with 
the President's management agenda.
    We also need to make sure that we come up with other 
incentives. The April 30 date is an example of an incentive 
that will encourage taxpayers to opt to use electronic filing. 
This is where we extend the filing date by 2 weeks, from April 
15 to April 30, to offer to individuals to file their return 
electronically, so there will be a number of individuals that 
have used the paper form of filing in the past that will now 
opt to use the electronic filing date.
    Chairman HOUGHTON. You have stated this before and 
Commissioner Rossotti stated it before also, that the 80 
percent in 2007 is not particularly realistic. So, what do you 
do, keep pushing for this and just say, somehow, some way, we 
are going to make it? Do you reduce the percentage figure? Do 
you increase the year figure? What do you do in order for us to 
have some sort of a realistic guide?
    Mr. WENZEL. Our goal is to keep pushing to try to achieve 
the 80 percent. While there is only----
    Chairman HOUGHTON. So, are people going to be hung by the 
thumbs if you don't reach that?
    Mr. WENZEL. I hope not. I hope that we will demonstrate 
along the way that we have tried everything we possibly could 
as an agency to reach that goal, because this is so critical in 
terms of moving the IRS forward. A substantial amount of our 
resources are required to process the paper returns in the 10, 
soon to be 9, processing centers that we have around the 
country. There is an enormous amount of full-time equivalent 
(FTE) positions, that need to go into processing that paper. We 
hope that every FTE position that we could save in that regard 
could be used somewhere else in our service and in our 
enforcement programs.
    Chairman HOUGHTON. Thank you. Mr. Pomeroy?
    Mr. POMEROY. Thank you, Mr. Chairman. I want to again begin 
my questioning by just saying I think that staff at the IRS is 
real top-flight professionals. They don't get the public 
acclaim that they probably ought to have, and I hope they 
understand how much we appreciate their dedicated and competent 
service.
    I understand that the IRS has entered into discussions 
since our last hearing regarding the private sector partners on 
the Free File e-filing as to coming up with some evaluation or 
standards as to the products that they might be offering to 
taxpayers, is that correct?
    Mr. WENZEL. Yes. Just to go back a little bit on the Free 
File, about a year or so ago, we entered discussions with the 
private sector about Free File, what we refer to as the Free 
File Alliance. We reached agreements with 17 different 
providers.
    In terms of the agreement that we entered into to start the 
2003 filing season, which is the first time effort, we entered 
into an agreement that they would be able to come into our site 
with the understanding that when they brought up their 
particular site, they would be able to have some pop-up screens 
to show the products and services that they have to offer.
    As I mentioned, we have had considerable success. Over 2 
million returns have been filed. We have our own survey for 
individuals who want to give us some feedback after they are 
done using these sites. To date, we have had a little over 
9,000 responses back from the over 2 million returns that have 
been filed. We would be very happy to give you the specifics on 
that and share that with the Committee. We have also heard from 
external groups, particularly some of the consumer groups, that 
they have some concerns. We have already scheduled a session 
with the Free File Alliance for the end of this month, 
Congressman, just to review this first-time effort in terms of 
the results and to listen to the feedback from all sources that 
we received so that we can build on the first year's experience 
and go forward and effect anything that needs to be done here 
in the way of improvements.
    Mr. POMEROY. I commend you for that and think that your 
leadership, the IRS's participation in discussion with the 
private sector partners regarding the identification of the 
range of products and certain quality dimensions of them that 
are acceptable and others that may not be acceptable is 
important.
    Now, for the trade association to do it on themselves, that 
might run afoul of their antitrust issues, and so as long as I 
believe the IRS is directing the discussion and participating 
in it, then there are State actions sufficient to make 
antitrust not apply. Therefore, your active leadership here is 
really important.
    I believe that many of the well-known name brand partners 
don't want to be associated with an endeavor that has inferior 
products coming onto the marketplace. Your efforts there will, 
I think, preempt any necessary legislative effort that we 
would--you ought to take care of it, not us, and so I am happy 
that you are looking after it. The other point I would like----
    Mr. WENZEL. Congressman, I just want to say you have my 
personal assurance, our personal assurance that that will be 
exact on how we would proceed on this.
    Mr. POMEROY. Thank you very much. The issues of concern 
raised regarding the pre-certification don't go as to whether 
pre-certification of EITC claimants is appropriate, but rather 
has sufficient care been made in developing the format so that 
we are starting with a document that is appropriate, eliciting 
the material needed for purposes of determining whether they 
qualify or not but not imposing a hurdle or a barrier that 
would discourage people who are qualified and, frankly, need 
this credit but otherwise wouldn't be allowed to pursue it.
    Just for an example, your third party verification that the 
children have lived for 6 months with the household is more 
stringent than that used for food stamps and places a barrier, 
again, on this population that may be difficult.
    Second issue, for some claiming step-parent status, 
marriage certificates are required, and I don't know that you 
have checked or not, but some States, California is reporting 
on their web page a 2- and 3-year backlog in the issuance of 
marriage certificates.
    Can you tell us that all care has been given to make 
certain that this does not represent a barrier, and would you 
be inclined to think it might be helpful to have the GAO look 
at the form to determine whether or not it will serve its 
intended role in the marketplace?
    Mr. WENZEL. We would welcome GAO's involvement. They have, 
over the years, been very, very beneficial in providing this 
kind of oversight.
    Let me just say, on the pre-certification issue, the last 
thing we want to do, is put additional burden on individuals. 
Our intent with pre-certification is that rather than examining 
the return on the back end, we are trying to go to the front 
end and resolve any concern that we might have so that once 
that individual is pre-certified, then it stays that way.
    Over a period of many months, we put together what we 
thought was the best approach to this issue, and we invited 
external groups into the IRS that have a very special interest 
and are well aware of the taxpayers that we would be working 
with in terms of the pre-certification.
    There have been two meetings that have been called by our 
national Taxpayer Advocate. She took the lead on this and 
invited these groups in and is engaging people from the wage 
and investment organization. I am briefed on it regularly 
myself in terms of how those sessions have gone. As far as the 
input, we have received information from those groups that we 
are now looking at ourselves to make sure that we are not going 
to create this kind of burden.
    It was interesting that you mentioned California. I was 
aware of that, and I think that is striking that it is going to 
take them that long. My understanding is it may be due to some 
budget problems they have. That is an unreasonably long period 
of time. This pre-certification effort should be done as 
quickly as possible.
    In a situation like that, we have what we call Federal and 
State agreements between the States and the IRS. There may be 
some opportunities to work out arrangements with a State that 
those extended delays don't occur when we need information for 
the pre-certification program.
    We are, as I mentioned, working with the groups, getting 
additional input, so all of this is being seriously considered 
right now to come up with the right answer that doesn't place 
undue burden on that whole process.
    Mr. POMEROY. I appreciate your response. I may have some 
additional questions for you in writing, but I see that my time 
has expired. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you very much, Mr. Portman?
    Mr. PORTMAN. Thank you, Mr. Chairman, and Mr. Wenzel, thank 
you for being here again. I want to commend you for your 
stewardship of the IRS during this interim period after Mr. 
Rossotti's departure and before the new Commissioner is 
confirmed. I understand Mr. Everson is on his way toward 
confirmation, having made it through the gauntlet of the Senate 
Finance Committee and maybe we will get a vote even as soon as 
this week in the full Senate. I know you are very eager for him 
to come on board.
    Mr. WENZEL. We look forward to Mr. Everson joining us as 
our Commissioner.
    Mr. PORTMAN. Well, again, your testimony today is an 
example of the kind of leadership you provided, and we 
appreciate it very much.
    On e-filing, just if I could quickly, and then I want to 
talk about EITC. The enormous diversion of resources you talked 
about that could otherwise be used for taxpayer service or 
enforcement is obviously a huge concern of the IRS. Just one 
other point to make is that there is also an enormous cost to 
the taxpayer because of the error rate, both caused by the 
taxpayer and by the IRS. We are told it is as high as 10 or 11 
percent on each side, so 20 to 22 percent error rate, which 
causes enormous downstream costs to you but also to the 
taxpayer, and a lot of that, I understand, is simply in 
transposing the numbers. That is why the Congress has been so 
determined to get that electronic filing number up, as you 
have, and I think we need to do everything we can, even take 
some chances. That is why I commend you for what you are doing 
in terms of giving people access to e-filing on a low-cost or 
no-cost basis. Forty-one percent of individual returns are now 
filed, or will be this year, by electronic. What is the 
business number?
    Mr. WENZEL. The business number, in terms of percentage?
    Mr. PORTMAN. Yes.
    Mr. WENZEL. It is about half that. I will get the exact 
figure for you.
    Mr. PORTMAN. Roughly 20 percent?
    Mr. WENZEL. Yes.
    Mr. PORTMAN. This is why we are putting in the legislation, 
which will come to the floor this week, this IRS recommendation 
of extending the filing deadline for those who file 
electronically, just to try to do everything we can because it 
is good for the IRS and good for the taxpayer to encourage 
electronic filing, and based on your surveys, we know that 
particularly people who have amounts due very much appreciate 
having that additional time and that will be an incentive, is 
that accurate?
    Mr. WENZEL. Yes.
    Mr. PORTMAN. We have gotten some criticism on this proposal 
from Members of the Committee on both sides of the aisle and 
also from tax preparers. Could you respond just briefly to the 
criticism that has been raised by tax practitioners about the 
problems of moving away from the sacred date of April 15?
    Mr. WENZEL. Certainly. April 15 has been there for, it 
seems like forever. I often commented to IRS and some 
practitioners along the way that if there was--if Congress ever 
wanted to establish another national holiday, maybe April 15 
would be appropriate--but that is coming from a tax 
administrator. So, I can appreciate the practitioners' concern 
about that.
    Our obvious intent there is to make sure that we have a 
very, very active awareness campaign, investing the right 
amount of resources so that individuals realize who qualifies 
for the April 30 date, and what it takes to qualify for that 
date.
    Mr. PORTMAN. I think that is very important, to keep the 
April 15 date out there and encourage folks to electronically 
file by indicating this is an exception to the April 15 rule, 
not that the date has changed. Again, I am willing to take that 
risk and push it as hard as we can because I think that 
electronic filing goal is so important and appreciate the 
Chairman's support and Mr. Pomeroy's support, too. This 
Subcommittee has taken a lead on that, and we will continue to 
help you in every way we can.
    Quickly, on the 10 deadly sins, are you happy with the way 
the legislation is drafted that is coming to the floor this 
week to reform the 10 deadly sins, so-called?
    Mr. WENZEL. Yes.
    Mr. PORTMAN. Okay. Any thoughts you have on that, we need 
to hear from you because after it passes this chamber, which I 
think it will, of course, we will be in negotiations with the 
Senate and trying to do something on the Senate side.
    With regard to electronic filing, you have got a study from 
2002, a U.S. Department of the Treasury study showing, again, a 
large improper payment rate. The study shows that as many as 
31.7 percent of claims amounting to $9.9 billion are improper, 
and I think we have gotten to the point here where we once 
again need to look carefully at the EITC and come up with some 
better ways to encourage compliance. I commend you for doing 
that.
    One of my questions, as you know, all along has been should 
the EITC be an IRS program? Is this an appropriate thing for 
the IRS to do? My experience with the IRS is that I am more for 
tax reform than ever because of the IRS problems it has 
administering this code, not because I believe the IRS is at 
fault, and I think the EITC is the classic example.
    If you could just quickly tell us whether this program is 
supported by the Taxpayer Advocate, the compliance program you 
have come up with.
    Mr. WENZEL. In terms of the program that we are proposing, 
the Taxpayer Advocate has been very much involved in all of the 
sessions and all of the procedures that we have now drafted to 
this point. She has provided us with valuable insight in terms 
of where we thought we might go in one direction, but she 
brought us back into another procedure that was, in terms of 
fairness and application.
    So, I can't speak for Ms. Olson, but I do know that she has 
been actively engaged, and when she had some disagreement with 
the direction that we were headed in, she was right there and 
stayed with it and we listened to her and made the changes. So, 
at this point in time, I would think that she is fully with us 
in terms of where we are with the effort.
    Mr. PORTMAN. I think it is important the person who is 
responsible for looking out for the taxpayer be involved in it, 
and my understanding is she is supporting it and I think that 
is an important point.
    Mr. WENZEL. Again, I----
    Mr. PORTMAN. I will ask additional questions in writing 
because my time is up, but if you could comment at some point 
today about the different error rates. Mr. Pomeroy raised a 
good question about whether what you are asking for in terms of 
certification is in addition to what we ask for in other 
programs, like the U.S. Department of Housing and Urban 
Development (HUD) programs or the food stamp program or 
Supplemental Security Income or other programs, and I think the 
compliance rate differences need to be pointed out at some 
point, as well. Thank you.
    Chairman HOUGHTON. Mr. Foley.
    Mr. FOLEY. Thank you very much, Mr. Chairman, and I do 
welcome you here today and I would echo in the comments of my 
colleague, Mr. Pomeroy, relative to the IRS and its employees 
taking an unusual burden of criticism due to the fact we here 
on this Committee oftentimes change the Code every other hour. 
So, it is difficult for you all to figure out all of the 
various rules and laws we are passing on you.
    He did also open up another opportunity, though, when he 
mentioned our effort to pull the tax code up by its roots, 
something we have all talked about, and I wondered if you had a 
chance at all to do an analysis internally relative to the 
implementation of a flat tax or a sales tax, and what it would 
do to the IRS itself.
    Mr. WENZEL. We have not done that, Mr. Foley. That kind of 
review would be something that would be done at the Department 
of the Treasury. The IRS on those two specific areas, the sales 
tax and flat tax, I am not aware of anything that we have done 
in the IRS.
    Mr. FOLEY. Would it be fair to assume a simplification of 
that sort would be much easier to not only implement, but 
obviously to monitor?
    Mr. WENZEL. We have heard about the need for simplification 
from taxpayers over the years. It is one of the critical 
issues. The issue is, keep it simple. Simplify the tax code. 
Make it more understandable, easier to prepare returns.
    More and more, every year, there is an increase in third 
party preparers that need to help individuals and businesses 
prepare individual and business tax returns because of the 
complexity. The issue, of course, universally is 
simplification.
    Mr. FOLEY. You raised another important point. I think 
complexity is probably the underlying word that bothers most 
Americans. It is not that they do not want to meet their 
obligations, but on our panel alone, my colleague from Florida, 
Representative E. Clay Shaw (R-FL), is a certified public 
accountant (CPA) and a lawyer. He is uniquely double-degreed, 
if you will, and he has a person prepare his return for fear of 
making a mistake. That seems to be, in his particular 
situation, somebody quite capable of doing a 1040 form.
    You look at most Americans who are struggling just to work 
their 40-, 60-, or 80-hour week, then gather all the receipts 
necessary in order to make certain their return is properly 
filed. It is daunting and intimidating. How are we providing--
--
    Mr. WENZEL. Congressman, if I could just say----
    Mr. FOLEY. Please.
    Mr. WENZEL. Our own employees have that issue, too, in 
terms of trying to provide the correct answers through a 
telephone or through one of our field assistance centers 
because they are dealing with the same tax code that is in two 
volumes already. So, we are always challenged in terms of our 
accuracy rate in trying to keep up with those changes.
    Mr. FOLEY. It does beg the need for reform of some kind, 
and I think simplification, not necessarily just changing 
rates. I think it needs to be dramatically changed. How are we 
doing for your agency relative to technology funding and 
providing you the infrastructure necessary?
    Mr. WENZEL. We feel that the funding that the Congress has 
given us to date has been fully supportive of our effort. 
During the current fiscal year, we actually slowed down our 
effort in terms of business systems modernization a little bit 
because we were evaluating where we were with our prime 
contractor and decided that we were taking a lot of projects on 
at once. We decided it is time for us just to pull back a 
little bit and do a reassessment.
    This calendar year, before the end of December, there are a 
number of significant projects that should come online. 
Specifically to your question, the business assistance 
modernization funding has been adequate for us.
    Mr. FOLEY. In conclusion, I did want to again compliment 
you. I visited some of your service centers in my area. I found 
the employees to be readily able to help people. The phone 
lines are being answered. They are very accommodating. Their 
assistance has been very, very good. So, I just want to take a 
moment to commend you, your agency and its employees.
    Mr. WENZEL. Thank you, Congressman. We will share that with 
our people. I am sure you have done that already, but I will 
pass that back.
    Chairman HOUGHTON. Thanks very much. Mr. Ryan?
    Mr. RYAN. Thank you, Mr. Chairman. I am encouraged to hear 
from my colleague from Florida that he still has service 
centers up and running to help his constituents, and that is 
really what I want to direct my questioning to, Mr. Wenzel.
    As you know, these service centers are very helpful, these 
Taxpayer Assistance Service Centers. People coming off the 
street, they get the forms they need. They get quick answers to 
some pretty simple questions they have.
    Unfortunately, what happened in Wisconsin was every 
Taxpayer Assistance Service Center was shut down except for 
Milwaukee. We have a very large State, and so when you shut 
down the Appleton, Waukesha, Janesville, and Racine Service 
Centers, obviously, a lot of people are upset about that, and 
that is the decision that the agency made.
    I would like to ask you for, and I don't know if you can 
give me this right now, but if you could do so in writing, for 
the justification of those decisions. It is also my 
understanding that the local IRS offices are still open. They 
still exist in those places, the same number of staff is still 
there, only that there can be no taxpayer assistance provided 
at those offices. No forms can be picked up at those offices. 
No questions can be answered at those offices. So, if a person 
wants to speak to a person, wants to go get a form, they will 
have to drive anywhere--like a couple hundred miles to 
Milwaukee to get that and stand in line at one office in our 
State.
    So, our entire Congressional delegation has written you and 
Mr. Rossotti prior to this about this, and I would like to get 
your response on that. Are you saving money by doing this, 
because it doesn't seem like you are saving money by 
consolidating it into the Milwaukee office because you are not 
reducing any FTE numbers. So, it seems like it has brought 
forth a lot of frustration, it has reduced the service of the 
IRS to our constituents, and it doesn't seem like you gained 
much efficiency in doing so. So, if you could give me a good 
response to that, I don't know if you can do it fully here, but 
in writing, I would appreciate that.
    Mr. WENZEL. Let me just comment, Congressman Ryan, and I 
will ask Mr. Dalrymple to respond to that. I don't know the 
specifics around the offices in Wisconsin, but I assure you we 
will respond to you in detail as to the rationale. We have 795 
offices in the continental United States and just under 500 of 
them offer call assistance.
    Mr. RYAN. Right.
    Mr. WENZEL. To your point, the offices that you mentioned, 
we don't offer that assistance to date. We have applied a 
criteria across the country in terms of where an office would 
provide assistance, and it sounds like the offices that you 
mentioned did not meet that criteria, but I would ask Mr. 
Dalrymple just to add to that.
    Mr. RYAN. Just before he does, but what that criteria meant 
for the State of Wisconsin is only one office in the 
metropolitan center of the State has these services. No other 
office in the entire State has these services. So, what does 
that do to people in the rural areas? Nothing. Just not 
providing the forms that people need in these local offices 
doesn't seem to me to be an incredible expense, now that you 
are not providing that service, you all of a sudden save a lot 
of money. That decision, I have a hard time coming to grips 
with, but please, go ahead.
    Mr. DALRYMPLE. I am not specifically familiar with 
Wisconsin, so we will definitely get you the written response 
that you have asked for. We have embarked on a strategy, 
actually, to make our telephone service tremendously better so 
that people who have the kinds of questions that you have 
talked about can get that service through our telephone 
services.
    Also, forms and questions are available to be answered or 
downloaded through our Internet sites. We have had over, as Mr. 
Wenzel had mentioned earlier, 3 billion hits so far this year, 
hundreds of millions of forms and publications downloaded.
    Fundamentally, we do expect to be able to serve rural 
areas, and in many instances where we have had to reduce 
service in some locations, we then had mobile units that have 
visited specific locations on a rotational basis, have specific 
places like senior centers where we go 2 days a week where we 
have had to close an office. So, we are trying to provide those 
kind of services in other ways. I will specifically look into 
Wisconsin to make sure that we haven't overlooked a need there, 
and we will get back with you.
    Mr. RYAN. In your response, because obviously you 
identified the seniors as being part of the problem, what you 
do when you sort of bring the services into the metropolitan 
area and not into the rural area is it is really the retirees 
who don't download things from the web, who don't really know 
the right questions to ask on the phone, who are the people who 
have been disproportionately benefiting from the local offices. 
So, that is really who loses out on this. In your response, if 
you can give me more details about your mobile office plan, 
because that is something that we can coordinate to ship 
around, give me more details about that, if you could, in your 
response.
    Mr. DALRYMPLE. We will do that.
    Mr. RYAN. All right. Thank you.
    [The information follows:]

    The IRS currently operates several TAC offices in Wisconsin. We 
have offices in Milwaukee, Madison, Green Bay, Mosinee, Eau Clair, 
Appleton, and La Crosse. These offices are placed to provide taxpayer 
assistance to the majority of Wisconsin residents. The TAC offices 
continue to provide the needed services to the surrounding communities 
and we have no plans to suspend these important services.
    Several convenient options are available for taxpayers to obtain 
the service they need, when they need it most, without visiting a local 
office. Taxpayers may contact IRS customer service representatives 
toll-free at 1-800-829-1040. Recorded tax information on hundreds of 
tax topics is available toll-free at 1-800-829-4477. Forms and 
publications can be ordered at 1-800-829-3676 or available over the 
Internet. The IRS Internet site can be accessed at www.irs.gov. 
Practitioners needing assistance have access to the Practitioner 
Priority Service toll-free by calling 1-866-860-4259. This accounts-
related service created exclusively for tax practitioners nationwide 
should be the practitioner's first point of contact for assistance 
regarding taxpayers' account-related issues. Employees answering these 
calls are specially trained in handling practitioner issues.
    If preferred, taxpayers can schedule appointments in advance to 
resolve any tax problems, thereby ensuring that an employee will be 
available and ready to assist them at the TAC nearest to them. Local 
telephone numbers for Taxpayer Assistance Centers are available from 
directory assistance and will appear in all new telephone directories, 
and are also available on the IRS Web site. In addition to scheduling 
appointments, taxpayers can call the number for advance information 
about the nearest office location and hours of service.
    With regard to your specific concern about the Racine office, I 
want to provide you with an update. This is a matter on which we 
corresponded with your office late last year. The IRS office in Racine 
remains open, but we have relocated the Field Assistance employee who 
worked in the TAC office there, on a part-time basis, to Milwaukee, 
which is less than 30 miles away.
    In addition, we have closed the Waukesha and Janesville TACs, both 
of which were only open part time. There was no Field Assistance 
employee in the Janesville location. The services previously offered in 
the Janesville TAC were provided on a limited basis by employees 
assigned to Compliance activities. The Waukesha TAC, like Racine, had 
only one Field Assistance employee, who has been voluntarily reassigned 
to Milwaukee, just 15 miles away.
    We initiated these actions to provide quality customer service for 
taxpayers and practitioners within the commuting distance of Milwaukee 
and reduce the impact on compliance resources needed to support lesser 
TACs. These TACs, with few employees, place a burden on employees at 
other locations who are required to manage these centers when TAC 
employees are necessarily absent. The Milwaukee office has a much 
higher demand for service, yet is not staffed as fully as such service 
is required. The voluntary assignment of the Racine and Waukesha 
employees to Milwaukee will ensure much more efficient and effective 
use of our resources and allow us to better serve higher numbers of 
taxpayers. In addition, enhanced security will be provided for these 
employees.
    I trust this information is helpful in responding to your concerns.

                                 

    Chairman HOUGHTON. Thank you. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman, and Mr. Wenzel, 
welcome. It is good to have you before the Committee, and thank 
you for this opportunity to spend some time with you and your 
staff today.
    I would like to focus on the IRS collection programs, 
particularly the new initiative that the Administration has 
included in your budget here, and let me begin with sharing 
some what I consider to be pretty disturbing statistics, and 
that is regarding IRS collection programs.
    It is estimated that the IRS collects approximately 9 
percent of assessments, leaving 91 percent of tax assessments 
uncollected for the duration of the 10-year statute of 
limitations. Between 1996 and 2001, the number of tax liens 
fell 43 percent, tax levies on property fell 73 percent, and 
seizures fell 98 percent.
    These statistics indicate that the IRS has not been very 
aggressive or very effective in collecting tax assessments. Of 
course, the Administration has decided to do something that 
other agencies have been doing for some time, and that is that 
there is a legislative proposal to allow the use of private 
collection agencies to collect outstanding tax obligations. 
Chairman Houghton of this Subcommittee has introduced 
legislation. I, like others, have joined with him as a 
cosponsor.
    I would like to hear from you, of course, as the Acting 
Commissioner, what are the advantages of this proposal that you 
have included in the Administration's budget request to assist 
you in collecting outstanding tax assessments.
    Mr. WENZEL. We support the legislation and look forward to 
its passage. As you pointed out there is a significant amount 
of what we call potentially collectible inventory that we are 
not devoting any resources to, and we see the possibility of 
private collection agencies coming in. The proposal is that the 
compensation for the effort the private collection agencies 
would put into the effort would come out of the proceeds that 
they are able to collect through their efforts. So, there isn't 
any loss of positions inside the IRS for this effort.
    Having been in the collection function in the IRS, as 
Assistant Commissioner of Collection at one time in my career, 
I advocated that we needed to do something to support the IRS's 
effort as relates to its collection initiatives by 
supplementing it with private collection agencies.
    Right now, there is a significant number of dollars that go 
uncollected each year because the 10-year statute has expired. 
There is a significant number, it is well over $200 billion, 
that is often pointed to as the amount of money sitting there 
that is currently uncollectible and no efforts are being made 
to collect it. A lot of that is corporations that have gone out 
of business, individuals that are deceased, individuals where 
there are hardships, where it is inappropriate to collect any 
additional taxes from them, and so forth.
    After you eliminate all of that, you still have a 
significant amount of money left, and our own review of that 
inventory to date demonstrates that if private collection 
agencies were able to come in, there is at least $13 billion 
that we feel is----
    Mr. WELLER. Thirteen billion dollars?
    Mr. WENZEL. At least $13 billion, potentially even more, 
that through additional efforts on the part of these companies 
that would be collected that would go into the Department of 
the Treasury.
    Mr. WELLER. Do you have some examples of States that have 
used private debt collection services?
    Mr. WENZEL. Actually, it is a significant number of States. 
It is somewhere in the neighborhood of 40 States that have gone 
into this for a period of years, and even in the executive 
branch, the U.S. Department of Education has used these 
companies, and also Financial Management Services, which is 
part of the Department of the Treasury. One of their principal 
roles is to collect delinquent debt throughout the executive 
branch.
    So, this is not a new effort in the executive branch. There 
is a lot of experience already in the executive branch, and 
particularly at the State level. Many of us in the IRS have 
actually traveled to some States and firsthand sat down with 
the State tax administrators to learn about their feedback as 
it relates to their satisfaction levels.
    In one in particular, Michigan, I will give you an example, 
that I visited a number of years ago, they have been in that at 
least probably about 10 years already, and other States along 
the same line have used private collection agencies to their 
advantage in terms of going after tax debt, and----
    Mr. WELLER. Commissioner, I realize my time is pretty well 
utilized. I was just going to, just in closing, I have been an 
advocate of this for some time and I appreciate your support 
for this initiative. The question I have is, we have had 
earlier proposals. How has this proposal been refined and 
improved upon from the earlier ones we have been looking at?
    Mr. WENZEL. There was a pilot, as we call it, that was 
conducted in the 1996-1997 time frame, and there were different 
reports that were prepared as a result of that effort. What we 
learned from that is, and we have applied it to this particular 
effort, was that we turned over accounts to the private 
collection agencies for that effort that were really, really 
old accounts. They were in the period of time that 5 or 6 
years. The best that we ever did at the IRS, maybe once a year, 
we would send out a notice, at best. So, there was a real 
challenge because of just the age of the accounts.
    The obvious thing is that once a debt is incurred, you 
don't let it sit there for too long before you start to do your 
follow-up and make sure that it is collected in a reasonable 
period of time, and the longer it takes and the older it gets, 
the more difficult it becomes to collect.
    So, what we have learned from that study, and that is just 
one example, is that we need to make sure that we give 
inventory--and we have it, believe me, at all stages as it 
relates to the age, from less than 1 year all the way out to 
the last year. If this proposal is passed, we intend to make 
sure we give a fair mix of inventory to these companies so they 
have an opportunity, and we have an opportunity.
    There is an oversight role, by the way, of the IRS. We just 
don't let those companies go about doing their business. We 
actually will have an IRS employee on premise, I call it, kind 
of like quality assurance to make sure that everything they do 
is what we would expect of our own employees as far as their 
employees in terms of the effort at hand. So, that is one 
example that we benefited from that previous pilot.
    Mr. WELLER. Thank you, Commissioner, and Mr. Chairman, 
thank you.
    Chairman HOUGHTON. Thank you. Now we are going to have 
another fast round of second questions.
    Mr. POMEROY. This will be so fast, Mr. Chairman, I will 
just basically tee it up, and you don't have to answer. I will 
ask for a written response.
    I have been informed that www.irs.com is not the IRS site. 
That is a private site. We have had that problem with other 
government names that have--where the domain name has been 
purchased, especially on the dot-com one. Obviously, 
www.treas.irs.gov, a lot of people aren't ever going to find 
their way there.
    Now, I understand also that the search engines that people 
might enlist to help get them there directs to the commercial 
site, and so I would be interested in learning from the IRS 
what activities you are doing, including outreach to the search 
engine firms, to make certain that inquiries for the IRS go to 
the more cumbersome www.treasury.irs.gov site, not www.irs.com. 
Thank you, Mr. Chairman. I yield back. I will write to you more 
about this.
    [The information from Mr. Wenzel follows:]

    At the time that IRS developed its own website, they were not 
allowed to have their own URL/Domain. IRS partnered with the Department 
of Treasury to use the following URLs/domain names:

     Lwww.irs.treas.gov
     Lwww.irs.ustreas.gov

    Since then, IRS has been issued authority to establish their own 
URL and domain name. Taxpayers as well as search engines were provided 
with IRS new URL--www.irs.gov--that provides a direct linkage to the 
IRS's website. The old URLs automatically redirect the public to the 
current URL.
    In a survey performed of the top search engines (according to our 
internal Web Trends reports), using different search terms as ``IRS'', 
``tax'' and ``tax forms'', the IRS current URL was displayed as the 
number one or two search result in several searches, but in all but one 
search was always on the first page of search results. Based on these 
results, we do not believe that additional guidance to the search 
engines is needed.
    In addition, IRS has also pursued the usage of IRS.com for private 
use. While we do not want a private company to use those URLs, we do 
not have the authority to enforce non-use.

                                 

    Chairman HOUGHTON. Thanks very much. Mr. Portman?
    Mr. PORTMAN. Thank you, Mr. Chairman. Just quickly on 
electronic filing, one idea that has been thought about, as you 
know, perhaps, is to insist on the April 15 date for all tax 
returns, but for those people who have an amount due who, based 
on your own surveys and common sense, are motivated by the idea 
of electronic filing, if they get a little more time to make 
their financial commitment, that those folks who electronically 
file would be able to send their check in late. In other words, 
the April 30 deadline, the 15 days later, would apply to the 
check but not to the return. How do you respond to that?
    Mr. WENZEL. Do you want to answer that, John?
    Mr. PORTMAN. Does that create administrative problems for 
you that are----
    Mr. DALRYMPLE. Well, we have done some research and we feel 
that we would actually--if we could extend the due date of the 
tax return and the payment date, that we could increase filings 
in the first year by almost 2 million electronic filers, and it 
is an important group of filers, also, because it is the most 
difficult group that we have in terms of penetration. It is 
more complicated tax returns and it is people who owe tax 
generally who would take advantage of this, and that has been 
the place where we have had the most difficult time penetrating 
that market segment.
    All of our marketing experts that we have used to help us 
with our marketing have told us that at a particular point, it 
is going to get more and more and more difficult to continue to 
grow at the rate we have grown electronic filing, and that we 
will have to have incentives if we are going to continue to 
make inroads. I actually believe that is one of the more 
important incentives.
    Mr. PORTMAN. John, you think one of the incentives has to 
be the return itself, not just the check?
    Mr. DALRYMPLE. I do, and I think the reason for that is 
that I think that there will be a tremendous amount of 
confusion if you separate the due date of the payment from the 
due date of the return.
    Mr. PORTMAN. Another opportunity for an error.
    Mr. DALRYMPLE. Exactly.
    Mr. PORTMAN. Mr. Wenzel, this may be your last time before 
this Subcommittee as Acting Commissioner, and if you could sit 
back and be reflective and philosophical for a moment and be 
totally candid with the Subcommittee, I would love to hear your 
view on three things quickly. I know we are going to hear from 
GAO in a moment on the business systems modernization, but is 
it on track or not, and what should we be doing with regard to 
business systems modernization other than more money, which we 
are asking for?
    Mr. WENZEL. This last year, we really have looked at 
business systems modernization, and did a serious critique as 
to where we are. As I mentioned earlier, we decided to slow 
down a number of the projects, eliminate some, and concentrate 
on a few. The expectation is here.
    There are two critical projects that are due later this 
fall during the August-September time frame. One is what we 
call the Customer Account Data Engine, and that is the start--
that is a critical project because even though it will only 
handle a 1040-EZ form, it is the really complete overhaul of 
our master file, which is every account for individuals and 
businesses. The other one is what we call our Integrated 
Financial System, which is a more in-house effort that is also 
due to come online.
    We meet regularly with the prime contracts in terms of 
their leadership. For example, I have another meeting with them 
this afternoon again in terms of status reports. We have sat 
down with them and they have beefed up their leadership in 
terms of the key positions from the prime and brought some more 
experienced senior executives into their role and 
responsibility as it relates to their deliverables and our 
expectations of our deliverables. We have sat down with them 
and said, in terms of the cost of the projects to date, that 
the prime has to make sure that--and they have agreed to do 
this--that some of this would be as it relates to a fixed price 
to a specific project and other examples where that cost, once 
we agree on that, won't continue to increase.
    Mr. PORTMAN. We are going to hear about some of the cost 
overruns and some of the delays from GAO, and again, my 
question to you would be--I appreciate that response, but are 
you leaving it in a situation where you think it can recover, 
get back on its feet, and do you think we are on track to get 
this done?
    Mr. WENZEL. I really think that we really haven't gotten 
off track, Congressman. These efforts, and Commissioner 
Rossotti, with all his years of experience, and others have 
come in----
    Mr. PORTMAN. Very complex.
    Mr. WENZEL. It is a huge undertaking. You know that, and 
others know that. That is not a reason to say that we can't get 
this done.
    Mr. PORTMAN. This will be a critical year, from what you 
have said. The two other things I would love to have you 
respond to in writing, if you could, to the Committee would be 
great, would be the Oversight Board, whether that is working, 
in your view or not. Again, as you depart, we would love to 
have your comments, and we are going to hear from the Oversight 
Board in a moment, and finally, EITC, and I would love to know 
what you think about not just some of these reforms we have 
talked about, and the reasons for them, I think, are clear, but 
whether there is a way for the IRS to do this in an efficient 
way, or whether it should be a different kind of a program. I 
appreciate your leadership, and thank you, Mr. Chairman.
    Mr. WENZEL. I look forward to providing my response, 
Congressman.
    Chairman HOUGHTON. Mr. Foley?
    Mr. FOLEY. No thank you, Mr. Chairman.
    Chairman HOUGHTON. Mr. Ryan?
    Mr. RYAN. No questions.
    Chairman HOUGHTON. Mr. Weller?
    Mr. WELLER. I just have one question here, Mr. Chairman, 
just to follow up on. Earlier in the hearing when we were 
talking about the EITC compliance, Mr. Commissioner, and it has 
been noted from IRS review and other review of the EITC 
program, there is about a 30 percent error rate, about $8.5 to 
$10 billion worth of fraud, according to the last estimate in 
1999 is the figure I have. I was wondering, how does this error 
rate compare with the error rate for other types of low-income 
assistance programs?
    Mr. DALRYMPLE. Actually, I have that data here, if I can 
find it in front of me. Basically, the error rates for things 
like HUD and other programs are in the 6 to 8 percent range. 
Our error claim rate, as you said, is just about 30 percent, so 
that is a fair comparison, I believe.
    Mr. WENZEL. We can provide you the specifics of the 
comparisons, and we have that available, as Mr. Dalrymple 
mentioned. This 30 percent has continued to grow and grow, and 
that is why we needed to come in with this proposal for fiscal 
year 2004 to try to make sure we stem that, actually reverse 
it, bring it back down, and try to eliminate it.
    Mr. WELLER. Well, Commissioner, if you could provide those 
statistics and similar means-tested programs and then also 
explain what you define as the error rate so that we are 
comparing apples to apples and not apples to oranges. Thank 
you, Mr. Chairman.
    Mr. POMEROY. Would the gentlemen yield just for a moment?
    Mr. WELLER. Sure.
    Mr. POMEROY. The question that I would have in follow-up, 
we passed in 2001 some reforms and hope that this 30 percent 
figure would refer to the pre-2001 reforms in EITC. Are you 
telling us, Commissioner, that the reforms have had no effect 
and the problem continues to grow?
    Mr. WENZEL. Yes. We have the breakdown by year, but truly, 
this is, in terms of the amount, where it is almost 30 percent 
or so, roughly $9 billion, that that figure continues to grow 
each year, yes.
    Mr. POMEROY. So, the reforms have had no effect, or have 
you measured the post-2001 reforms from the pre-2001 period?
    Mr. DALRYMPLE. Actually, the latest data we have is from 
the 1999 research study, which we have projected out. So, in 
that sense, we have not done another research study. We are 
doing one now as part of our national research program which 
will allow us to have some measurements here which we will be 
able to report back to the Committee on what that is.
    Let me just say that we expect that the over-claim rate 
will be significant. Whether it has gone up or down at this 
point in time, because we haven't done a research study since 
1999, I can't say with any specificity.
    Mr. POMEROY. I certainly don't want to carry water for 
anybody that is abusing this very important program, but I 
think I would caution the IRS about using 1999 data when we 
have passed a law to tighten up the error rate and to try and 
reduce noncompliance if you haven't had any evaluation of 
whether or not the error rate is lower in light of the changed 
legislative landscape. I yield back.
    Chairman HOUGHTON. Mr. Portman?
    Mr. PORTMAN. Thanks, Mr. Chairman. If you could give us the 
timing on that new research that you are doing, what will that 
study timing----
    Mr. DALRYMPLE. We are in the middle of our national 
research project right now. There is a bridge study that is 
being done in order for us to be able to measure the EITC 
compliance as part of that, as part of the national research 
project that is measuring compliance overall.
    Mr. WELLER. When will that be available?
    Mr. DALRYMPLE. I don't have a time frame right now 
Congressman, but we will get back to the Committee with that 
and tell you exactly when the data for the EITC portion will be 
available.
    Chairman HOUGHTON. Well, I have got a couple of questions I 
won't ask you now, I will send them to you. I want to thank you 
so much. This will probably be the last time that you will be 
in front of us as the Acting Commissioner. You represent the 
finest in what civil service is, and we are enormously 
grateful, and thank you very much for it.
    [Applause.]
    [Additional written questions submitted by Chairman 
Houghton, Representative Pomeroy, Representative Weller, and 
Representative Portman to Mr. Wenzel, and his responses 
follow:]

1. The Administration's budget requests $10.4 billion to fund the IRS 
for fiscal year 2004. This is about the same as last year. What would 
the IRS do with an additional $287 million in resources in fiscal year 
2004, as recommended by the IRS Oversight Board?

    The President's FY 2004 budget request represents what the Agency 
has the capacity to manage. This request is a thoughtful representation 
of what the IRS requires to provide effective customer service and also 
maintain efficient tax administration.
    Under the Oversight Board recommendations, additional funds would 
be placed in our system modernization efforts and would also be used to 
increase customer service.
    The IRS has announced that it will request an independent review of 
the CADE project. Funding the system modernization effort to the 
Oversight Board recommended level would not be the most effective use 
of our appropriated funds. After the independent review is completed, 
the IRS will be better positioned to work with the Oversight Board to 
produce a budget that will cover our system requirements and our 
management capacity.
    The IRS has just finished a successful filing season. It's shown 
improvement in all aspects of customer service. The President's budget 
request represents the right level of funding for the IRS to meet its 
mission without exceeding its capacity to manage.

What new benefits will taxpayers see this coming year?

    Because of concerns in ensuring that all taxpayers pay their fair 
share of the tax burden, our budget request includes increased funding 
needs to enhance compliance particularly for high risk, high-income 
taxpayers, businesses, and abusive tax schemes.
    The Service is also requesting funds for the Earned Income Tax 
Credit Compliance Initiative to ensure that only eligible applicants 
receive the credit. While the current initiative prevents $1 billion in 
erroneous payments annually, it fails to reduce the EITC noncompliance 
rate to acceptable levels. A new approach, based on recommendations of 
the Treasury EITC Task Force, will require that further information be 
provided to the IRS by certain EITC claimants in order to validate 
eligibility before payment.
    Also, in order to enhance compliance efforts, the President's FY 
2004 Budget proposes legislation that would allow the IRS to use 
Private Collection Agencies (PCAs) to support IRS collection efforts in 
specific, limited areas. The use of PCAs would enable the Government to 
obtain payment from delinquent taxpayers while simultaneously allowing 
the IRS to focus its own limited enforcement resources on more complex 
cases.

2. What is the percentage of business returns filed electronically?

    In Calendar Year 2002, 6,251,572 business returns were filed 
electronically. This represents 18% of those returns which could have 
been e-filed and 14% of all business returns filed. For reference, the 
term business returns includes:

     fiduciary returns (Form 1041);
     partnership returns (Form 1065);
     corporation returns (Form 1120 series);
     estate tax returns (Form 706 and 706NA);
     gift tax returns (Form 709);
     employment tax returns (Form 940 series, Form 941 series, 
Form 943 series, Form 945, and Form CT-1); and
     corporate extensions (Form 7004);
     exempt organization returns, Federal Tax Deposits, Form 
1040 returns, with attached Schedules C, E, and F, excise tax returns, 
and Forms K-1 are not included.

3. The IRS compiles data on the ``most common errors'' identified on 
returns prepared by taxpayers and professional preparers. Generally, 
the error types have been the same for the past decade, and the errors 
made by taxpayers are the same as those made by tax professionals 
(e.g., math calculations, filing status, and Social Security numbers). 
What are the most common errors made by taxpayers?

    1. Earned income tax credit was figured or entered incorrectly.
    2. Taxpayer identification numbers or names for dependents did not 
match IRS or SSA records. We did not allow the exemptions.
    3. Refund amount or the amount owed was figured incorrectly.
    4. Tax amount was not the correct amount from the tax table for 
the taxable income.
    5. Taxable amount of Social Security benefits for page 1 was 
figured incorrectly.
    6. Tax was figured or entered incorrectly.
    7. Child(ren)'s age exceeded the limit. Child tax credit was 
reduced or removed.
    8. Taxpayer identification numbers or names for dependents did not 
match IRS or SSA records. All or part of Child Tax Credit not allowed.
    9. Earned income credit was not allowed. Must be at least 25, but 
less than 65, years old within the tax year.
 10. Child tax credit was figured incorrectly.


What are the most common errors made by tax professionals?

    1. Taxpayer identification numbers or names for dependents did not 
match IRS or SSA records. We did not allow the exemptions.
    2. Rate Reduction Credit was not claimed. We computed it.
    3. Taxpayer identification numbers or names for dependents did not 
match IRS or SSA records. All or part of Child Tax Credit not allowed.
    4. Earned income tax credit was figured or entered incorrectly.
    5. SSN for child(ren) who qualify taxpayer for earned income 
credit did not match SSA records. Earned income credit was changed.
    6. Child(ren)'s age exceeded the limit. Child tax credit was 
reduced or removed.
    7. Spouse's SSN was either missing or did not match SSA records. 
Spouse's personal exemption was not allowed.
    8. Additional child tax credit was figured incorrectly on Form 
8812.
    9. Based on information reported, we refigured the tax using the 
filing status for a single person.
 10. Taxable amount of Social Security benefits for page 1 was figured 
incorrectly

How do these errors compare to earlier years?

    Statistics show that the same types of errors occur each year. 
There may be a reorder of the top ten but basically the same type of 
errors occur each year. Filing seasons that occur after there is 
significant change in the tax code, may show a spike of errors relating 
to the new provision. An example of this is the computation of the 
Child care tax credit. These errors usually show a significant drop in 
succeeding years.

What needs to be done?

    The number one cause of filing errors is the complexity of the tax 
code. Taxpayers are often confused and frustrated by the intricate 
calculations required to formulate the proper tax.
    There is a significant drop in the volume of errors when returns 
are electronically filed. The IRS is dedicated to increasing taxpayers' 
use of electronic filing. Fewer errors, positive acknowledgement of 
receipt and faster refunds are the main reasons to file electronically. 
The Congress set a goal that 80% of all individual returns be file 
electronically by 2007. This will be a difficult goal to achieve but 
the IRS will continue to work towards having as many returns 
electronically filed as possible.

4. Describe the background for the EITC program and any conflicts or 
problems this program presents to the IRS. Does the IRS believe this 
type of program can be effectively administrated or should their 
objectives be achieved in a different kind of program?

    The IRS TY 1999 EITC Compliance Study estimated that between 45% 
and 49% of all EITC returns contained an over claim (i.e., the claimant 
was either not entitled to EITC at all or was not entitled to EITC in 
the amount claimed). Thus, according to the study, in TY99 there were 
approximately 9 million EITC returns with over claims. Likewise, in TY 
2000, the IRS detected over 13 million potentially erroneous EITC 
returns and estimated that approximately 9 million represented actual 
errors. Although the IRS already detects a high number of erroneous 
claims, it cannot actually prevent payment on those claims unless it 
can confirm or refute facts about a taxpayer's personal circumstances 
(e.g., residency of claimant and children, marital status or household 
composition) prior to payment. Under the current structure, the IRS can 
only verify such factual information after a return is filed. The IRS 
currently is able to work only about 4% of erroneous EITC returns. The 
task force recommendations attempt to address this structural flaw that 
is inherent in administering a social benefits program through the tax 
code. Although compliance objectives cannot be achieved using the 
current ``tax administration'' paradigm, the IRS believes that it can 
achieve those compliance objectives with minimal additional burden to 
claimants under the integrated approach recommended by the joint 
Treasury/IRS EITC task force, which represents a shift towards a 
``social benefits program administration'' paradigm.

5. Concerning EITC errors:

    Please provide the specific comparisons discussed at the hearing 
for error rates in HUD and other federal programs.

    HUD Housing Assistance: 10%; USDA Food Stamps: 7%; SSA Supplement 
Security Income: 6%

Please provide the error rate for all non-EITC taxpayer groups (however 
small) that exceed 30%, such as for certain small businesses, self-
employed, etc.

    Based on the Tax Year 1988 Individual Income Tax TCMP (Taxpayer 
Compliance Measurement Program), we estimated that the Net Misreporting 
Percentage (basically the proportion of income not accurately reported) 
was between 31.3% and 32.3% for Nonfarm Proprietor Income, between 
31.3% and 32.3% for Farm Income, and about 81% for Informal Supplier 
Income. The ``Informal Supplier'' category consists of sole proprietors 
who operate in an informal business style, i.e., cash basis with few or 
no books and records. Examples of Informal Suppliers are street 
vendors, door-to-door salesman, and individuals who moonlight to 
augment their wage income. Please note that this data is 15 years old. 
Inferences should be drawn with considerable caution because much in 
the tax system and the economy has changed during that time. The 
ongoing National Research Program (NRP) should allow us to develop 
better estimates of non-compliance for specific subpopulations of 
individual taxpayers, but these will not be available until sometime 
late in 2004.

Please outline the legislative and administrative reforms put into 
place since the 1999 EITC compliance study, and describe its 
effectiveness in improving compliance.

    The IRS will not have definitive answers about changes in the EITC 
non-compliance rate until the completion of the NRP in late 2004, which 
will provide data for the 2001 tax year. The joint Treasury/IRS EITC 
task force estimated that the cumulative impact of the legislative and 
administrative changes effective subsequent to TY 1999 would have 
reduced the TY99 over claims from between $8.4-$9.9 billion to between 
$6.4-$7.9 billion. The biggest legislative change since TY99 was the 
modification of rules relating to a claimant's Adjusted Gross Income 
contained in the Economic Growth and Tax Relief Reconciliation Act of 
2001 (Pub. L. 107-16), and effective TYs beginning after 12/31/01. 
Previously, it was the TP with the higher modified AGI. Now the TPs can 
choose which of them will claim the credit using the child. This 
increases EITC claimants because some were prohibited from claiming the 
credit because the other TP had the higher modified AGI--often too high 
to claim the credit. This provision also includes tie-breaker rules, 
which are applied by the Service when two or more taxpayers actually 
claim the credit using the same child.

6. What are the plans at the IRS for beginning EITC pre-certifications?

    Commissioner Everson is currently independently reviewing the EITC 
task force proposals. Once the Commissioner has completed his review, 
the IRS will issue an announcement seeking public comment on aspects of 
the verification initiative. Responses to this formal request for 
comments, in addition to the extensive comments the IRS has been 
receiving during the course of briefing stakeholders (see below) and 
feedback from focus groups will be used to refine the verification 
process and forms. During late summer, the IRS intends to contact 
45,000 EITC claimants who will be randomly selected for processing 
using the verification proposal. The IRS will refine the verification 
program in response to information gained from the verification pilot.

Has the IRS done a ``due diligence'' assessment in planning to insure 
that the documents to be required of EITC beneficiaries can be feasibly 
obtained and will be useful to the IRS in enforcing the law?

    The IRS has a team working on the documentation requirements for 
the pre-verification process. This team is carefully considering what 
documentation will be acceptable for verifying qualifying child 
relationship and residency eligibility to ensure that the requirements 
reduce erroneous claims. Taxpayer burden and the participation rate are 
key considerations. Outside stakeholder comments are being solicited.

Please provide a description and analysis of the existing EITC 
correspondence examination program and EITC re-certification program.

    The correspondence examination program is primarily an automated 
process that operates in a pre-refund environment. Returns are selected 
based on a set of business rules, which are established using internal 
and external data. If a return is identified based on the selection 
process, the entire refund is frozen and the taxpayer is notified that 
his or her return is under review. The IRS may release the refund after 
this review without any further action by the taxpayer. If additional 
information is needed to validate the claim for the EITC, a letter and 
report are automatically generated and sent to the taxpayer requesting 
the information. A correspondence examination considers all issues 
related to dependency and support and requires documentation to support 
more than the EITC eligibility claim. After review of taxpayer 
documentation, or if taxpayers fail to provide requested documentation, 
returns determined not to meet eligibility requirements have EITC 
disallowed through Statutory Notice of Deficiency procedures. For 
returns where EITC is determined to be allowable and all questioned 
items are substantiated, the refunds are released and the examination 
closed ``no change.'' If disallowed, the taxpayer is provided 
information on their appeal rights to refute the IRS's determination.
    In response to legislation passed in 1997, the IRS implemented the 
EITC Re-certification Program in January 1999. When the IRS denies the 
EITC during an examination, a re-certification indicator is placed on 
the taxpayer's account preventing the taxpayer from receiving EITC 
unless the IRS and/or the taxpayer take appropriate actions.
    In a subsequent year, if taxpayers believe they are qualified to 
receive EITC, they attach Form 8862, Information to Claim Earned Income 
Credit after Disallowance, to that tax return. Upon receipt of this 
form, the IRS freezes the refund and then determines whether or not the 
return should be selected for audit. IRS examiners are to select the 
returns for examination unless the taxpayer is no longer claiming the 
EITC child or children previously disallowed and is not claiming a new 
EITC child. If the return is selected for audit, essentially the same 
examination procedures are followed for correspondence examinations to 
determine EITC eligibility. If not, the EITC is issued.

Please describe how the planned EITC pre-certification program would be 
similar to, and different, these two existing IRS programs both in 
terms of how the IRS will handle the cases and the information to be 
requested of taxpayers.

    Each of the programs is similar in that claimants are required to 
submit certain documentation that demonstrates eligibility for the 
credit. But the programs differ in significant ways. Unlike the 
qualifying child verification program and the re-certification program, 
a correspondence examination requires documentation to support all 
issues included in the examination of a return and does not limit focus 
to the EITC qualifying child eligibility issue. The verification 
program also differs from the correspondence examination and re-
certification programs in that taxpayers will be given the opportunity 
to show EITC eligibility prior to filing their returns to allow 
claimants to avoid any refund delays. Moreover, under the new 
verification approach, if a claimant's return is selected for further 
review, only the EITC-portion of the refund will be frozen and any 
remaining refund will be released to the claimant. In contrast, the 
current examination and re-certification programs require freezing the 
entire refund until a determination is made on the eligibility of the 
taxpayer to receive the EITC. Under the verification proposal, 
taxpayers with re-certification indicators would be instructed to 
participate in the pre-verification program. Additionally, under the 
verification proposal, a dedicated staff will specialize in qualifying 
child verification issues. This staff will review documentation, handle 
correspondence and answer phone inquiries about the verification 
process and acceptable documentation. This will help ensure equal 
application of rules, while at the same time providing greater 
assistance to those taxpayers having difficulty understanding or 
providing standard documentation. In addition, the qualifying child 
verification approach proposes a single-issue inquiry worked by these 
issue specialists and will be designed to move large volumes quickly by 
focusing only on qualifying child eligibility. In contrast, 
correspondence examination can include other issues and credits related 
to dependency and support, which add time and complexity to the 
process.

Please describe how various EITC pre-certification issues need to be 
resolved to prevent unnecessary barriers for EITC recipients (including 
obtaining birth/marriage certificates and third-party verification of 
household living arrangements).

    The key issue surrounding the relationship verification is how to 
verify attenuated relationships without unduly burdening taxpayers for 
this one-time verification. Verification of household living 
arrangements is part of establishing the residency requirement. Under 
the qualifying child verification proposal, claimants will be given 
multiple ways and multiple sources to prove that they meet this 
requirement. The IRS is continuing to seek outside stakeholder 
feedback, including through taxpayer and practitioner focus groups to 
provide suggestions for other credible sources of verification. 
Moreover, the instructions to the verification forms include a 
dedicated toll-free number for claimants and preparers to call to 
receive assistance if they believe they cannot obtain the listed 
documentation. Thus, the IRS believes that legitimate claimants will be 
able to obtain necessary documentation. Finally, the IRS is continuing 
to review stakeholder input and compliance data to determine possible 
additional ways to minimize burden.

Please give us an estimate of the error rate and amount of EITC 
overpayments. How does the error rate for this program compare with the 
error rate for other types of low-income assistance programs?

    The IRS TY 1999 EITC Compliance Study estimates an unrecovered 
overclaim rate of between 27% and 32% and between $8.4 billion and $9.9 
billion, as set forth in the answer to question 5, the error rates for 
other programs are as follows: HUD Housing Assistance--10%; USDA food 
stamps--7%; and SSA Supplement Security Income--6%.

What documentation is currently required for individuals to receive the 
EITC and are all forms that are used for verification finalized or are 
you still working out the details? Would you agree that we need to take 
some steps to verify eligibility for the EITC?

    Currently, an EITC claimant is not required to file any 
documentation to receive the EITC (beyond filing a tax return that 
includes a schedule EIC). If an EITC claimant's return is selected for 
examination, the EITC issue is worked in conjunction with all related 
issues as explained above. Documentation is requested to establish all 
requirements for EITC and related issues using document request forms 
specifically for qualifying child, filing status and dependency issues. 
The documentation requirements and the forms for the qualifying child 
verification initiative are still in draft form pending additional 
stakeholder input and focus group testing.
    The joint Treasury/IRS EITC task force concluded that the IRS 
cannot appreciably reduce the overclaim rate without verifying EITC 
qualifying child eligibility before payment of the refund. The IRS 
agrees with this assessment. The IRS will use all its available 
resources to establish a claimant's eligibility without action on the 
part of the claimant, but it must obtain documentation from selected 
claimants about their eligibility when the IRS data is insufficient.

Some are saying that the documentation requirements (both a birth and 
marriage certificate) will be too difficult to produce and that some 
states take 2-3 years to provide marriage certificates. Is this true?

    The IRS generally believes that the documentation will not be too 
difficult to produce. The documents described in this question (birth 
certificate, marriage certificate) are associated with proving the EITC 
relationship requirement, which is a one-time requirement. A birth 
certificate and marriage certificate are not required in most 
situations. For example, the IRS can establish close relationships, 
such as parental, for about 80% of EITC claimants using available 
databases without requiring any documentation from a taxpayer. Other 
close relationships such as grandchild, niece, and nephew can be 
established if the taxpayer can provide just the SSN of the parent of 
the qualifying child so we can systemically verify the relationship. 
The birth certificate of the parent of the child is another choice that 
a claimant may use to substantiate their qualifying child relationship 
eligibility. Although there have been some claims that certain states 
may take 2-3 years to provide marriage certificates, we believe this 
claim overstates the difficulty in obtaining marriage certificates. 
(For example, while a State of California Web site states that ``due to 
budgetary constraints, our processing time can take up to 2-3 years,'' 
that same site directs individuals to the California county recorder's 
offices, which generally issue marriage certificates in much shorter 
time periods.) Nonetheless, the IRS takes seriously concerns about 
claimant burden, and is currently working with its stakeholders to 
ensure that any documentation required is as minimally burdensome as 
possible.

Is the EITC compliance program supported by the Taxpayer Advocate?

    Yes. The National Taxpayer Advocate was a Member of the EITC task 
force Executive Steering Committee that approved the task force 
administrative proposals, including the qualifying child verification 
proposal. In addition, a Member of her staff was on the EITC task force 
working group. The National Taxpayer Advocate has been extensively, 
personally involved in briefing and working with stakeholders to ensure 
that these proposals can be implemented with the least possible burden 
to eligible claimants.

Has the IRS met with stakeholders to get their views on this new 
compliance initiative?

    The IRS and the National Taxpayer Advocate have been extensively 
briefing our stakeholders, including Low Income Taxpayer Clinics, other 
advocacy groups, practitioners, and the Internal Revenue Service 
Advisory Committee, since March. The IRS has been meeting with many of 
the groups on a regular basis to receive their input on the compliance 
initiatives and suggestions for improving both the process and the 
draft forms. In addition, the IRS is conducting focus groups in June to 
get additional feedback. Finally, as noted above, once Commissioner 
Everson has completed his review, the IRS will issue an announcement 
seeking public comment on certain aspects of the qualifying child 
verification initiative.

7. The IRS is developing a new audit program, the National Research 
Program, which will provide for an updated means of selecting tax 
returns for examination. When will this new audit selection process 
begin?

    In April 2000, the Internal Revenue Service (IRS) established the 
National Research Program (NRP). The purpose of this effort is to 
address the shortfall in data about taxpayer compliance that is 
required to run the IRS effectively and efficiently. The NRP is a 
comprehensive effort to measure payment, filing, and reporting 
compliance for different types of taxes and taxpayers. NRP's current 
and most public effort is a study of reporting compliance with the 
Federal income tax by individuals.
    One goal of this effort is to gather high-quality information about 
taxpayer compliance behavior that will allow the IRS to better allocate 
its resources to enforcement and other activities. A second goal 
recognizes the deterioration of the workload selection formulas in use 
today, due to the reliance on data generated for Tax Year 1988. In 
recent years the percentage of audits closed with no tax change has 
been increasing rather steadily. The rate means that the IRS is 
devoting resources to unproductive examinations and that compliant 
taxpayers are being unnecessarily burdened. A third goal of the 
reporting compliance study is to collect data that will provide insight 
into the causes of reporting errors that may aid in providing taxpayer 
service. If examinations turn up systemic compliance errors on 
particular items for otherwise compliant taxpayers, the IRS may be able 
to address the source of these errors through redesigned forms, better 
communications, improved taxpayer education, or perhaps through 
recommending legislative changes. A fourth goal is to develop data that 
can be used to update IRS estimates of the tax gap, since most of the 
estimates for individual tax gap components are based on old data and 
studies.
    The program of examining 46,860 returns is well underway. The IRS 
has assembled case files for virtually all the returns in the sample, 
and we already reviewed more than 86% of them to identify issues for 
examination and the level of taxpayer contact to verify information on 
the returns (the returns are either accepted as filed--perhaps with 
adjustments made, sent to a correspondence examination facility, or 
sent to a field office for a face-to-face examination). These actions 
occurred in the first months of the current NRP reporting compliance 
study. The bulk of examinations will take place in fiscal years 2003 
and 2004, with the more complicated returns generally being examined 
later in the process (since these often are filed after receiving an 
extension of the due date and often require extensive case-building).
    Preliminary data from the NRP reporting compliance study should be 
available within the IRS late in fiscal year 2004 with more thorough 
analysis and use of the data occurring in 2005.

What will be the overall audit rate for individuals and for 
corporations as a result of the new program?

    The current reporting compliance study does not include 
corporations so there will be no direct impact on their audit rate. In 
general, the NRP audits substitute for other examinations of individual 
tax returns, so there will be little effect on the overall audit rate 
for these taxpayers while the NRP examinations are taking place. As we 
are in the early examination phase, the current study cannot yet 
provide data to determine the levels of compliance among individual 
taxpayers and projections of what the audit rates for individuals 
should be.

Will large corporations and small businesses be selected for audit at 
the same rate as low-income individuals?

    The current study focuses only on individual income tax returns 
(taxpayers filing Form 1040). As such, the current study will have no 
impact on the audit rates of large corporations. Individual taxpayers 
with high and low incomes, individuals with only wage and salary 
income, and individuals who file a Schedule C or Schedule F to account 
for their business operations all will be part of the NRP reporting 
compliance sample. In general, NRP audits substitute for other 
examinations of individual returns, so there should be little effect on 
the overall audit rate for these taxpayers while the NRP examinations 
are taking place. Changes in future audit rates for these groups of 
taxpayers may result from the levels of compliance discovered during 
this study.

8. The April 7, 2002 New York Times article titled ``Affluent Avoid 
Scrutiny On Taxes Even As IRS Warns Of Cheating'' raises many questions 
about IRS's ability to address non-compliance by high-income taxpayers 
and businesses. Is it true that 1 in 45 working poor will be subjected 
to an IRS audit while 1 in 145 high-income taxpayers will be audited?

    No. Based on our FY 2001 accomplishments (cases closed in FY 2001), 
1 in 120 taxpayers with income less than $25K were audited (0.83% 
coverage), as compared to 1 in 145 with income over $100K (0.70% 
coverage). However, the ``income less than $25K'' coverage includes the 
EITC mandated returns which are not part of the examination plan 
targeted priorities. If the EITC cases are removed from the low income 
category, then only 1 in 565 taxpayers with income less than $25K were 
audited in FY 2001 (0.18% coverage).
    For FY 2002, only 1 in 130 taxpayers with income less than $25K 
were audited (0.78% coverage) versus 1 in 120 for those with income 
over $100K (0.86% coverage). After removing the mandated EITC cases, 
only 1 in 580 taxpayers with income less than $25K were audited in FY 
2002 (0.17% coverage).

Is it true that tax losses on partnership/K-1 income is in the range of 
$9-$64 billion annually?

    The IRS is compiling the data for this answer. The response will be 
delivered to the Committee no later than June 1, 2004

What types of taxpayers are filing the ``high-risk'' returns that the 
Treasury Department announced IRS will focus on for audit this year?

    In 1988 the Service changed the definition of a high income return 
to include those returns with Total Positive Income (TPI) of $100,000 
or more. At that time, these taxpayers accounted for approximately 2 
percent of all individual returns filed. For examination workload 
planning, execution, and monitoring purposes this definition remains in 
effect today. However, the number of returns in this category has grown 
to approximately 10 percent of the individual filing population.
    To ensure adequate examination coverage for high income returns, we 
created a new sub-category for FY 2003 and the future with emphasis on 
returns with TPI of $1million or more. These returns represent 0.2 
percent of all returns filed during processing year 2001.
    For FY 2003 and 2004, we have realigned our compliance resources to 
focus on the areas of greatest compliance risk. To a large extent, much 
of the non-compliance in these areas involves the use of multi-tiered 
entities/K-1s (partnerships, 1120S, trusts) to improperly reduce income 
and tax liabilities. Taxpayers filing these high risk returns generally 
have incomes in excess of $100K or more and they come from all walks of 
life. They include various types of professionals, business owners, 
executives, consultants, and so forth.
    Our strategies to deal with these high risk taxpayers include the 
following:

     Promoter Investigations An initiative focused on 
identifying and investigating promoters (which may include return 
preparers, financial planners, professionals or others) who sell or 
distribute any plan, arrangement or transaction designed or structured 
for the purpose of circumventing tax laws or evading tax obligations.
     Abusive Offshore Financial Transactions An initiative 
aimed at bringing back into compliance with tax laws, taxpayers who 
used ``offshore'' payment cards or other offshore financial 
arrangements to mask or shelter their income.
     Abusive Tax Avoidance Transactions A program designed to 
bring taxpayers, who have used an abusive scheme to circumvent tax laws 
or evade tax obligations, back into compliance.
     High Income Taxpayers (TPI > $1Million) A initiative 
directed at taxpayers with Total Positive Income (TPI) income of 
$1million or more who are involved in structured financial transactions 
in order to lower their taxable income.
     UI DIF (Returns with a high probability of unreported 
income) A strategy to identify self-employed taxpayers filing Form 1040 
returns with potential unreported income, especially those with Total 
Gross Receipts of $100,000 or more and a Schedule C or F.
     High Income Non-Filers (Income > $100,000) An initiative 
focused on those taxpayers with Information Reporting Program (IRP) 
income, i.e., income reported by third parties on Forms W-2, 1099, and 
so forth., of $100,000 or more in 1 year who have not filed a return.

Is the IRS still focusing on wage earners' returns because they are 
more non-compliant than other individual business filers or corporate 
filers because IRS computer systems are targeted to get audit wage 
earners (generally through correspondence audits--even for the most 
minor infractions) because they are ``easy pickings?''

    The IRS is not focusing its' audits or their enforcement resources 
on wage earners' returns. The IRS is focusing enforcement resources in 
each Operating Division on a variety of programs designed for the type 
of taxpayer they serve.
    Correspondence audits are the primary enforcement tool of the Wage 
& Investment Business Division. These audits are quicker to complete, 
and far less complicated than the traditional face-to-face audits. 
Correspondence audits represent a valuable enforcement tool and were 
not put in place because the effected taxpayers were ``easy pickings.''

9. Concerning Free Filing, please provide the results of IRS's survey 
(9,000 + responses), feedback from external groups, results of April 
2003 Free File Alliance session.

    Since Free File was launched on January 16, 2003, Members of the 
Free File Alliance have prepared and transmitted to the IRS over 2.73 
million returns (as of April 20, 2003). The overwhelming majority (95%) 
of the Free File comments received by the IRS were submitted through 
the IRS.gov Help Desk (See chart below). This volume represents a small 
fraction (.001%) of the total number of taxpayers (5.6 million) who 
visited the Free File homepage. E-mail was the dominant method of 
contacting IRS. Calls and chats were also used. It is important to note 
that 83% of the 5800 e-mails received during the weeks of January 27, 
February 3 and February 10, and almost 60% of the e-mails overall, were 
related to technical difficulties with the IRS.gov Web site--not issues 
related to Free File Alliance products. Immediately after the Web site 
issues were resolved (February 10), the number of emails received 
steadily declined. This correction had the same impact on the number of 
calls and chats received during the same period indicating that the 
types of comments submitted through these channels were similar to 
those submitted through e-mail.

                           Free File Comments
                            IRS.gov Help Desk
------------------------------------------------------------------------
                                                Number of
                Week Starting                   Comments     % of Total
------------------------------------------------------------------------
January 16, 2003                                       84         0.82%
------------------------------------------------------------------------
January 20, 2003                                      310         3.04%
------------------------------------------------------------------------
January 27, 2003                                    2,750        26.93%
------------------------------------------------------------------------
February 3, 2003                                    3,100        30.36%
------------------------------------------------------------------------
February 10, 2003                                   1,606        15.73%
------------------------------------------------------------------------
February 17, 2003                                     806         7.89%
------------------------------------------------------------------------
February 24, 2003                                     297         2.91%
------------------------------------------------------------------------
March 3, 2003                                         207         2.03%
------------------------------------------------------------------------
March 10, 2003                                        172         1.68%
------------------------------------------------------------------------
March 17, 2003                                        185         1.81%
------------------------------------------------------------------------
March 24, 2003                                        162         1.59%
------------------------------------------------------------------------
March 31, 2003                                        172         1.68%
------------------------------------------------------------------------
April 7, 2003                                         180         1.76%
------------------------------------------------------------------------
April 14, 2003                                        180         1.76%
------------------------------------------------------------------------
Total                                              10,211       100.00%
------------------------------------------------------------------------
% of Total                                        100.00%         0.01%
------------------------------------------------------------------------

    The remaining 5% of comments were received through several other 
sources within IRS including e-mails submitted through the Electronic 
Tax Law Assistance (ETLA) system (the second most common vehicle for 
contacting IRS) and through the IRS Customer Service Representatives 
(CSRs). Using the Inquiry Referral process, IRS's CSRs informed the 
responsible program office of the various taxpayer comments mostly 
relating to the following: level of company customer service and 
software design, site design problems that led taxpayers to believe 
they had to pay for something such as a state return, company web site 
operational problems, and error reject problems.
    All Comments and concerns received through these vehicles were 
immediately addressed by IRS personnel (through the use of formatted 
responses where appropriate) or were reviewed by IRS staff for 
validation and/or resolution, if necessary. For example, when a number 
of comments were received regarding the performance of a particular 
Free File Alliance member's tax software program, the IRS provided 
constructive feedback to the representatives of the company for 
purposes of improving their program. In every instance, the feedback 
was received positively and was used to improve the company's product.
    The success of the Free File program for its inaugural year cannot 
be overlooked. The IRS exceeded their original Free File volume 
projections. However, the IRS and the Free File Alliance recognize that 
based on the results and feedback of this past filing season, more 
improvements will be made to the program. In fact, discussions between 
the IRS and industry have already begun on plans for next year's 
release of the program.

10. Concerning private IRS debt collection:

Of the $13 billion in potentially collectible tax debts, how does this 
number breakdown in terms of income level, amount of tax due, age of 
case, and type of taxpayer?

    All the information in the following table relates to Forms 1040.


------------------------------------------------------------------------
                                             Percentage  Representation
------------------------------------------------------------------------
% of balance due under 2 years old                                   26%
------------------------------------------------------------------------
% of balance due 4 years old                                         21%
------------------------------------------------------------------------
% of balance due 6 years old                                         22%
------------------------------------------------------------------------
% of balance due 8 years old                                         17%
------------------------------------------------------------------------

------------------------------------------------------------------------
% of balance due more than 8 years old                               14%
------------------------------------------------------------------------
% of balance due with AGI less than                                  15%
 $20,000
------------------------------------------------------------------------
% of balance due with AGI between $20,000                            14%
 and $40,000
------------------------------------------------------------------------
% of balance due with AGI between 40,000                             12%
 and $75,000
------------------------------------------------------------------------
% of balance due with AGI between 75,000                              4%
 and $100,000
------------------------------------------------------------------------
% of balance due with AGI between 100,000                             4%
 and $250,000
------------------------------------------------------------------------
% of balance due with AGI more than                                   1%
 250,000
------------------------------------------------------------------------
% of balance due with AGI of Blank                                   50%
------------------------------------------------------------------------
Note: Blank means no AGI for Tax Year 2001
------------------------------------------------------------------------

------------------------------------------------------------------------
% of balance due less than $250                                    0.03%
------------------------------------------------------------------------
% of balance due >$250 to $500                                     0.11%
------------------------------------------------------------------------
% of balance due >$500 to $1,000                                   0.76%
------------------------------------------------------------------------
% of balance due >$1,000 to $2,500                                 6.38%
------------------------------------------------------------------------
% of balance due >$2,500 to $5,000                                11.03%
------------------------------------------------------------------------
% of balance due >$5,000 to $10,000                               14.04%
------------------------------------------------------------------------
% of balance due >$10,000 to $25,000                              21.81%
------------------------------------------------------------------------
% of balance due >$25,000 to $50,000                              18.91%
------------------------------------------------------------------------
% of balance due >$50,000 to $100,000                             12.31%
------------------------------------------------------------------------
% of balance due >$100,000 to $250,000                             5.95%
------------------------------------------------------------------------
% of balance due more than $250,000                                8.67%
------------------------------------------------------------------------


How much of the $13 billion is attributable to taxes less than 2 years 
old?

    Of the $13 billion, 26% ($3.4 billion) is attributable to cases 
with eight or more years until statute expiration, i.e., less than 2 
years has run on the statute.

How much does it cost the IRS to send the typical series of collection 
notices to a taxpayer?

    The IRS is compiling the data for this answer. The response will be 
delivered to the Committee no later than June 1, 2004.

How much in the average telephone collection IRS employee get paid in 
salary and how much (as an estimate) does this employee collect in 
taxes?

    The IRS is compiling the data for this answer. The response will be 
delivered to the Committee no later than June 1, 2004.

11. Is the Oversight Board providing an effective review of IRS 
activities? Does it perform the role expected by the 1998 Restructuring 
Act and is it giving useful feedback to the IRS?

    Shortly after the Board was constituted, it began to establish its 
procedures for working with the IRS. As the Board continued to mature, 
it became a valuable part of the IRS oversight process. Along with the 
Taxpayer Advocate, General Accounting Office, and the Treasury 
Inspector General for Tax Administration, the Oversight Board provides 
another informed but independent view of the IRS's operations. Past 
history shows that the IRS needs strong, independent oversight.

                                 

    We welcome James R. White, Director of Tax Issues, GAO, and 
the Honorable Karen Hastie Williams, Member of the IRS 
Oversight Board. Mr. White and Ms. Williams, thank you very 
much for being here. Mr. White, would you please give us your 
testimony.

   STATEMENT OF JAMES R. WHITE, DIRECTOR OF TAX ISSUES, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Mr. WHITE. Mr. Chairman and Members of the Subcommittee, we 
are pleased to participate in the Subcommittee's annual hearing 
and provide our assessment of IRS's budget request and filing 
season performance to date.
    This year, IRS expects to process about 130 million 
individual tax returns as we have heard, issue about 100 
million refunds, and receive tens of millions of phone calls. 
Many of these contacts with Americans occur during the filing 
season.
    Let me start with the budget. For fiscal year 2004, IRS is 
requesting $10.4 billion and 100,000 FTE employees. In dollar 
terms, this is a 5.2-percent increase over last year's request. 
The 2004 budget request is one of a series that over the last 
several years have identified compliance as a top priority for 
receiving additional resources, that is, increased staffing. 
However, actual compliance staffing for these same years has 
declined. For example, between 2001 and 2003, it declined by 
over 7 percent. Thus, recent history raises questions about 
whether IRS will be able to satisfy the priority needs 
identified in the 2004 budget.
    Let me explain. One reason for the inability to allocate 
more resources to compliance work is unfunded cost increases, 
costs, such as Federal salary increases larger than those 
anticipated in the budget. The IRS has dealt with such 
unbudgeted costs by cutting back on compliance rather than, for 
example, cutting staff issuing refunds or answering taxpayer 
questions.
    A second reason is the difficulty of realizing internally 
generated savings. Like last year, this year's IRS budget 
includes investments in priority areas like compliance that 
would be funded in part out of a budget increase and in part 
out of internal savings. The graph on the easel, which is also 
shown on page 3 of my statement, helps illustrate. Of $454 
million in new priority spending, what IRS calls program 
enhancements, $288 million would come from the budget increase. 
The rest, $166 million, is funded from internal savings such as 
an initiative to improve the efficiency of handling payments 
and returns that would save over 200 staff years.
    As we did last year, we commend IRS for identifying such 
savings opportunities. However, it now appears that IRS will 
not be able to realize all of the savings identified in last 
year's budget, in some cases, for example, because new computer 
systems have been delayed. This history raises the question of 
whether the 2004 budget is optimistic.
    I will return to this issue, but want to make two other 
points first. One is that the budget justification for 
information technology, another IRS priority with over $2 
billion in the budget request, still needs improvement. 
Specifically, the information systems budget for operations and 
maintenance is not formulated using practices followed by 
leading organizations. The IRS is working to implement 
recommendations we made last year.
    The request for capital funds, called business systems 
modernization, is adequate. We support it, and IRS has improved 
its ability to manage the funds. However, IRS has acknowledged 
some remaining weaknesses and has initiatives planned or 
underway to correct them, as well.
    Now, I will discuss the filing season. The IRS's filing 
season performance to date has improved compared to recent 
years. For example, telephone access has improved while 
accuracy has remained generally stable and IRS's website has 
seen increased use, which decreases the number of labor-
intensive phone calls.
    Electronic filing continues to grow, and although more than 
half of returns are still filed on paper, the number of paper 
returns is declining. In fact, paper returns have decreased so 
much that IRS is closing one of the paper return processing 
centers, an action that is going smoothly.
    Mr. Chairman, as the examples of improved telephone access 
and the processing center closing show, IRS is beginning to 
realize payoffs from the ongoing systems modernization 
investments and wider management improvements. Although IRS has 
not succeeded in reallocating staff to one of its priority 
needs, compliance, there will likely be increased potential for 
such reallocation as modernization proceeds.
    This will present Congress, in both its oversight and 
appropriation roles, with significant opportunities to weigh in 
on IRS's overall strategy for better accomplishing its mission. 
Specifically, Congress will have opportunities to help IRS 
establish strategic priorities and make decisions about the 
resources needed for those priorities.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions.
    [The prepared statement of Mr. White follows:]

   Statement of James R. White, Director of Tax Issues, U.S. General 
                           Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    We are pleased to participate in the Subcommittee's inquiry into 
Internal Revenue Service's (IRS) fiscal year 2004 budget request and 
2003 tax filing season performance.
    With its mission to ``provide America's taxpayers with top quality 
service by helping them understand and meet their tax responsibilities 
and by applying the tax law with integrity and fairness to all,'' IRS 
is responsible for collecting most of the funds that pay for the 
Federal Government. To carry out its mission, IRS has a budget of about 
$10 billion and staff of about 100,000 full time equivalents (FTE). For 
2003, IRS expects to process 130 million individual income tax returns, 
issue 99 million refunds, receive 100 million telephone calls, and 
assist 4 million taxpayers face-to-face at IRS and volunteer 
[1] offices.
---------------------------------------------------------------------------
    \[1]\ These offices use IRS-trained volunteers to help prepare 
basic tax returns for taxpayers with special needs.
---------------------------------------------------------------------------
    As you requested, our statement discusses both IRS's 2004 budget 
request and its 2003 filing season performance. With respect to the 
budget, we assessed the likelihood that IRS will be able to allocate 
more resources to one of its key priorities, compliance, and whether 
the proposed spending on some computer systems is justified. With 
respect to the filing season, we assessed IRS's performance in 
processing returns and providing assistance to taxpayers.
    Our assessment of the budget request is based on a comparative 
analysis of IRS's fiscal year 2003 and 2004 budget requests, supporting 
documentation, and interviews with IRS officials. Our assessment of the 
filing season is based on a comparison of IRS's performance this year 
to last, site visits to IRS processing centers and walk-in sites, and 
interviews with IRS and Treasury Inspector General for Tax 
Administration (TIGTA) officials, tax preparers, and other external 
stakeholders. We also reviewed IRS's Web site for usability and 
accessibility.
    In summary, our assessment of IRS's 2004 budget request shows that:

     IRS is requesting 100,043 FTEs and $10.4 billion, an 
increase of about 5 percent over its fiscal year 2003 request. The 2004 
budget request is one of many that have identified compliance 
activities as among IRS's top priorities for receiving additional 
resources. These additional resources were to be funded from budget 
increases, internally generated savings, or both. Savings projections 
have been revised downward since the 2004 budget request was prepared, 
which raises questions about IRS's ability to achieve all the savings 
and shift resources to compliance as planned. Further, IRS's recent 
history shows that it has been unable to increase resources in 
compliance, despite having made it a priority in budget requests. In 
fact, for the most recent three full fiscal years--2000, 2001 and 
2002--compliance resources have declined slightly. Reasons for this 
include unfunded expenses consuming budget increases.
     Another priority area for IRS is Information Technology 
(IT). IRS is requesting about $2.1 billion and 7,986 staff years in 
information technology resources for fiscal year 2004. This includes 
(1) $429 million for the agency's multiyear capital account that funds 
contractor costs for the BSM program and (2) about $1.67 billion and 
7,735 staff years for information systems, of which $1.62 billion is 
for operations and maintenance. In preparing its fiscal year 2004 
budget request for the operations and maintenance of information 
systems, IRS began to implement an information technology portfolio 
management process patterned after the one used for the BSM program. 
However, until IRS fully implements planned process improvements, its 
ability to develop supportable information systems budget requests will 
remain limited.

    Our assessment of the 2003 filing season to date shows that:
    IRS's 2003 filing season performance has improved over last year, 
based on the data we reviewed in key filing season activities--paper 
and electronic processing, telephone assistance, IRS's Web site, and 
walk-in assistance. In particular, access to IRS's telephone assistors 
has improved and Web site usage has increased. While we cannot quantify 
the connection between these results and IRS's ongoing systems 
modernization efforts, the improvement in filing season performance, in 
part, represents a payoff from systems modernization.

IRS's Fiscal year 2004 Budget Request Includes Compliance, Taxpayer 
Service, and Information Systems as Priorities

    For fiscal year 2004, IRS is requesting $10.4 billion, an increase 
of 5.3 percent over fiscal year 2003 requested levels, and 100,043 
FTEs. IRS's 2004 budget request is its second in a row to propose 
increased spending for higher priority areas that would be funded, in 
part, with internal savings redirected from other areas. Specifically, 
IRS proposes to devote an additional $454 million and 3,033 more FTEs 
to enhance programs, primarily in compliance and some customer service 
areas. As shown in figure 1, $166 million of the enhancements would be 
funded from internal savings with the remainder funded from the budget 
increase.
Figure 1: IRS's Proposed Funding for Program Enhancements

[GRAPHIC] [TIFF OMITTED] T0816A.001

    Source: IRS data.
    As we did in last year's testimony on IRS's 2003 budget request, we 
commend IRS for identifying savings to be reinvested in operations to 
improve IRS performance. This approach implements a key principal of 
IRS's long-term modernization effort. Under this approach, the 
reengineering of IRS's work processes--much of which is dependent on 
investments in computer modernization--would automate or eliminate 
work, improve productivity, and free staff time that could then be 
redirected to higher priority customer service and compliance 
activities.
    We provide some context for understanding the 2004 budget request 
in figures 2 and 3 as shown in appendix I. In those figures, we 
illustrate how IRS allocated expenditures and staff resources in fiscal 
year 2002, the most recently completed year.

Current Projections and Recent History Raise Questions
About Whether IRS Will Realize Some Priority Resource Reallocations

    Revised projections developed since the 2004 budget request was 
prepared raise questions about IRS's ability to achieve all the savings 
projected and shift resources to compliance as planned. In addition, 
some projected savings are based on reengineering efforts that are not 
well defined. Further, IRS's recent history also shows that it has been 
unable to increase resources in the compliance area despite having made 
it a priority in past budget requests. In fact, for the most recent 3 
full fiscal years--2000, 2001, and 2002--compliance resources have 
declined slightly. Reasons for this decline include unfunded expenses 
consuming budget increases and workload increases in other essential 
operations.

IRS Has Revised Some Savings Shown
in Its 2004 Budget Request

    IRS has revised the savings associated with several reengineering 
efforts identified in the 2004 budget request. Revisions this far in 
advance of the start of the fiscal year are not a surprise. They do 
indicate that there is some uncertainty associated with the budget 
request's savings projections.
    Four of the seven most significant reengineering efforts--in terms 
of FTEs and dollars to be saved--will not achieve all of their 
projected savings because the efforts were based on assumptions that 
will not be realized, according to IRS data and officials. IRS now 
projects that the seven most significant efforts will save 1,073 FTEs 
and $60.5 million, down from original projections of 1,356 FTEs and 
$77.7 million.
    IRS provided different reasons for why all savings will not be 
achieved for the following individual efforts.

     IRS's effort to improve the efficiency of compliance 
support activities--the single most significant effort--was partially 
dependent on IRS implementing individual compliance savings projects in 
2003. This effort was projected to save 394 FTEs and almost $26 
million. However, due in part to delays until 2004 to allow for 
additional testing, this effort is now expected to save about 30 
percent of the original projections through the end of fiscal year 
2004.
     IRS's effort to improve the efficiency of personnel 
services--the second most significant effort--depended in part on the 
functions of a new computer system to achieve most of its savings. This 
effort was originally projected to save 222 FTEs and $14.6 million. 
According to IRS officials, these functions will not be delivered on 
time due to schedule delays. IRS officials have not determined the 
impact of this delay and are currently assessing other potential 
approaches to achieve savings in this area.

    IRS officials said the remaining three of the seven most 
significant efforts will achieve all or more of their projected 
savings. For example, the effort to improve the efficiency of handling 
payments and returns, originally projected to save 121 FTEs and $4.6 
million, is now expected to have more than double the savings, or 235 
FTEs and $11.9 million, due to greater than expected productivity. 
However, according to IRS officials, even when their savings are 
combined, these three efforts will not save enough to offset the 
reduced savings from the other four.
    Reengineering efforts may not achieve all of their savings goals, 
in part, because of the long time lag between when IRS begins 
developing its budget request and when the fiscal year begins. As with 
most other federal agencies, IRS usually begins formulating its budget 
request about 18 months before the start of the fiscal year and about 
10 months before the President submits his budget to Congress. With 
planning beginning so far ahead of the budget's actual execution, there 
are inevitably intervening events, such as implementation delays with 
computer systems, that make the assumptions upon which projections are 
based no longer realistic.

Some 2004 Reengineering
Efforts Are Not Well Defined

    Some of the reengineering efforts listed in the 2004 budget request 
are not well defined, thus raising questions about whether they will 
achieve their savings goals. For example:

     IRS still is reviewing its procedures to identify ways to 
make tax return processing more efficient. Although IRS projected this 
effort to save 203 FTEs and $6.9 million, it has not yet identified the 
operational areas that will be reengineered. IRS officials said that 
the projected savings are based on a 2 percent efficiency increase, but 
they are currently determining how to achieve that goal.
     The effort to improve the efficiency of personnel 
services noted above also included numerous competitive outsourcing 
assessments affecting several program areas that, according to the 
budget request, would result in a significant reduction of staffing. 
However, in response to our request for more information, IRS was 
unable to provide details on the type or number of specific 
assessments, program areas that would be affected, how this effort 
would lead to reduced staffing, or the amount of net savings expected.

    According to IRS budget officials, IRS uses its budget formulation 
process to establish productivity goals, although the responsible 
business units may not know specifically how savings will be achieved. 
Officials said that this approach encourages innovation in meeting 
performance goals while identifying ways to save FTEs and budget 
dollars.

In Recent Years, Compliance Staffing Declined

    Since 2001, IRS's budget requests have made increasing compliance 
staff one of several key priorities. For example, in its 2001 budget 
request IRS asked for funding for the Staffing Tax Administration for 
Balance and Equity (STABLE) initiative, which was designed to provide 
additional staffing for examination, collections, and the new Tax 
Exempt and Government Entities Division. However, TIGTA recently 
reported data that showed an over 7 percent decline in compliance staff 
between 2000 and 2002.[2]
---------------------------------------------------------------------------
    \[2]\ Treasury Inspector General for Tax Administration, Trends in 
Compliance Activities through Fiscal Year 2002, Reference No. 2003-30-
078, Washington D.C.: March 2002. The compliance staff figures include 
revenue officers, revenue agents, and tax auditors.
---------------------------------------------------------------------------
    There are several reasons for the decline, including increased 
workload and unfunded costs. In September 2002, the Commissioner 
attributed the decline in compliance staffing to increases in workload 
in other essential operations such as processing returns, issuing 
refunds, and answering taxpayer mail. In the most recently completed 
fiscal year, 2002, IRS faced unbudgeted cost increases, such as rent 
and pay increases, in the amount of about $106 million. As a result, 
IRS had to delay hiring revenue agents and officers, tax compliance 
officers, and tax specialists. As shown in appendix I, in 2002 figure 2 
shows about 69 percent of IRS's spending was for labor costs. IRS noted 
in its budget request that any major negative changes in the agency's 
financial posture, such as unfunded salary increases, will have a 
negative effect on staffing levels.
IRS's Experience in 2003 Illustrates the Difficulty of Projecting 
Savings and Investments

    IRS's experience with last year's budget request illustrates the 
difficulty of projecting and realizing savings and investing resources 
in higher priority areas. As part of its 2003 budget request, IRS 
identified internal savings of almost $197 million and 2,287 FTEs to be 
accomplished through various reengineering efforts and workload 
decreases. IRS planned to reinvest those savings in higher priority 
areas--compliance and customer service program enhancements, including 
efforts to stabilize audit rates, improve telephone assistance level of 
service, and target highest priority collection cases. However, IRS now 
estimates that about $75 million, or 38 percent, of the dollar savings 
and about 1,280, or 56 percent, of the FTE savings will be achieved by 
the specific reengineering efforts and workload decreases as identified 
in the 2003 budget request. IRS officials provided several reasons why 
some savings for these particular reengineering efforts will not be 
realized, including delays in modernization projects and less-than-
anticipated workload decreases. For example, IRS received more innocent 
spouse cases than anticipated, and the cases received were more 
complex, causing the hours spent per case to increase.
    While savings associated with a particular effort listed in the 
2003 budget request may not materialize, IRS officials said that 
business unit managers have identified other ways to increase 
productivity and did more work with fewer staff--therefore achieving 
productivity increases through efforts not identified in the 2003 
budget request. As an example, officials provided an analysis showing 
increased telephone collections cases closed with significantly fewer 
staff than in the previous year. While GAO did not verify these 
savings, however, IRS officials were confident that this and other 
similar productivity increases were being achieved. Furthermore, IRS 
budget officials said the results of productivity increases not listed 
in the 2003 budget request should be included in any tally of IRS's 
savings.
    We agreed that productivity increases generate savings. IRS was 
unable to quantify the gains from productivity increases in time for 
this hearing. IRS officials also said that most of the savings 
generated by the productivity increases would be used to handle 
workload increases in the same area where savings were generated. They 
said the savings would not be available for reallocation to other 
areas.
    As was the case in 2002, cost increases not included in the 2003 
budget request are also limiting IRS's ability to fund new investments. 
According to IRS officials, IRS will need to fund a total of about $388 
million out of existing resources, including about $128 million for pay 
increases.

Information Technology Budget Formulation

Process Still Needs Improvement

    IRS is requesting about $2.1 billion and 7,986 staff years in 
information technology (IT) resources for fiscal year 2004. This 
includes (1) $429 million for the agency's multiyear capital account 
that funds contractor costs for the BSM program and (2) about $1.67 
billion and 7,735 staff years for information systems, of which $1.62 
billion is for operations and maintenance. In preparing its fiscal year 
2004 budget request for the operations and maintenance of information 
systems, IRS began to implement an information technology portfolio 
management process patterned after the one used for the BSM program. 
However, until IRS fully implements planned process improvements, its 
ability to develop supportable information systems budget requests will 
remain limited.

Fiscal Year 2004 BSM Request Developed
in Accordance with Federal Guidance

    Consistent with the Clinger-Cohen Act of 1996,[3] the 
Government Performance and Results Act of 1993,[4] OMB 
guidance on budget preparation and submission [5] require 
that, before requesting multiyear funding for capital asset 
acquisitions, agencies develop sufficient justification for these 
investments. This justification should reasonably demonstrate how 
proposed investments support agency missions and operations, and 
provide positive business value in terms of expected costs, benefits, 
and risks.
---------------------------------------------------------------------------
    \[3]\ P.L. 104-106.
    \[4]\ P.L. 103-62.
    \[5]\ See, for example, OMB Circular No. A-11: Preparing, 
Submitting, and Executing the Budget (Washington, D.C.: June 27, 2002).
---------------------------------------------------------------------------
    Since the BSM appropriation was established in fiscal year 1998, we 
recommended [6] that IRS put in place an enterprise 
architecture (modernization blueprint) to guide and constrain its 
business system investments.[7] Use of such a blueprint is a 
practice of leading public and private sector organizations. Simply 
stated, this architecture provides a high-level road map for business 
and technological change from which agencies can logically and 
justifiably derive their budget requests and capital investment plans. 
In response to our recommendations, IRS developed an enterprise 
architecture. In March 2002, IRS approved a new version of this 
architecture (version 2.0), which describes IRS's current and target 
business and technology environments. In December 2002, IRS completed 
the associated high-level transition strategy that identifies and 
conceptually justifies needed investments to guide the agency's 
transition over many years from its current to its target architectural 
state.
---------------------------------------------------------------------------
    \[6]\ See U.S. General Accounting Office, Tax Administration: IRS's 
Fiscal Year 1997 Spending, 1997 Filing Season, and Fiscal Year 1998 
Budget Request, GAO-T-GGD/AIMD-97-66 (Washington, D.C.: Mar. 18, 1997); 
Tax Systems Modernization: Blueprint is a Good Start But Not Yet 
Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD-98-54 
(Washington, D.C.: Feb. 24, 1998); and  Tax Administration: IRS's 2000 
Tax Filing Season and Fiscal Year 2001 Budget Request, GAO/T-GGD/AIMD-
00-133 (Washington, D.C.: Mar. 28, 2000).
    \[7]\ An enterprise architecture provides an institutional 
``blueprint'' for defining how an organization operates today (baseline 
environment) in both business and technological terms, and how it wants 
to operate in the future (target environment). It also includes a 
sequencing plan that provides a road map for transitioning between 
these environments.
---------------------------------------------------------------------------
    IRS's $429 million request for the BSM account for fiscal year 2004 
is based on its enterprise architecture as well as its related life 
cycle methodology and investment management process. Thus, this request 
is based on analyses that meet the statutory and regulatory 
requirements for requesting multiyear capital investment funding.

BSM Program Management Capability
Improved, But Risks Remain

    Pursuant to statute,[8] funds from the BSM account are 
not available for obligation until IRS submits to the congressional 
appropriations committees for approval an expenditure plan that meets 
certain conditions.[9] In November 2002, IRS submitted an 
expenditure plan seeking approval to obligate funds from the BSM 
account for its planned fiscal year 2003 projects and program-level 
initiatives. In March 2003, IRS submitted a revised plan that reduced 
the initial request by shifting funding for two BSM projects to the 
information systems account and reducing the amount requested for the 
core infrastructure projects and program-level initiatives.
---------------------------------------------------------------------------
    \[8]\ Consolidated Appropriations Resolution, 2003 (P.L.108-7).
    \[9]\ IRS's BSM expenditure plans are required to (1) meet OMB 
capital planning and investment control review requirements, (2) comply 
with IRS's enterprise architecture, (3) conform with IRS's enterprise 
life cycle methodology, (4) be approved by IRS, Treasury, and OMB, (5) 
be reviewed by GAO, and (6) comply with the acquisition rules, 
requirements, guidelines, and systems acquisition management practices 
of the Federal Government.
---------------------------------------------------------------------------
    In briefings to the staff of the relevant appropriations 
subcommittees and IRS on the results of our review of IRS's November 
2002 expenditure plan, we reported that IRS has progressed 
significantly in improving its modernization management controls and 
capabilities, and has taken steps to better balance the pace of the BSM 
program with its management capability. We also reported that, although 
important progress has been made, certain management controls and 
capabilities, related to configuration management, human capital 
management, and cost and schedule estimate validation, have not yet 
been fully implemented. Our analysis has shown that weaknesses in these 
controls and capabilities contributed to BSM project cost, schedule, 
and performance shortfalls during fiscal year 2002. In approving the 
release of a portion of the fiscal year 2003 BSM funding, the 
appropriations subcommittees directed IRS to, among other things, fully 
establish and implement all management processes and controls needed to 
effectively manage the BSM program. IRS has acknowledged these 
weaknesses and has initiatives planned or underway to address them.
    Despite the progress made during the past year, IRS's BSM program 
faces heightened risks because (1) several key projects are entering 
their later stages of development and deployment, (2) some of these 
projects provide the foundational infrastructure upon which later 
projects depend, (3) an increasing number of project milestones are 
experiencing cost increases and schedule delays, and (4) IRS plans to 
start more projects. While IRS is better prepared to manage risk and 
meet the challenges ahead, sustained top management involvement, 
improved management capabilities, and consistent oversight, are 
critical to the successful implementation of the BSM program.

Although Progress Made, Information Systems Budget
Request Development Process Needs Additional Improvements

    Leading private- and public-sector organizations have taken a 
project- or system-centric approach to managing not only new 
investments but also the operations and maintenance of existing 
systems. As such, these organizations

     identify operations and maintenance projects and systems 
for inclusion in budget requests;
     assess these projects or systems on the basis of expected 
costs,
     benefits, and risks to the organization;
     analyze these projects as a portfolio of competing 
funding options; and
     use this information to develop and support budget 
requests.

    This focus on projects, their outcomes, and risks as the basic 
elements of analysis and decision-making is incorporated in the IT 
investment management approach that is recommended by the OMB and 
GAO.[10] By using these proven investment management 
approaches for budget formulation, agencies have a systematic method, 
on the basis of risk and return on investment, to justify what are 
typically very substantial budget requests for the operations and 
maintenance of information systems. These approaches also provide a way 
to hold IT managers accountable for operations and maintenance spending 
and the ongoing efficiency and efficacy of existing systems.
---------------------------------------------------------------------------
    \[10]\ See, for example, U.S. General Accounting Office, 
Information Technology Investment Management: A Framework for Assessing 
and Improving Process Maturity, Exposure Draft, GAO/AIMD-10.1.23 
(Washington, D.C.: May 2000, Version 1).
---------------------------------------------------------------------------
    In our assessment of IRS's fiscal year 2003 budget request, we 
reported [11] that IRS did not develop its information 
systems operations and maintenance request in accordance with the 
investment management approach used by leading organizations. For 
example, in developing the request, IRS had not identified and assessed 
the relative costs, benefits, and risks of specific operations and 
maintenance systems and projects. Instead, according to IRS officials, 
they developed the request by beginning with the fiscal year 2002 
expenditures and simply adding amounts to fund cost-of-living and 
salary increases. IRS officials attributed this gap between IRS's 
practices and those followed by leading organizations to the lack of an 
adequate cost accounting system, cultural resistance to change, and a 
previous lack of management priority. We recommended [12] 
that IRS prepare its fiscal year 2004 information systems budget 
request in accordance with the investment management approach used by 
leading organizations. IRS agreed and initiated actions to address our 
recommendation.
---------------------------------------------------------------------------
    \[11]\ U.S. General Accounting Office, Internal Revenue Service: 
Assessment of Budget Request for Fiscal Year 2003 and Interim Results 
of 2002 Tax Filing Season, GAO-02-580T (Washington, D.C.: Apr. 9, 2002) 
and Internal Revenue Service: Improving Adequacy of Information Systems 
Budget Justification, GAO-02-704 (Washington, D.C.: June 28, 2002).
    \[12]\ See GAO-02-580T and GAO-02-704.
---------------------------------------------------------------------------
    IRS has made progress in incorporating investment management 
practices into the formulation of its fiscal year 2004 information 
systems budget request. For example, IRS created information technology 
portfolios for its operations and maintenance systems in accordance 
with revised OMB budget guidance.[13] According to IRS 
officials, these portfolios were used to assist managers and staff 
involved with information technology planning and investment decision-
making to (1) assess initiatives in terms of their cost, risks, and 
expected returns and (2) determine and maintain the appropriate mix of 
investments. They also indicated that they are working with Treasury 
and OMB to improve the information technology investment portfolio 
development process. IRS's emphasis on portfolio development 
demonstrates an increased effort to ensure its information systems 
operations and maintenance requests are supported.
---------------------------------------------------------------------------
    \[13]\ Office of Management and Budget, OMB Circular No. A-11.
---------------------------------------------------------------------------
    Despite this progress, IRS has not yet completed its planned 
actions to implement our recommendation. As of April 2003, IRS has not 
developed an activity-based cost accounting system to enable it to 
account for the full costs of operations and maintenance projects and 
determine how effectively IRS projects are achieving program goals and 
mission needs. IRS officials stated that they are developing an 
activity-based cost model in conjunction with the Integrated Financial 
System modernization project, but this model will not be fully 
implemented until December 2003. Furthermore, IRS officials stated that 
data from this model will not be available for use until the fiscal 
year 2006 budget formulation cycle. In addition, IRS has still not 
completed its capital planning guidance, and thus did not use it in 
preparing its fiscal year 2004 information systems budget submission. 
According to IRS officials, the agency has developed a draft Capital 
Planning and Investment Control guide that is undergoing internal 
review, but it will not be completed and implemented until late October 
2003. Until IRS incorporates the cost model and capital planning and 
investment control guidance into the preparation of its information 
systems budget request, IRS will not be able to ensure that the 
information systems operations and maintenance request is adequately 
supported.

Interim Results of IRS's 2003 Filing Season
Show Improvement Over Previous Years

    IRS's filing season performance through mid-March has improved 
compared to recent years, based on data we reviewed in five key filing 
season activities--paper and electronic processing, telephone 
assistance, IRS's Web site, and walk-in assistance. For example, 
telephone access has improved, and IRS's Web site has seen increased 
use. While we cannot quantify the connection between these results and 
IRS's ongoing systems modernization efforts, the improvement in filing 
season performance, in part, represents a payoff from systems 
modernization.

IRS's Paper and Electronic Processing Operations Have Gone Smoothly 
This Year

    Through March 28, IRS has smoothly processed about 67 million 
individual income tax returns. According to IRS data and to officials 
and tax preparers we spoke with, IRS has not experienced any 
significant processing or computer problems. IRS officials attribute 
this year's smooth processing, in part, to the relatively insignificant 
tax law changes compared to last year.
    Electronic filing continues to grow, although at a slower rate than 
projected. Of the approximate 67 million returns, about 26 million 
individual income tax returns were filed on paper and 41 million 
returns were filed electronically, as of March 28, as shown in table 1. 
This represents an increase in electronic filing of 10.4 percent over 
the same time period last year. Whether IRS will achieve its goal of 54 
million tax returns filed electronically in 2003 is uncertain. Last 
year at this time, IRS was also below its goal, but made up the 
difference late in the filing season.

 Table 1: IRS Performance in the First Weeks of the 2003 and 2002 Filing
                                 Seasons
------------------------------------------------------------------------
             Volume in thousands                  2002          2003
------------------------------------------------------------------------
Actual returns processeda
------------------------------------------------------------------------
Paper.......................................       29,014        26,289
------------------------------------------------------------------------
Electronic..................................       37,035        40,870
------------------------------------------------------------------------
Telephone assistance
------------------------------------------------------------------------
Total callsb................................       60,674        38,213
------------------------------------------------------------------------
Answered by assistors.......................        9,540         9,938
------------------------------------------------------------------------
Answered by automation......................       28,130        19,860
------------------------------------------------------------------------
Not answered................................       23,004         8,415
------------------------------------------------------------------------
Customer service representative level of              69%           84%
 serviceb...................................
------------------------------------------------------------------------
Average speed of answerb....................  216 seconds   155 seconds
------------------------------------------------------------------------
Accounts customer accuracy ratec............   88% +/- 1%    88% +/- 1%
------------------------------------------------------------------------
Tax law customer accuracy ratec.............   84% +/- 1%    81% +/- 1%
------------------------------------------------------------------------
Internet assistance
------------------------------------------------------------------------
Forms and publications downloadedd..........      213,000       283,000
------------------------------------------------------------------------
Refund status inquiriese....................          N/A        10,200
------------------------------------------------------------------------
Walk-in assistance
------------------------------------------------------------------------
Returns prepared at IRS walk-in sitesf......          436           291
------------------------------------------------------------------------
Returns prepared at volunteer sitesg........          466           594
------------------------------------------------------------------------
Source: IRS data.
a From January 1 to March 29, 2002, and January 1 to March 28, 2003.
b Based on actual counts from January 1 to March 23, 2002, and January 1
  to March 22, 2003.
c Based on a representative sample estimated at the 90 percent
  confidence level from January to February 2002 and 2003.
d From January 1 to March, 31 2002 and 2003.
e From January 1 to March 28, 2003.
f From January 1 to March 16, 2002, and January 1 to March 15, 2003.
g From January 1 to March 9, 2002, and January 1 to March 8, 2003.

    Growth in electronic filing is a key part of IRS's modernization 
strategy. Electronic filing allows IRS to control costs and improve 
customer service, by reducing labor intensive processing of paper 
returns. This year, to help increase electronic filing, IRS entered 
into an agreement with the Free File Alliance, a consortium of 17 tax 
preparation companies, to offer free online tax preparation and filing 
services for at least 60 percent of all taxpayers via the IRS Web site. 
IRS data shows that as of March 26, about 2.1 million returns were 
filed through the consortium, close to the goal of 2.5 million. While 
there have been some complaints about pop-up ads, taxpayers reported in 
IRS surveys that they were generally pleased with the service.
    Because of the growth in electronic filing, the number of paper 
returns has declined in recent years. As a result, IRS is closing 
processing operations at the Brookhaven Submission Processing Center, 
one of its eight processing centers for individual income tax returns 
filed on paper. This closing represents a significant consolidation of 
IRS's processing operations. Based on processing data to date, the 
consolidation has not disrupted the filing season.

Telephone Access Improved over Last Year, While Accuracy Generally 
Remained Stable

    Access to IRS's toll-free telephone lines improved over last year. 
As table 1 shows, as of March 22, the percentage of taxpayers that 
attempted to reach an assistor and actually got through and received 
service--referred to as the Customer Service Representative level of 
service--increased 15 percentage points over the same period last year, 
for the approximately 10 million calls served. In addition, taxpayers 
have waited 61 seconds less, on average, to speak to an assistor so far 
this filing season as compared to last year. According to IRS 
officials, the increase in the level of service is largely due to lower 
than expected call demand and more effective routing of calls to 
qualified assistors. Part of the reason for the decrease in demand is 
that some taxpayers are using the new refund status check feature on 
IRS's Web site rather than calling.
    Accuracy was relatively stable this year as compared to last year. 
As shown in table 1, taxpayers who called about their accounts received 
correct information an estimated 88 percent of the time. IRS officials 
said that accounts accuracy rates remained stable, because many simple 
refund inquiries were diverted to the new refund feature on IRS's Web 
site, leaving assistors to handle more complex calls. Table 1 also 
shows taxpayers who called with tax law questions received correct 
information an estimated 81 percent of the time, slightly down from 
last year. According to IRS officials, because many assistors had 
difficulty in adapting to a change in the guide used to query callers.

Web Site Is Seeing Increased Use and Has New Features, although 
Concerns About Usability Still Exist

    IRS's Web site use has increased over last year. About 283 million 
forms and publications have been downloaded--a 29 percent increase over 
the same period last year. In addition, an independent study reported 
that IRS's Web site had ranked in the top 10 out of 40 government web 
sites and that users were able to access IRS's site in less than one 
second during the January 20 through February 28 test period.
    IRS added a new feature to its Web site for use this filing season: 
the refund status check, (``Where's My Refund?''). This feature enables 
taxpayers to find out if the IRS received their returns and whether 
their refunds were processed. IRS intended this feature to divert some 
simple telephone calls from assistors. Data shows that as of March 28, 
about 10.3 million taxpayers have used this feature to check the status 
of their refund.
    While some of the problems we identified in previous years appear 
to have been remedied, we continue to have concerns about the search 
function on IRS's Web site. Our informal testing of IRS's Web site 
showed that it is more user friendly than last year. We found it to be 
more accessible, easier to navigate, and data was more current. 
However, the search functions still do not always make the most 
pertinent information readily available. For example, when we typed 
``earned income tax credit'' into the forms and publication search 
function, Publication 596--the primary publication on the earned income 
tax credit--was the 70th item on the list, and we had to scroll through 
seven pages to find it. According to IRS officials, an independent 
contractor is currently looking at ways to improve the search 
functions, and the contractor expects to issue its report in mid-April 
of this year.

Walk-in Assistance Improved and Community Based Coalitions Expanded 
over Last Year

    The quality of assistance at IRS's walk-in sites has improved this 
year over last, and service to taxpayers through community based 
coalitions has increased. At congressional direction, the TIGTA has 
been responsible for measuring the quality of assistance at IRS's walk-
in sites. According to TIGTA officials, the accuracy of tax law 
assistance provided at IRS's walk-in sites increased as of February 
this year to about 73 percent--an increase of 27 percentage points over 
the same period last year. TIGTA also found that the rate at which IRS 
employees referred taxpayers to a publication instead of answering tax 
law questions--which had been an issue last year--declined by about 85 
percent.
    According to TIGTA officials, the increased accuracy rates resulted 
from various steps taken by IRS, including revising to the guidelines 
used by walk-in staff, certifying staff proficiency, conducting monthly 
reviews of tax law accuracy, and taking immediate action to address 
review information relating to any incorrect answers or improper 
referrals found during IRS or TIGTA quality reviews.
    As table 1 shows, more taxpayers had their returns prepared by 
community-based coalitions and other organizations that provide free 
tax return-preparation assistance as part of IRS's Volunteer Income Tax 
Assistance and Tax Counseling for the Elderly programs. These programs 
use IRS-trained volunteers to help prepare basic tax returns for 
taxpayers with special needs--including those with a low to fixed 
income, non-English speaking people, and the elderly.

Concluding Observations

    As the examples of improved telephone access and the Brookhaven 
Submission Processing Center closing show, IRS is beginning to realize 
payoffs from the ongoing systems modernization investments and wider 
management improvements. Although IRS has not succeeded in reallocating 
staff to one of its priority needs, compliance, there will likely be 
increased potential for such reallocation as modernization proceeds. 
This will present Congress, in its oversight and appropriations roles, 
with significant opportunities to weigh in on IRS's overall strategy 
for better accomplishing its mission. Specifically, Congress will have 
opportunities to help IRS establish strategic priorities and make 
decisions about the resources needed to meet those priorities.
    Mr. Chairman, this concludes my prepared statement, and I would be 
pleased to respond to any questions.
                                 ______
                                 

Appendix I
                   How IRS Allocated Expenditures and
                  Staff Resources in Fiscal Year 2002

    To provide some context for understanding the 2004 budget request, 
figures 2 and 3 illustrate how the Internal Revenue Service (IRS) 
allocated expenditures and staff resources in fiscal year 2002, the 
most recently completed year. Figure 2 shows IRS's fiscal year 2002 
actual expenditures in several categories, including about 69 percent 
that was spent on labor. Figure 3 shows how IRS allocated its labor 
across functional areas, including ensuring compliance such as auditing 
and collecting delinquent taxes (45 percent), providing taxpayer 
services such as telephone assistance (21 percent), and processing tax 
returns (15 percent). However, the boundaries between categories may 
not be as well defined as the figures indicate. For example, in figure 
3, staff categorized as maintaining information systems could also be 
considered under support for processing, taxpayer service or 
compliance. Therefore, the figures are meant to provide a summary of 
how IRS uses its resources and should be interpreted with caution.

Figure 2: IRS's Expenditures in Fiscal Year 2002 [14]
---------------------------------------------------------------------------
    \[14]\ IRS's annual expenditures may exceed its current year 
appropriations, because IRS has additional budgetary resources 
available to it and also incurs certain costs that were funded in prior 
years. During fiscal year 2002, IRS's total budgetary resources 
included its fiscal year 2002 appropriation of $9.437 billion as well 
as unobligated balances available from prior years, spending authority 
from offsetting collections, and recoveries of prior year obligations.

[GRAPHIC] [TIFF OMITTED] T0816B.001


---------------------------------------------------------------------------
Figure 3: How IRS Spent Its 99,180 Staff Years in Fiscal Year 2002

[GRAPHIC] [TIFF OMITTED] T0816C.001


                                 

    Chairman HOUGHTON. Ms. Williams?

   STATEMENT OF THE HONORABLE KAREN HASTIE WILLIAMS, MEMBER, 
            INTERNAL REVENUE SERVICE OVERSIGHT BOARD

    Ms. WILLIAMS. Good morning, 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 be here this morning 
and appear before the Subcommittee on behalf of the IRS 
Oversight Board. I have submitted written remarks and ask that 
they be included within the record.
    My remarks today will focus primarily on the Oversight 
Board's recommendation for the IRS fiscal year 2004 budget. I 
would like to address the Oversight Board's view of the IRS 
budget from two perspectives. First, I will discuss the 
challenge the IRS must face as it continues to modernize in 
accordance with its strategic plan. The IRS's ability to meet 
these challenges will be affected by resource availability. 
Second, I want to present the Oversight Board's fiscal year 
2004 budget recommendations, and why we have made these 
recommendations.
    The IRS is 5 years into a process that will transform it 
into a modern financial institution. During this period, the 
IRS has refocused, redefined, and rebuilt itself with dramatic 
changes in its mission, organization, management processes, and 
governance. It remains, however, the essential engine of 
finance in the Federal Government.
    As the transformation continues, the IRS continues to face 
difficult challenges. Each will require an investment of 
resources over multiple years if the IRS is to continue the 
following transformation processes.
    First, closing a compliance gap that is unfair to honest 
taxpayers. Second, continuing and implementing the business 
systems modernization program that will modernize its business 
processes and information technology. Third, replacing its 
human capital. Fourth, modernize its facilities. Let me 
highlight several specific issues.
    On enforcement, the IRS faces many examination and 
collection issues, but the sheer number of identified cases 
that it cannot pursue because of the lack of resources seems to 
me like a serious failure to treat all taxpayers fairly. Our 
system of voluntary compliance is based on the premise the 
taxpayers believe that everyone is paying what they legally 
owe. While this situation cannot be fixed in a single year, the 
IRS Oversight Board believes that the IRS needs about a 2 
percent real growth each year for the next 5 years. This is a 
practical and necessary approach to the problem. Moreover, if 
you look at the survey results on page 3 of my submitted 
testimony, taxpayers expect it.
    With respect to business systems modernization, let me 
emphasize one simple fact. The IRS will never become modernized 
unless it replaces its current information systems. The Legacy 
systems, many of them over 40 years old, prevent the IRS 
employees from obtaining timely and accurate information about 
taxpayers' accounts and must be modernized.
    Although the Oversight Board has been disappointed in the 
performance of this critical program, which is still plagued 
with delays and schedule and cost overruns, these facts remain. 
The modernization program is a major long-term investment that 
will require significant ongoing and growing investment. 
Modernization should be implemented as quickly as possible in 
order to lower the program's ultimate cost and serious risks. 
Funding reductions, while seemingly attractive in the short 
term, have long-range negative consequences which outweigh any 
short-term savings.
    Human capital is a very important and vital element in 
modernizing the IRS. During the past 5 years, the IRS has 
devoted energy and resources toward its structural realignment 
in its business systems and technology modernization, but it 
has placed less attention on strategic human capital planning. 
This must change.
    During the next 5 years, the IRS must cope with an aging 
work force that is increasingly retirement eligible, as is true 
in many government departments, build new skills for the more 
complex work in a modernized environment, develop an agency-
wide approach to training, use modernized technology so it can 
deliver high-quality services to taxpayers, and improve 
internal communications.
    The facilities of the IRS are aging and are no longer 
capable of supporting the modernized IRS. As it modernizes its 
processes and technologies, the facilities must be capable of 
supporting this modernized environment. Today's buildings do 
not provide the functionality needed to house modern office 
workers who use information technology extensively in their 
jobs. Upgrading facilities will challenge the budget in the 
next 5 years.
    With respect to the IRS budget, the Oversight Board has 
looked carefully at issues of fiscal constraint. We have, in my 
view, however, indicated that the government, in order to 
collect the revenue that is due--and the taxpayers insist that 
this be done--needs additional resources. The Oversight Board's 
budget recommendations are detailed in my written statement.
    We recommend a budget of $10.724 billion. Our recommended 
budget is $287 million higher than the Administration's. We 
believe this is necessary for several reasons. We believe that 
this additional funding is the first step in a 5-year plan to 
close the compliance gap. It provides for additional FTE levels 
for the IRS so that it can rebuild its human capital needs. It 
provides full funding for the IRS efforts to modernize its 
processes and information technology and it provides for 
increased level of telephone service to the taxpayers, 
additional taxpayer outreach and pre-filing assistance to help 
taxpayers file correctly, prevent problems before they occur. 
This budget will also provide funding for counterterrorism.
    We believe that modernization still has a way to go. There 
are new systems that are scheduled to come online, including 
the customer account system that Acting Commissioner Wenzel 
referred to, and that will be critically important in providing 
services to taxpayers. If the IRS is not able to demonstrate in 
the year ahead that the modernization program is moving 
forward, then I think we will have to reconsider the additional 
funding.
    In conclusion, Mr. Chairman, let me say that the Oversight 
Board supports the extension of the filing deadline to April 
30, both with respect to filing the returns and making payments 
electronically. We believe this will help move toward the goal 
that the Congress has established to increase e-filing both for 
individual filers as well as for businesses.
    With that, I will conclude my formal remarks and will be 
happy to entertain your questions.
    [The prepared statement of Ms. Williams follows:]

  Statement of The Honorable Karen Hastie Williams, Member, 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. My remarks today will be focused primarily on the Oversight 
Board's recommendation for the IRS FY2004 budget.
    Let me preface my remarks by saying that the IRS Restructuring and 
Reform Act (RRA 98) gives the Oversight Board specific responsibilities 
to review and approve the budget request of the IRS prepared by the 
Commissioner, and submit this request to the Treasury Department. RRA 
98 also provides that the President shall submit the Oversight Board's 
budget recommendation to the Congress, without revision, together with 
his own budget request, and gives the Oversight Board the 
responsibility to ensure that the budget request supports the annual 
and long-range strategic plans.
    I would like to address the Oversight Board's view of the IRS 
budget from two perspectives. First, I will discuss the challenges the 
IRS must face as it continues to modernize in accordance with its 
strategic plan. The IRS's ability to meet these challenges will be 
affected by resource availability. In a world of scares resources, the 
Administration, Congress, and Oversight Board must be conscious of the 
competitive balance between resources and performance. The Oversight 
Board wants to alert IRS stakeholders, especially the Congress, of the 
strategic needs the IRS must face in the next five years, and the 
budgetary demands that meeting these needs will entail.
    Secondly, I want to present the Oversight Board's FY2004 budget 
recommendations, and why we made these recommendations. Funding the IRS 
presents difficult choices, and these decisions should be made in full 
consideration of the performance levels that various funding 
alternatives deliver to the public.

Strategic Challenges Over the Next Five Years

    RRA 98 set the IRS on a process to transform itself into a modern 
financial institution that could meet the needs of taxpayers. Five 
years into that process, the IRS finds itself at a crossroads. It has 
made enormous progress in setting the stage to provide better service 
and ensure fair treatment under the law for taxpayers. During this 
period, the IRS has refocused, redefined, and rebuilt itself, with 
dramatic changes in its mission, organization, management processes, 
and governance.
    Yet the tax system is still plagued with two long-term conflicting 
trends: an increased demand on the tax administration system, and a 
steady decline in IRS resources due to budget constraints. In the past 
decade, the IRS workload has increased steadily. The number of tax 
returns continue to grow; particularly complex returns, such as those 
filed by individuals earning more than $100,000 each year and small 
corporations.
    As the transformation continues, the IRS continues to face 
challenges, some of which may be more difficult than the ones it has 
overcome in the last five years. The Oversight Board believes that the 
following issues present enormous challenges to the IRS, and each will 
require an investment of resources over multiple years if the IRS is to 
continue the transformation process:

     Closing a compliance gap that is unfair to honest 
taxpayers
     Continuing and implementing the Business Systems 
Modernization program that will modernize its business processes and 
information technology
     Replenishing its human capital
     Modernizing its facilitiesClosing the Compliance Gap

Closing the Compliance Gap

    There is mounting evidence that some taxpayers are not reporting 
and paying what they legally owe. The amount of assessed but 
uncollected taxes, analogous to receivables, is almost $280 billion and 
growing. The Administration has asked Congress to authorize the IRS to 
use private collection agencies to help reduce uncollected taxes. The 
number of promoted abusive tax shelters also is on the rise, and the 
IRS has developed programs to do more to counter this problem. Both of 
these issues are serious, but particularly vexing to the Oversight 
Board is the number of potential examination and collection cases the 
IRS has identified but cannot pursue due to lack of resources. For many 
of these cases, the IRS is only assigning resources to approximately 20 
to 30 percent of the cases it has identified. In the view of the 
Oversight Board, IRS's lack of resources to pursue this many known 
cases is a serious failure of the IRS to meet taxpayers' needs. Our 
system of voluntary compliance is based on the premise that taxpayers 
believe that everyone is paying what they legally owe.
    The Oversight Board recognizes the IRS cannot add the resources in 
a single year to work all identified cases. Adding this many new 
employees would be impractical, ineffective, and inappropriate. A more 
practical approach is to add a manageable number of new employees on a 
steady basis over a long period of time. This is the approach that 
former Commissioner Rossotti suggested to the Oversight Board in his 
End-of-Term Report, recommending a steady but slow growth in staff in 
the range of 2 percent per year for the next five years combined with a 
3 percent increase in productivity. The Oversight Board believes that 
an investment of this scope is what is needed to close the compliance 
gap.
    Not only does the large workload gap represent a significant 
revenue shortfall to the government, taxpayers expect the IRS to 
enforce the law. Honest taxpayers recognize that they bear the burden 
for under-enforcement by the IRS. The IRS Oversight Board conducted a 
public survey in July 2002, in which taxpayers' opinions about the 
IRS's role in enforcement was questioned. Ninety-three percent of 
taxpayers said that it was very important or somewhat important to them 
that the IRS ensures that high income taxpayers, corporations, and 
small business are honestly paying what they owe. More detailed survey 
results are in the table below.

----------------------------------------------------------------------------------------------------------------
 How important is it to you, as a taxpayer, that the IRS does each of the following to ensure that all taxpayers
                                           honestly pay what they owe?
-----------------------------------------------------------------------------------------------------------------
                                                     Very       Somewhat     Not Very    Not at All
                                                  Important    Important    Important    Important    Don't Know
----------------------------------------------------------------------------------------------------------------
1. Ensures low income taxpayers are reporting             56           28            8            5            3
 and paying their taxes honestly
----------------------------------------------------------------------------------------------------------------
2. Ensures small businesses are reporting and             68           25            3            3            2
 paying their taxes honestly
----------------------------------------------------------------------------------------------------------------
3. Ensures high income taxpayers are reporting            77           16            1            3            2
 and paying their taxes honestly
----------------------------------------------------------------------------------------------------------------
4. Ensures corporations are reporting and                 83           10            1            3            3
 paying their taxes honestly
----------------------------------------------------------------------------------------------------------------


Continuing and Implementing the BSM Program

    The Business Systems Modernization (BSM) program is a second 
strategic area that will require a long-term investment if the IRS is 
to become a modern financial institution. Much has been written about 
the state of the IRS's computers, but the sad fact is that no private 
sector company could remain competitive with computer systems similar 
to those used by the IRS. These systems prevent IRS employees from 
obtaining timely and accurate information about taxpayers' accounts and 
must be modernized.
    The BSM program is essential to the transformation of the IRS. 
Without modern processes and information technology, the IRS cannot 
meet taxpayers' needs. The Oversight Board, however, has been 
disappointed in the performance of this critical program, which is 
still plagued with delays in schedule and cost overruns.
    Not only does some of the most difficult development work lie 
ahead, but the approach to modernization requires that legacy and 
modernized systems operate in parallel for extended periods of time, 
possibly five years. These parallel operations will represent an 
additional cost to the IRS that it is not experiencing today in a major 
way. The Oversight Board estimates that the IRS has spent approximately 
$60 million in FY2002 from its operational information systems budget 
to support the BSM program, and will spend $75 million in FY2003 and 
approximately $120 million in FY2004 supporting this program. 
Additionally, modernized systems will have a major impact on business 
operations, and transitioning to modernized systems will require a 
major investment in developing modernized processes and training of IRS 
employees. Managing change must become a way of life for the IRS, and 
implementing change will present additional cost challenges.
    The Oversight Board wants to emphasize two important points about 
the BSM program:

     The BSM program is a major long-term investment that will 
require significant ongoing and growing investment
     BSM should be implemented as quickly as possible in order 
to lower the program's ultimate cost and risk. Funding reductions, 
while seemingly attractive in the short term, have long-range 
consequences, which outweigh any short-term savings.

Replenishing Human Capital

    As the IRS transforms itself by modernizing its organizational 
structure and its business and technology systems, it is also important 
for the IRS to assess its human capital needs. In a modernized 
environment, people will remain an important enabler of agency 
performance and will continue to be the IRS's most important asset. 
Both the Government Accounting Office (GAO) and Treasury Inspector 
General for Tax Administration (TIGTA) have identified human capital 
issues among the major challenges facing IRS management.
    During the past five years, the IRS has devoted energy and 
resources towards its structural realignment and its business systems 
and technology modernization programs, but has placed less attention on 
strategic human capital planning. During the next five years, the IRS 
must cope with an aging workforce that is increasingly retirement 
eligible, build new skills for more complex work in a modernized 
environment, develop an agency-wide approach to training using 
modernized technology so it can deliver high quality services to 
taxpayers, and improve internal communications.
    Ensuring that IRS employees are engaged in their new organizations 
and new positions still represents a major challenge for the IRS. 
Moreover, the reorganization is only the first of many changes the IRS 
must manage. The introduction of modernized technology has barely 
begun, and this change will require the IRS to address employees' needs 
in the modernized environment.
    The investment needed to improve the IRS's human capital is not 
separately identified like the BSM program; it is embedded in all its 
budget accounts. Historically, budget for human capital improvements 
such as training are often cut first when the need to reduce 
expenditures occurs. It is important to that human capital investments 
be given the attention they deserve, and be more explicitly identified 
so that decisions on human capital needs be made on an informed basis. 
Addressing these needs over the next five years will be critical to 
continuing IRS transformation to a modern financial institution.

Modernizing its facilities

    Much like its information technology, the IRS is presently 
dependent on aging facilities to process paper returns. Commonly known 
as ``pipelines'', they are co-located with ten central sites referred 
to as campuses at which the IRS performs a multitude of centralized tax 
administration functions. With the level of electronic filing now 
rising, the IRS is planning to close its first pipeline, located at its 
Brookhaven campus.
    The Brookhaven pipeline closing only represents the start of a 
program to re-align IRS campus facilities to its new workforce needs. 
In 2005, the IRS plans to close its pipeline at Kansas City, and in 
2007 plans to close the pipeline at its Philadelphia campus.
    The IRS has partnered with the General Services Administration to 
develop a long-term strategic plan to modernize all its campus 
facilities by the year 2017. The plan includes 83 buildings at 10 
campuses, encompassing approximately 9.8 million square feet of space, 
at a capital cost estimated at $2 billion.
    Although one goal of the plan is to replace aging facilities with 
flexible, modern facilities that align with the IRS new organization, 
the plan will achieve other objectives as well. The existing facilities 
average over 35 years in age, and are generally in need of substantial 
repair. As the IRS modernizes its processes and technology, its 
facilities must be capable of supporting the modernized environment. 
Today's buildings do not provide the functionality needed to house 
modern office workers who use information technology extensively in 
their jobs.
    The plan has not yet been approved, but the Oversight Board has no 
doubt that the need to upgrade IRS facilities over the next 15 years 
will add an additional strain on already scarce budget resources. The 
plan's first step is to provide new facilities in Kansas City and 
Philadelphia. The IRS requested the Board's support to include $72 
million in FY2005 budget for these facilities. The Board recognizes the 
condition of some of the IRS's campuses, but noted that budget 
restraints will require trade-offs in the future, and that decisions 
must be placed in this context.

Oversight Board's FY2004 IRS Budget Recommendations

    I would now like to present the Oversight Board's FY2004 budget 
recommendations in the context of the long-range budget challenges just 
discussed. The FY2004 budget is the first step. It provides for steady 
improvements in IRS performance, and establishes a level of investment 
necessary for addressing these challenges.
    The Oversight Board is cognizant that the present war on terrorism 
and the present budget deficit increase the need to ensure that all 
federal spending be thoroughly justified and deliver value to 
taxpayers. Nonetheless, the Oversight Board has statutory 
responsibilities for IRS governance and must ensure that it makes an 
honest and independent assessment of the performance levels the IRS 
must deliver to taxpayers and the budgetary implications of those 
needs. The Oversight Board worked closely with the IRS, as well as with 
Treasury and the Office of Management and Budget (OMB) in producing its 
budget recommendation. The Oversight Board believes that its budget 
recommendation supports the annual and long-range strategic plans of 
the IRS, as required by RRA 98.
    Moreover, especially in this difficult budgetary time, the 
Oversight Board believes that there is great value in having the 
government collect the revenue it is due by ensuring that all taxpayers 
pay what they honestly owe. Taxpayers expect that this be done, and 
fairness dictates it.
    Table 1 shows the Oversight Board's FY2004 budget recommendations 
for each account compared to the FY2003 IRS budget and the Office of 
Management and Budget (OMB) recommendations.

 Table 1. Comparison of IRS's FY2003 Budget with Administration Request and Oversight Board Recommendations for
                                             FY2004 (All $ in 000s)
----------------------------------------------------------------------------------------------------------------
                                                                                     Oversight      Difference
                                                    FY2003 IRS    Administration   Board FY2004       between
                    Account                      Appropriation 1   FY2004 Budget      Budget      Administration
                                                                      Request     Recommendation   and Oversight
----------------------------------------------------------------------------------------------------------------
PAM............................................         $3,930           $4,075          $4,247            $172
----------------------------------------------------------------------------------------------------------------
TLE............................................         $3,705           $3,976          $4,021             $44
----------------------------------------------------------------------------------------------------------------
IS.............................................         $1,621           $1,670          $1,670               -
----------------------------------------------------------------------------------------------------------------
BSM............................................         $364 2             $429            $500             $71
----------------------------------------------------------------------------------------------------------------
EITC...........................................           $145             $251            $251               -
----------------------------------------------------------------------------------------------------------------
HITC...........................................            $70              $35             $35               -
----------------------------------------------------------------------------------------------------------------
  Total........................................         $9,835          $10,437         $10,724            $287
----------------------------------------------------------------------------------------------------------------
1. FY2003 actual appropriation. Administration FY2003 request was $9,916 million.
2. The original FY2003 budget request was $450 million, which was subsequently reduced to $380 million.

    Overall, the Oversight Board's recommendation is $889 million 
higher than the FY2003 IRS appropriation, of which approximately $273 
million is due to inflation and $616 million is attributed to growth. 
This growth includes approximately $100 million for an expanded EITC 
program and $35 million for the HITC program.
    The Oversight Board's recommended budget is $287 million higher 
than the Administration's recommended IRS budget of $10,437 million. 
Without the 650 FTEs proposed for the EITC Reform Initiative, which is 
common to both budgets, the Oversight Board recommends an additional 
2,120 FTEs over FY2003 levels compared with the Administration request 
of 238 additional FTEs.
    The Oversight Board's budget recommendation provides for:

     A first step in a five year plan to close the compliance 
gap;
     An adequate FTE level for the IRS so it can rebuild its 
human capital to meet its future needs
     Full funding for the IRS's efforts to modernize its 
processes and information technology;
     Increased level of telephone service to taxpayers;
     Additional taxpayer outreach and pre-filing assistance to 
help taxpayers file correctly and prevent problems before they occur, 
and
     Additional funding for counterterrorism activities.

    The Oversight Board has recommended this budget for several 
reasons. First, and most importantly, it is consistent with the 
Oversight Board's goal of achieving two percent in real growth for a 
five year period, which it believes is necessary for the IRS to close 
the workload gap in compliance. The IRS requires this level of funding 
if it is to successfully continue its transformation.
    Secondly, it provides for additional investment in the BSM program, 
which the Oversight Board believes is essential to the transformation 
of the IRS. Unfortunately, the Oversight Board believes the 
Administration request will result in the delay of delivery of 
important benefits to taxpayers.
    Third, it restores resources for customer service and enforcement 
that have been lost in recent years. Unexpected cost increases have 
caused the IRS to realize a number of Full Time Equivalents (FTEs) that 
was significantly below the Administration's request. For example, the 
Administration request for FTEs in FY2002 and FY2003, and the FTE level 
achieved by the IRS, are:



                                                        Administration
                     Fiscal Year                       FTErequest  (less   FTEs Achieved  by      Difference
                                                             EITC)              the IRS

FY2002..............................................             99,116              96,714              -2,402
FY2003..............................................             98,727              96,802              -1,925
                                                                                (projected)


    The FY2003 FTE level will likely be lower when the effects of the 
$64 million across the board cut in the FY2003 appropriation are 
calculated.
    The Oversight Board is concerned that these same problems will be 
experienced in FY2004. In the FY2004 budget, the Administration 
proposed a 2 percent raise for civil service employees and a 4.1 
percent raise for military personnel. If past years are any indication, 
Congress will again agree to provide pay parity to military and 
civilian personnel. Furthermore, both the House and Senate versions of 
the FY2004 budget resolution contain a `sense of the Congress' 
provision supporting military-civilian pay parity for federal 
employees.
    The Board's FY 2004 budget proposal, as does the Administration's, 
assumes a 2% pay increase. The Board urges that Congress provide the 
necessary funds to fully fund any pay raise it may pass in the coming 
year. Otherwise, as in previous years, the IRS will be forced to cut 
employee training programs, telephone service to taxpayers and freeze 
future hiring initiatives.
    For three of the six IRS appropriation accounts, there is no 
difference between the Administration and the Oversight Board 
recommendations. For Tax Law Enforcement, the difference is small, only 
about 1 percent. Both the Administration and Oversight Board are 
recommending significant increases to this account. In two accounts, 
PAM and BSM, the differences are larger. I will only address the 
difference in these two accounts.

Processing, Assistance, and Management

    The Oversight Board's recommendation for the Processing, 
Assistance, and Management Account is $172 million higher than the 
Administration's proposed budget. A common feature of both 
recommendations is that this account should be the source of 
significant savings resulting from improvements in systems and work 
processes. Much of the work accomplished in this account relates to 
assisting taxpayers, processing of tax returns, and management, and the 
IRS has saved 1,427 FTEs through reengineering in this account.
    Although enforcement issues have captured the public's attention, 
customer service issues are still important, and in many ways can 
prevent future non-compliance. The demand for customer service grows 
each year; so too does the complexity of the tax code. Yet only seven 
out of ten taxpayers can get help from the IRS over the telephone.
    The Oversight Board's recommended budget also contains the savings 
resulting from reengineering, but also recommends an additional $172 
million for taxpayer assistance that the Board believes is needed to 
help taxpayers. For example, the Oversight Board's budget provides an 
additional $45.6 million to improve telephone services to small 
businesses as well as individual taxpayers who have questions or 
concerns regarding their taxes, as well as an additional $38 million in 
pre-filing services to determine the needs and values of taxpayers, 
identifying whether current or innovative methods are working, and 
providing education and assistance to taxpayers. Overall, the Oversight 
Board's additional budget will provide for the following pre-filing and 
account services:

     Provide a higher level of assistor service (76 percent v. 
73 percent), which will result in IRS assistors answering an additional 
1,700,000 phone calls from small business owners and other taxpayers 
who have questions regarding their tax obligation;
     Provide face-to-face assistance to an additional 492,000 
taxpayers through outreach programs and pre-filing compliance 
alternative treatment initiatives;
     Provide indirect assistance to an additional 138,000 
taxpayers through established partnerships with practitioner groups as 
well as the Volunteer Income Tax Assistance program;
     Provide an additional 38 staff-years of education and 
out-reach services.

Business Systems Modernization

    The Oversight Board's recommendation for the Business Systems 
Modernization account is $136 million higher than the FY2003 
appropriation of $364 million and $71 million higher than the 
Administration's proposed budget of $429 million.
    Considering the essential nature of the BSM program, the Oversight 
Board is concerned with the FY 2003 appropriation for the BSM account, 
and the implications of these actions for future appropriations. The 
Administration's original FY 2003 budget request included $450 million 
for the BSM account, which was approved by both the House of 
Representatives and the Senate Appropriations Committee. However, in 
September 2002 the IRS was assigned responsibility for implementing a 
new tax credit, the Health Insurance Tax Credit (HITC), which was 
passed as part of the 2002 Trade Adjustment Act. In response to this 
new requirement, the Administration supported a transfer of $70 million 
from the BSM account to implement the HITC program, creating a separate 
HITC account and reducing the BSM request to $380 million. This 
transfer was in lieu of a request for additional funding to cover the 
costs of the HITC program.
    Ultimately, the FY2003 appropriation for BSM was $364 million, $28 
million less than the FY 2002 appropriation of $392 million. The 
Oversight Board is disappointed that funds to meet the requirements of 
the new HITC requirement were taken from such an important strategic 
program as BSM. Admittedly the BSM program had disappointing results in 
FY2002, but underfunding the program in the long term only delays the 
delivery of benefits to taxpayers.
    Clearly the program execution needs improvement, and the Oversight 
Board believes that approval of expenditures must be consistent with 
the IRS's ability to manage and implement the program. The Oversight 
Board believes that the current process of having Congress approve the 
BSM expenditure plan provides safeguards against spending funds on 
projects the IRS cannot manage.
    The Board believes the IRS is beginning to improve its ability to 
manage the BSM program. If the IRS can demonstrate its ability to 
manage the program, the funding to move the program forward must be 
available. On the other hand, if the IRS cannot demonstrate its ability 
to manage the BSM program in an acceptable manner, additional changes 
must be made prior to starting any new projects. Poor performance is 
not acceptable.

Extension of Filing Deadline for Electronic Filers

    One last topic that I would like to address is the proposed 
extension of the filing deadline to April 30th for taxpayers who file 
and pay electronically.
    I commend this subcommittee for its strong interest in electronic 
filing. E-filing delivers benefits to taxpayers and is now starting to 
simplify IRS operations as well. The number of paper returns has now 
decreased to the point where the IRS is planning to close one of its 
ten paper processing pipelines in 2004, and is planning to close a 
second one in 2005.
    Last year, in its electronic filing report to Congress, the 
Oversight Board supported the extension of the filing deadline to April 
30th for taxpayers that file electronically. Recently, in response to 
questions raised at the Oversight Board's public meeting in January, 
the Board revisited this issue to ensure that this continues to be a 
sound recommendation. Based on surveys the IRS has made of taxpayers, 
the Board believes that the proposed due date change would be effective 
in attracting additional electronically filed returns, and continues to 
support the proposed extension.
    That concludes my statement. I will be pleased to answer any 
questions.

                                 

    Chairman HOUGHTON. Thank you very much. I just have a quick 
question. I may be misidentifying the numbers here, but you 
were asking for $200 million more than the original request, 
but my Lord, you are able to put the service back into 
compliance, you are able to upgrade the people, you are able to 
modernize the new technology and to institute a program for 
counterterrorism. That is all within that $200 million?
    Ms. WILLIAMS. Mr. Chairman, the $200 million goes toward 
those objectives. We are not saying that it will complete that 
process. We are also mindful of the savings that the agency 
presumes that it will be able to make in terms of savings from 
their past budget. So, both of those elements are part of what 
we anticipate the higher budget can satisfy.
    Chairman HOUGHTON. Thank you very much. Mr. Pomeroy?
    Mr. POMEROY. I want to thank the panel, and especially Ms. 
Williams for participating in the Advisory Oversight Committee. 
I think that is a terrific additional resource that has come 
online to help us from a third party, credible vantage point 
evaluate whether the IRS has this capacity it needs.
    As to Mr. White, the GAO, I would like, and I think the 
Chairman and I will get a formal request together, a GAO 
evaluation of this whole business of the preparation of the 
pre-certification on the EITC. I would like an evaluation in 
terms of whether or not sufficient care has been put into the 
process by which the proposed prototype certifications are 
going to be market friendly or would represent potentially a 
barrier to people that otherwise need those benefits.
    We want screening. We want to get that error rate down. We 
want to stop cheating, but we don't want, on the other hand, to 
prevent some of the most vulnerable aspects of our population 
from accessing a benefit that we have determined they are 
entitled to have and, in fact, need.
    So, there is substantial concern now in terms of whether or 
not this thing has been developed too quickly, with too little 
input, not sufficiently linked to other pre-certification 
processes other agencies might use that have substantial 
marketplace experience in terms of whether or not they are user 
friendly or not. So, that is one component of what we would 
like you to look at.
    The second component involves basically an evaluation as 
this first set comes in. It is going to be 45,000 the first 
year, 2 million the second year, 5 million the third year, and 
there is a concern as to whether or not on this time line there 
is sufficient opportunity to really evaluate what we are seeing 
by way of results from the first year's experiment. I think the 
GAO evaluation, for example, the first 1,000 sent out and 
responded, or in any event, a very careful evaluation of this 
first 45,000 block would assist the IRS greatly in evaluating 
whether or not this is just prepared to ramp up to the next 2 
million or whether or not we need to do some important form 
revision.
    So, that is what I am interested in. Is this thing ready to 
go to the first 45,000 in your evaluation there, and then, 
second, what are we getting as returns start to come in? I 
think GAO could play a very important role for us in making 
certain that we have a market-appropriate product as we 
initiate pre-certification. Is GAO equipped to do something of 
that nature?
    Mr. WHITE. Mr. Pomeroy, those are two very good questions. 
What I would like to do is talk to either you or your staff 
about the details of the proposed study.
    Mr. POMEROY. I expect that the Chairman and I will be of 
one mind on this and be able to tee something up with a little 
more specificity than my utterances from the dais, but you get 
what I mean.
    Mr. WHITE. Yes. Yes. We will work with you and your staff.
    Mr. POMEROY. That is the kind of thing you can do?
    Mr. WHITE. Yes, sir.
    Mr. POMEROY. Thank you. I yield back.
    Chairman HOUGHTON. Thanks very much. Mr. Portman?
    Mr. PORTMAN. Thank you, Mr. Chairman, and Mr. White, thanks 
for staying on top of the business systems modernization 
program. We have had some cost overruns and delays, and as the 
Acting Commissioner said, it is a very difficult and complex 
project, but we depend on you to provide us with accurate 
third-party analysis and to keep everyone's feet to the fire 
because it is so important.
    Ms. Williams, thank you very much for your service on the 
Oversight Board. I know this is sometimes a thankless task 
which you do in addition to your full-time job, and yet your 
expertise and the expertise of your colleagues has been, I 
think, very, very helpful. Commissioner Rossotti thought so, 
and I still believe the Oversight Board plays a very important 
function, partly on the budget side, and that is one question I 
want to ask you about.
    You do ask for actually over $200 million more than the IRS 
has asked for. I am not sure if it is that different than the 
IRS initial discussions with the Office of Management and 
Budget (OMB), but in terms of where we have ended up. As I look 
at it, what I really see is that you are asking for additional 
funding in the enforcement area, which is obviously very 
important, and we have talked about some of the problems with 
enforcement right now, but you are also asking for additional 
funding in other areas, too, including taxpayer service and, of 
course, including the modernization effort as we just talked 
about.
    I guess my question to you is this. Traditionally, the IRS 
has been accused of kind of having a pendulum swing. It is 
either a focus on enforcement, and sometimes that enforcement 
mentality has dominated over the years, I would say 
particularly in the years prior to the Commission's work where 
there were a lot of concerns raised, and then perhaps the 
pendulum swings the other way toward focusing on service and 
having less focus on the enforcement side. We talked about the 
impact of the 10 deadly sins, for instance, on the enforcement 
attitude, and so on.
    Are you fearful, looking at this with some perspective now, 
that we may be seeing that pendulum swinging again, in other 
words, now that we have identified this problem in terms of 
compliance and enforcement, are we in danger of the pendulum 
swinging, or do we have more of a balance now where we are able 
to move forward, understanding that by providing service, in 
the end, we do get better enforcement?
    Ms. WILLIAMS. Mr. Portman, our view is that enforcement and 
service are not opposite sides of the coin. We think both are 
critically important to the success of the IRS, and our budget 
recommendations are in both of those areas, as you observed, in 
customer service as well as in the enforcement area. Indeed, we 
feel that by providing additional services, we can accelerate 
the compliance process by providing accurate and complete 
information to taxpayer inquiries.
    So, I think the two of them have to be looked at in tandem, 
and I don't think that we have a pendulum effect. I think we 
have sometimes in the past considered a stop and start in terms 
of emphasis. We hope to see both elements going forward, and 
that is a particular reason behind our recommendations for the 
budget.
    Mr. PORTMAN. Well, thank you, and again, your job is in 
part to oversee that and make sure that we continue to have a 
balance, and I couldn't agree with you more. I think every 
service business in America has learned that almost in a 
revolution in the service industry, that by providing better 
information, by having better service, in a sense, you have 
better compliance and better enforcement and they are not 
inconsistent, and I hope you will continue to work on that.
    The Oversight Board, as you know, has been the subject of 
some controversy since its establishment, and it was initially 
established in 1998. Then it took a while to get the Oversight 
Board Members there. With Steve Nichols' departure recently, we 
have heard again some questions about the independence of the 
Oversight Board.
    I would appreciate it if you could comment on that. How 
independent is the Oversight Board? Is it continuing to serve 
the function envisioned by the Commission and by the 
Restructuring and Reform Act of 1998? How do you feel about the 
Oversight Board, and its relationship with the IRS?
    Ms. WILLIAMS. I think the Oversight Board is clearly very 
independent. I think that the Oversight Board sees as its focus 
the concerns of taxpayers. Our concern is for the taxpayers, 
just as on a corporate board, a good board of directors is 
focused on its shareholders.
    From this perspective, we look very closely at the IRS. We 
look at its budget. We look at its personnel. We have had a 
series of public hearings over the years to get public input. 
Members of the Oversight Board and staff have attended tax 
forums every year that we have been in existence where more 
than 2,000 practitioners are present. We make ourselves 
available in small groups to talk with them, to get their 
concerns and to put that into our thinking as we look at the 
budget.
    So, I think that the Oversight Board as envisioned by this 
Committee and the Congress as a whole has served an important 
independent role. Certainly, we talk with the IRS management. 
The Commissioner and the Secretary of the Department of the 
Treasury, as you know, are statutory Members of the Oversight 
Board and have participated in our meetings on a regular basis.
    We think that this combination of interaction with 
management, with the public, with the practitioners who work 
with the IRS, provide us with an independent basis to make 
recommendations with respect to budget as well as to management 
initiatives.
    Mr. PORTMAN. Thank you, Ms. Williams.
    Chairman HOUGHTON. Mr. Weller.
    Mr. WELLER. Thank you, Mr. Chairman, and Ms. Williams. Mr. 
White, thank you for participating today in today's panel. I 
would like to direct my question to GAO, if I could, this 
morning. Earlier, I had asked the Acting Commissioner regarding 
the Administration's proposal for use of private debt 
collection services to collect outstanding tax assessments, and 
I was wondering, Mr. White, the statistics that I shared at 
that time, less than a dime on the dollar was being collected 
between 1996 and the year 2001 in outstanding tax assessments. 
I was just wondering from the perspective of the GAO, from your 
analysis, what are the primary reasons why the IRS was unable 
or ineffective in collecting outstanding tax assessments?
    Mr. WHITE. I would make a couple of points. One is not all 
of that debt, not all of those outstanding tax assessments are 
collectible. There is a significant proportion of that that is 
debt owed by bankrupt businesses, mainly small businesses, but 
bankrupt businesses, so there is no chance of collecting a 
significant portion of that debt.
    At the same time, there is tax debt that has collection 
potential that IRS is unable to work. We have done work in the 
past. The IRS simply is unable to work all of the cases, so 
they will make an assessment. It goes into their collections 
queue and they are unable to work all of those cases.
    Mr. WELLER. Why are they unable to work all of those cases?
    Mr. WHITE. Well, part of it is due to staffing declines in 
the compliance area. Over the last--you can go back almost any 
number of years and what you see is a steady, but over years 
when you add it up, a fairly significant decline in compliance 
staff. We talked about it in our statement, that IRS has over 
the last several budgets proposed increasing resources devoted 
to compliance, and they have been unable to do that.
    Mr. WELLER. Now, the Administration has proposed and Mr. 
Houghton has introduced legislation which would provide for the 
use of private debt collection agencies to help collect what is 
collectible for tax assessments. Have you reviewed that 
proposal? Has the GAO reviewed that proposal?
    Mr. WHITE. We have not reviewed the current proposal. We 
reviewed the experience in 1996 and 1997 when IRS did their 
pilot then, and I guess there are kind of two levels of issues 
here. One is the policy judgment about whether this is a good 
approach to take in general, and I think because of the concern 
about the uncollected debt with collection potential that IRS 
is able to work, that there may be some benefits to this sort 
of approach.
    Then a second level issue, though, is the IRS's capability 
to manage this sort of process. Back in 1996 and 1997, they did 
not have the capability in their information systems to 
identify the kinds of cases that the private debt collectors 
could most productively work. They had agreed with the 
contractors up front to deliver certain kinds of cases to those 
contractors. They were unable, using the systems they had at 
that time, to actually pick those cases out and get them to the 
contractors. So, after the first pilot, the effort was stopped.
    Mr. WELLER. The Commissioner noted that over 40 States use 
private collection services, and I was wondering, has the GAO 
ever studied how the States have utilized these services and 
see whether there have been successes or weaknesses in the 
State program?
    Mr. WHITE. As I said, we have not looked at the current 
proposal. We have not looked at what the States have done since 
1996 or 1997. We have not looked at whether IRS's systems now, 
with the improvements that they have been making as a result of 
the modernization investments, now give them improved 
capability for delivering cases to contractors.
    Mr. WELLER. Thank you, Mr. White. Ms. Williams, do you have 
any thoughts from the Oversight Board's perspective on this?
    Ms. WILLIAMS. Yes, Congressman Weller. I would be happy to 
respond. We believe that this is a very positive initiative. 
Over $280 billion in uncollected funds stand on the books and, 
unfortunately, is growing. We think that the IRS has learned 
from the earlier pilot experience, has looked at the problems 
that arose there, and is prepared to launch a new effort with 
the support of the Congress.
    The Oversight Board will stay on top of the situation. One 
of the things we have talked to the IRS about is being sure 
that as they initiate this process, there are good controls in 
place, there are performance measures that they can use to 
evaluate the performance, that the cases that are selected are 
cases that have a reasonably high degree of collection to avoid 
some of the problems that Mr. White identified, and that there 
is an appropriate fee structure.
    As you are certainly aware, other agencies of the Federal 
Government, such as the Department of Education, already use 
outside collection agencies and have done that successfully. 
So, we think that this is an important initiative, and we fully 
support it.
    Mr. WELLER. Thank you. Thank you, Mr. Chairman. I see my 
time is expired.
    Chairman HOUGHTON. Thank you very much. I have just got one 
additional question, but I want to thank you very much, so 
much, Mr. White, for being here and we will be in touch with 
you on this evaluation of the pre-certification. Ms. Williams, 
thank you very much for your participation.
    I would like to ask you both a broad question. We never 
seem to quite have the funds to do what we want, and everything 
is being squeezed. You have got the compliance issue, you have 
got the equipment issue for analysis and administration and 
electronic filing. You have got service. Then on top of that, 
Ms. Williams, you say that the facilities really are inadequate 
and also our human capital planning is not adequate. Those are 
going to take additional dollars. Are we going to be able to do 
all of that within the confines of these sort of projected 
budgets?
    Ms. WILLIAMS. Mr. Chairman, I think we will be able to 
begin the process or to continue from where we are now. We are 
not going to have 100 percent success, but we think it is 
important that the IRS focus on all of these issues.
    From the perspective of the Oversight Board, we represent 
the taxpayers. We think the taxpayers need service; they need 
modernization; they need enforcement. I think with the 
leadership of the Oversight Board, the IRS focused on these 
three key areas. I think we can make significant progress and 
use the dollars appropriated by the Congress effectively toward 
this end.
    It is a long-term process. It is not going to happen on a 
1-year basis. That is why in the past, the Oversight Board has 
recommended multi-year funding, particularly for the 
modernization program, because it is very difficult to have 
stop-and-start funding and have an effective, smooth delivery 
of these major system changes that are underway.
    So, I think it is a long-term process. It is a multi-year 
process. We believe that the budget that has been recommended 
by the Oversight Board, which, as I think you recognized, was 
not that different from what the IRS originally recommended to 
the Department of the Treasury before it went through the OMB 
review process, is a number that will get us clearly down the 
path that we need to go.
    Mr. WHITE. Mr. Chairman, one way to judge an agency's 
budget is by looking at the resources they are given and then 
comparing that to the results that the agency is able to 
achieve with those resources, and I think in the IRS case, 
there is some good news there.
    Over the last several years, Congress has fully funded, or 
essentially fully funded IRS's budget request, and over that 
same period, IRS has had two priorities. One was to improve 
service to taxpayers. One was to improve their compliance 
processes.
    On the service to taxpayers side of the coin, we are seeing 
some visible improvements now. Telephone service is 
considerably higher than it was several years ago when you look 
at access rates and accuracy rates.
    The example of the paper return service center closing is 
another example of a payoff, where IRS is improving efficiency 
through increased electronic filing. This is enabling them to 
close a service center, which is a very labor intensive process 
for handling paper returns, and ultimately ought to be able to 
shift those resources then into other areas.
    At the same time, on the compliance side, they have not 
been able to increase resources there the way that they have 
intended in the last several budgets, where they have made that 
a priority but have not been able to shift the resources into 
that area.
    Chairman HOUGHTON. Thank you very much again. I certainly 
appreciate your time and all the information and wisdom you 
share with us. Thank you.
    Now, I would like to call the next panel, which is Robert 
McKenzie, attorney, of Arnstein and Lehr from Chicago, on 
behalf of the American Bar Association (ABA); Timothy 
McCormally, Executive Director of Tax Executives Institute 
(TEI); William Stevenson, Chairman of the Federal Taxation 
Committee of the National Society of Accountants in Alexandria; 
and Claudia Hill, a Member of the National Association of 
Enrolled Agents (NAEA). If you would come to the desk, I would 
appreciate it. All right, ladies and gentlemen. Thank you very 
much for being with us. Mr. McKenzie, would you start your 
testimony?

   STATEMENT OF ROBERT E. MCKENZIE, AMERICAN BAR ASSOCIATION 
                      SECTION OF TAXATION

    Mr. MCKENZIE. Mr. Chairman, Ranking Member Pomeroy, and 
other Members of the Subcommittee, I am Bob McKenzie. I am from 
Chicago, Illinois. I am here on behalf of the ABA. One 
disclaimer. The testimony to be presented is on behalf of the 
section of Taxation and represents the views of our individual 
Members and does not represent the view of the entire ABA. With 
that disclaimer, let us move to a few points.
    Chairman HOUGHTON. That lets you off the hook. You can say 
anything you want.
    [Laughter.]
    Mr. MCKENZIE. Let me move to just a few important points 
made in our written testimony, and I would submit that for your 
review, but I would like to first go to the problems with the 
collection due process (CDP). We found that it is a wonderful 
program. It adds protections for taxpayers, but the problem we 
have is that the tax protester community is using it to abuse 
and delay the system. We have serious reservations about the 
abuse of these new rights by this community, and we believe 
that there has to be legislation to reduce the impact of the 
tax protesters' abuse of the CDP system.
    There is legislation currently pending which would permit 
the IRS to treat portions of the CDP hearing request based on 
frivolous positions without having a full hearing, and we 
believe that that is appropriate. We also believe that even 
though the courts have sanctioned some of these protesters when 
they have gone to Tax Court, that may not be sufficient.
    For those people who continually abuse the system, we 
believe that consideration should be given to even more serious 
sanctions, including the right to enjoin further actions in Tax 
Court by the U.S. Tax Court, and perhaps criminal penalties for 
those who continually abuse the system, because some of the tax 
protesters aren't getting the word. They enjoy abusing the 
system, and our view is for those taxpayers we represent who 
are legitimately protesting through the CDP system, they are 
not getting their cases heard because of the abuses of the 
system by a minority whose only goal is to thwart the tax 
system.
    So, we do hope, though, if there is any such penalty 
imposed, that consideration be given that this be based upon a 
reasonable basis test, which is a test that is already 
established within Internal Revenue Code 6662 in respect to 
penalties when we look to penalizing people abusing the CDP 
process.
    The second issue I would like to speak to goes to 
Congressman Weller's question with respect to collection 
outsourcing, and we believe this is something that certainly 
deserves review, but we would like to have this panel look in 
balance to the issue of section 1204 of the Restructuring and 
Reform Act 1998, which specifically prevented the IRS from 
using collection statistics in evaluations.
    One of the problems we have with outsourcing is how can we 
protect the taxpayer in the same manner, when in the past, we 
had civil service employees being paid a salary and not being 
rewarded in a monetary bounty system for collection and we had 
abuses. Now, we are moving to a system proposed which would 
give a monetary reward to outside collection agencies for each 
collection. So, we would ask that any outsourcing look to 
balancing both the needs of the taxpayers for protection and 
the intent of this body with section 1204 in protecting those 
rights with the need to get the revenue. So, we certainly 
believe it is something that warrants looking at, but we have 
great reservations about the protection of taxpayer rights, and 
we would also note that many of our Members have noted that not 
all State agencies have fully protected people's rights with 
outside collection activities.
    The last matter I would like to discuss is the failure of 
the IRS's new offer and compromise system. Congress passed new 
laws in 1998 to liberalize the offer and compromise process. 
The IRS has not effectively implemented it. They have not 
applied the individual facts and circumstances test that was 
required in addition to the IRS standards, and their new system 
adopted in 2001 in reaction to a large backlog has, in fact, 
resulted in a much lower acceptance rate of offers and 
compromise, and we have to consider that. Thank you.
    [The prepared statement of Mr. McKenzie follows:]

 Statement of Robert E. McKenzie, American Bar Association Section of 
                                Taxation

    Good morning. My name is Robert E. McKenzie. I practice tax law in 
Chicago, and currently serve as the Division Coordinator for the 
American Bar Association Section of Taxation to the IRS Wage and 
Investment Division. This testimony is presented on behalf of the 
Section of Taxation. It has not been approved by the House of Delegates 
or the Board of Governors of the American Bar Association. Accordingly, 
it should not be construed as representing the policy of the 
Association.

                            I. Introduction

    The Section of Taxation is comprised of more than 20,000 tax 
lawyers. As the country's largest and broadest-based professional 
organization of tax lawyers, one of our primary goals is to make the 
tax system fairer, simpler and easier to administer. Our members 
include attorneys who work in law firms, corporations and other 
business entities, government, non-profit organizations, academia, 
accounting firms and other multidisciplinary organizations. We advise 
on virtually every substantive and procedural area of the tax laws, and 
interface regularly with the Internal Revenue Service (``IRS'') and 
other government agencies and offices responsible for administering and 
enforcing such laws. Many of our members have served in staff and 
executive-level positions at the IRS, the Treasury Department, the Tax 
Division of the Department of Justice, and the congressional tax-
writing committees.
    We very much appreciate the opportunity to provide input to the 
Subcommittee regarding ways in which the IRS might more efficiently and 
effectively administer the internal revenue laws. There are, of course, 
numerous aspects to this enormous task. My testimony today focuses on 
what we believe to be an especially important administrative objective: 
effective collection of federal income taxes. In that regard I will 
focus my comments principally on the offer in compromise program and 
how it has been implemented. I will also address briefly a number of 
other issues affecting tax collection.

                        II. Offers in Compromise

    Section 7122 of the Internal Revenue Code grants the IRS the 
authority to compromise tax obligations. The offer-in-compromise 
(``OIC'') program is intended to bring taxpayers, who are sincerely 
trying to fulfill their obligations, back into compliance. In order to 
accomplish this objective more effectively Congress and the Treasury 
Department have gradually liberalized the OIC program in recent years--
both by expanding the grounds on which compromise may be granted and by 
establishing allowable expense guidelines that permit taxpayers 
entering into compromises to provide for basic living expenses in light 
of their particular facts and circumstances. Notwithstanding 
Congressional and Treasury initiatives, we as tax practitioners have 
found that in practice the statutory and regulatory objectives of the 
OIC program are not being met. In fact, the effectiveness of the OIC 
program is being severely undermined in certain cases by the manner in 
which it is being implemented.
    Traditionally, compromise was permitted on two grounds: doubt as to 
collectibility (i.e., the taxpayer conceded the amount due, but was 
unable to pay it) or doubt as to liability (i.e., the taxpayer 
contended that he or she did not owe the underlying liability and was 
able to show that the issue had not adequately been heard earlier in 
the administrative process). In 1998, Congress expanded the scope of 
the program by directing the IRS to implement a third ground for 
compromise: ``effective tax administration.''
    While the aim of the OIC program is to collect the maximum, 
reasonably collectable amount from the taxpayer, while still 
encouraging future compliance--both in terms of filing returns and 
paying tax--the IRS in recent years has tended to process OICs 
restrictively with the result that taxpayers are not only left with tax 
debts that they are not reasonably able to pay but also are strained to 
meet their current tax obligations.
    How has this occurred? In the summer of 2001, the IRS created a new 
centralized processing system for offers in compromise. The centralized 
processing system was designed to reduce the backlog created by the 
increasing number of offers in compromise submitted each year. 
Unfortunately, in some cases, the backlog is being reduced simply by 
the return of offer packets that have only minor omissions in 
documentation. For example, documentation sometimes is simply lost. 
Lost documentation is treated the same as documentation that was never 
submitted. Failure by the taxpayer to provide the missing documentation 
in a short time-frame results in the offer not being processed at all. 
This strict ``gatekeeper'' approach is not consistent with recent 
Congressional efforts to liberalize the OIC program and to encourage 
reasonable collection alternatives.
    Similarly, many IRS employees below the Appeals level who process 
offers in compromise refuse, in direct contravention of the amendments 
to IRC  7122 enacted in the Restructuring and Reform Act of 1998, to 
consider individual facts and circumstances when applying allowable 
expense standards for offers in compromise. While Appeals generally 
observes the IRC  7122 requirements, the OIC program is not benefiting 
all taxpayers it is intended to reach if fair consideration of an offer 
can only be obtained at the Appeals level.
    In addition, the IRS has taken the position that if a taxpayer can 
pay the tax debt, based on his current monthly income and expense 
extrapolated over the entire remaining statute of limitations for 
collection, an OIC will not be available. In fact, as a condition of 
approving an offer, some Area offices have insisted that the statute of 
limitations be extended up to five additional years, both for purposes 
of determining the acceptable offer amount and the term for its 
payment. While it is obvious that some baseline period is necessary to 
determine collectibility, these are unrealistic measurement standards.
    Finally, although compromise based upon effective tax 
administration (``ETA'') grounds is still relatively new, and final 
regulations on ETA were only issued in July of 2002, the ability of 
taxpayers to compromise on these grounds is being frustrated by a lack 
of clear policies concerning the processing of ETA offers. The final 
ETA regulations did not provide a meaningful indication of what kinds 
of cases have a chance of succeeding on ETA grounds.
    In the long run, the desire to collect the maximum amount of tax 
possible must be weighed against disincentives to future compliance 
that are being created by current restrictive OIC policies. To realize 
the objectives of the OIC program more effectively, we recommend the 
following:

     Return to a local system of processing offers in 
compromise, or streamline centralized processing by permitting offers 
to be submitted for initial consideration with only the amount of 
documentation essential to make a reasoned decision.
     Direct IRS employees who are processing offers in 
compromise to exercise more discretion when evaluating the sufficiency 
of documentation submitted with an offer.
     Assign experienced Revenue Officers to review each 
incoming OIC.
     Ensure that IRS employees are properly trained to follow 
statutory directives to consider individual facts and circumstances 
when applying allowable expenses.
     Support legislative efforts to develop additional 
guidelines on processing ETA offers.

                    III. Allowable Expense Standards

A. Background

    In August, 1995, the IRS adopted guidelines with respect to 
taxpayer expenses that would be taken into account when considering 
installment agreements and offers in compromise. The guidelines on 
national and local allowances published by the IRS are designed to 
enable taxpayers entering into offers in compromise to settle their tax 
liabilities while still providing for basic living expenses.
    To introduce additional flexibility into the OIC program and, in 
particular, ``make it easier for taxpayers to enter into OIC 
agreements,'' Congress, in 1998, directed the IRS to continue the 
practice of prescribing guidelines for allowable expenses. In addition, 
Congress expressly directed that the allowable expense guidelines be 
expanded to provide that IRS employees consider the facts and 
circumstances of each individual taxpayer before ultimately determining 
the appropriate amount of allowable expenses for such taxpayer. In 
particular, the legislative history anticipates that the IRS would 
``take into account factors such as equity, hardship, and public 
policy'' in making individual determinations. Unfortunately, practice 
has shown that IRS employees rarely deviate from the published expense 
tables. Additionally, allowable expenses guidelines are often 
administered unfairly and inconsistently.
    The IRS created two categories of expenses to guide examiners in 
their decision-making: Necessary Expenses and Conditional Expenses. The 
IRS has charts for national and local standards setting forth its view 
of necessary living expenses. Necessary Expenses are based on national 
and local standards tables, which are usually less than the taxpayer's 
actual expenses. Conditional Expenses are those expenses that the IRS 
does not consider meeting the Necessary Expense tests, but which it 
might allow if the taxpayer can pay the outstanding taxes pursuant to 
an installment agreement within five years. If the taxpayer could not 
pay within five years, she is allowed one year to eliminate her 
Conditional Expenses.

B. Necessary Expenses

    The IRS procedures provide that a Necessary Expense will be 
allowable if ``it provide[s] for a taxpayer's and his or her family's 
health and welfare and/or the production of income.'' The IRS requires 
that Necessary Expenses be in an amount that reflects the minimum on 
which the taxpayer and his or her family can live based on prescribed 
national, local or other applicable administrative standards:
    1. National Standards: These provisions establish reasonable 
amounts standards for five types of Necessary Expenses: food, 
housekeeping supplies, apparel and services, and personal care products 
and services. The first four standards come from the Bureau of Labor 
Statistics (``BLS'') Consumer Expenditure Survey 1999-2000. The last 
standard has been established by the IRS. Any amount above the national 
standards may be considered excessive. Alaska and Hawaii have been 
allowed some upward adjustment because of their high cost of living. 
However, it is interesting to note that the IRS adjusts Hawaii expense 
upward by 10% yet its employees receive a 25% cost of living 
adjustment. It is also interesting to note that the same standards are 
applied everywhere in the continental United States despite the fact 
that personal living expenses vary widely. For example, contrast the 
personal living expenses of a New York City resident with those of a 
Des Moines resident. It is clear that the New Yorker would face 
significantly higher costs yet the tables do not reflect any 
differential.
    2. Local Standards: Local standards have been established for 
housing and transportation. The IRS has established a housing category 
for each county in the United States. Housing standards, which include 
utilities, are extremely parsimonious. However, when applying the local 
housing standards, the IRS employee is allowed to consider other 
factors that might justify an expense in excess of the local housing 
standard including, for example:

    1. The increased cost of transportation to work and school which 
would result from moving to lower cost housing;
    2. The tax consequences that would result from selling a home;
    3. The tax consequences which would result from moving from an 
owned home to a rented home, and
    4. The cost of moving to a new residence.\1\
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    \1\ Internal Revenue Manual 5.15.1.3.2.2.2.

    In practice, it is rare that IRS employees will deviate from the 
tables. The tables impose particular hardships on young families 
because they are based upon averages and include homeowners whose homes 
were acquired years ago and have low mortgage payments.
    Transportation standards are established for regions with 
additional amounts allowed for particular metropolitan areas. The IRS 
Tables set the standards for amounts to be allowed for car purchase and 
lease, repairs, insurance, maintenance and fuel.\2\ These amounts are 
inadequate. For example, in the Washington, D. C. area the IRS allows 
$55 per month for a second vehicle. A family with teenage drivers would 
have insurance costs alone that would exceed $55 per month.
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    \2\ Internal Revenue Manual 5.15.1.3.2.2.
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    3. Reasonableness Standards: IRS collection employees may allow 
other expenses if believed to be necessary and reasonable in amount. 
Because there are no national or locally established standards for 
determining reasonable amounts, the IRS employee is given discretion to 
determine whether an expense is necessary and the amount is 
reasonable.\3\
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    \3\ Internal Revenue Manual 5.15.1.3.
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    None of the standards provides properly for the economic needs of 
the average family. Taxpayers are essentially told to live below a 
subsistence level. Moreover, because the standards are based on data 
for periods a year or more before the time of negotiation, they 
invariably fail to reflect current average costs.

C. Conditional Expenses

    Conditional Expenses, which include excessive Necessary Expenses, 
are taken into account if the taxpayer has the ability to pay the tax 
liability, including projected accruals, within five years. In 
addition, the taxpayer has up to one year to modify or eliminate 
unallowable Conditional Expenses if the tax liability, including 
projected accruals, cannot be fully paid within five years. By way of 
example, if a taxpayer's car payment exceeded the standards by $100, 
that expense would have to be eliminated within one year. In practice, 
most taxpayers have many expenses that exceed the tables and reducing 
all of them is usually not possible.

D. Other Necessary Expenses

    The IRS standards for Other Necessary Expenses are quite strict and 
lack flexibility.\4\
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    \4\ (1) In addition to those listed under the National and Local 
Standards, certain other expenses are usually considered to be 
necessary.
      (a) taxes,
      (b) health care,
      (c) court-ordered payments,
      (d) involuntary deductions,
      (e) accounting and legal fees for representing a taxpayer before 
the IRS,
      (f) secured or legally perfected debts (minimum payments), and
      (g) accounting and legal fees other than those for representing a 
taxpayer before the IRS which meet the necessary expense test of health 
and welfare and/or production of income.
    (2) Depending upon individual circumstances, other expenses may 
meet the necessary expense test: health and welfare and/or production 
of income.
    (3) A taxpayer may be required to substantiate the amounts and 
justify these expenses as necessary. Unless the tax liability will be 
fully paid, including projected accruals, within five years, expenses 
must be reasonable in amount. Expenses include, but are not limited to:
      (a) childcare,
      (b) dependent care: elderly, invalid, or disabled,
      (c) secured or legally perfected debts,
      (d) life insurance,
      (e) charitable contributions,
      (f) education,
      (g) disability insurance for a self-employed individual,
      (h) union dues,
      (i) professional association dues;
      (j) accounting and legal fees other than those for representing a 
taxpayer before the IRS which meet the necessary expense test of health 
and welfare and/or production of income, and
      (k) optional telephone services (call waiting, caller 
identification, etc.) or long distance calls, if they meet the 
necessary expense test of health and welfare and/or production of 
income.
    (4) The last two listed expenses are frequently encountered: 
charitable contributions and education.
      (a) Charitable contributions. These expenses include donations to 
tax exempt organizations such as civic organizations, religious 
organizations (tithing and educational), and medical services or 
associations. To be necessary, charitable contributions have to provide 
for a taxpayer's or his or her family's health and welfare or be a 
condition of employment. Otherwise, they are conditional and allowable 
only if the tax liability, including projected accruals, can be paid 
within three years.
      (b) Education. To be a necessary expense, a taxpayer must 
demonstrate that:
        1. the education is for a physically or mentally handicapped 
dependent and must demonstrate that such education is not otherwise 
provided by public schools: or
        2. the education is a condition of employment. [IRM 
5.15.1.3.2.3]
    (5) The expenses listed in IRM 5.15.1.3 do not exhaust the category 
of necessary expenses. Other expenses may be considered if they meet 
the necessary expense test: health and welfare and/or the production of 
income.
    (6) If other expenses are determined to be necessary and, 
therefore, allowable, the case history must be documented providing the 
reasons for the decision.

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E. Unsecured Debts

    The taxpayer's payment of unsecured debts generally does not 
qualify as a Necessary Expense unless the expense is necessary for the 
production of income or is in settlement of a credit enforcement 
action. The IRS standards have forced many taxpayers to file for 
Chapter 13 bankruptcy protection in order to secure reasonable 
repayment terms.

F. Excessive Necessary and Conditional Expenses Incurred after Assess-
ment of Tax Liability

    The IRS takes the position that it will not take into account any 
Conditional Expense or Excessive Necessary Expense incurred after the 
assessment of a tax liability. IRS employees are instructed that in 
such instances consideration of enforcement against the post-assessment 
assets or not allowing the expenses in an installment agreement may be 
appropriate. The IRS employee has the authority, however, to make 
exceptions to the five-year rule \5\ and in unusual situations the IRS 
can choose to allow Conditional Expenses even if the liability, 
including projected accruals, cannot be paid within five years. In 
practice, very few IRS employees have seen fit to exercise this 
authority to vary from the five-year rule.\6\
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    \5\ Internal Revenue Manual 5.15.1.3.2.2.
    \6\ Internal Revenue Manual 5.15.1.3.3.1.4.

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G. Results of IRS Policies

    As a result of the restrictive allowable expense standards and the 
inflexible application of these standards by the IRS, taxpayers are 
forced to make difficult decisions that undermine the effectiveness of 
the OIC program.
    A clear indicator of the failure of the IRS to follow the 
legislative mandate to liberalize the offer program are the following 
statistics on accepted offers:



                                           2001               2002

Number of offers in compromise                    125                124
 received (thousands)
Number of offers in compromise                     39                 29
 accepted (thousands)
Amount of offers in compromise                340,778         \7\300,296
 accepted (thousand dollars)



    The IRS revised offer program introduced in 2001 has resulted in 
over a 25% reduction in accepted offers. Notwithstanding IRS denials to 
the contrary it has established a program which results in the denial 
of many appropriate offers.
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    \7\ IRS 2002 Data Book
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    The IRS should revisit its standards in order to have a more 
realistic approach to family needs. The standards for personal expenses 
should provide for regional variances in expenses. Taxpayers should be 
allowed to account for legal obligations in their budgets. IRS 
personnel should exhibit more flexibility in applying the standards.
    In the case of offers in compromise, IRC  7122(c)(2)(B) now 
provides that, in applying its standards, the IRS ``shall determine, on 
the basis of the facts and circumstances of each taxpayer, whether the 
use of the schedules--is appropriate and shall not use the schedules to 
the extent such use would result in the taxpayer not having adequate 
means to provide for basic living expenses.'' \8\ In practice, the IRS 
rarely deviates from its schedules. The IRS should be directed to 
comply with the provisions of IRC  7122(c) and rely more extensively 
on the application of individual facts and circumstances. A more 
flexible policy in this regard would result in more successful offers 
in compromise and, thus, increase collection revenues.
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    \8\ IRC  7122(c) Standards for evaluation of offers.
      (1) In general.
        The Secretary shall prescribe guidelines for officers and 
employees of the Internal Revenue Service to determine whether an 
offer-in-compromise is adequate and should be accepted to resolve a 
dispute.
      (2) Allowances for basic living expenses.
        (A) In general. In prescribing guidelines under paragraph (1), 
the Secretary shall develop and publish schedules of national and local 
allowances designed to provide that taxpayers entering into a 
compromise have an adequate means to provide for basic living expenses.
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    We also propose that IRC  6159 be amended to adopt language 
similar to  7122(c) for installment agreements. The IRS should be 
required to review the facts and circumstances of each taxpayer when 
considering an installment agreement. The current application of the 
standards has caused adverse results, including forced bankruptcies, 
increased default rates on installment agreements and hardships to 
taxpayers attempting to pay their tax debts. We believe that greater 
IRS flexibility in this regard will increase collection rates for 
delinquent taxes.

                         V. Other Problem Areas

A. Abuse of Collection Due Process by Tax Protestors

    The 1998 Reform Act granted new rights to taxpayers with respect to 
IRS collection procedures. Specifically, taxpayers now have the right 
to request a hearing before levy action is taken against the 
taxpayer.\9\ Taxpayers are also provided with a hearing after a federal 
tax lien is placed on their property. These collection due process 
(``CDP'') hearings are designed to ensure that the collection actions 
proposed to be taken against the taxpayer are reasonable, and that the 
IRS has fully complied with all statutory and procedural collection 
requirements.
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    \9\ I.R.C.  6320 and 6330.
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    While CDP hearings have helped to usher in a new era in IRS-
taxpayer relations, and are designed to promote a higher quality of 
service, they have also contributed to a decline in collection 
expediency because (i) they have placed greater demands on decreased 
IRS staff, and (ii) some taxpayers have intentionally used them as 
tools to delay collection frivolously. Current statutory and/or 
administrative provisions should be amended to decrease the number of 
unnecessary and frivolous CDP hearings.
    CDP hearings are conducted by the IRS Appeals Division. This past 
year, approximately 30,000 new CDP cases reached Appeals, and 
collection cases now account for half of Appeals' workload.\10\ Under 
the existing statute, the IRS must grant a CDP hearing if the taxpayer 
submits a timely written request for a hearing.\11\ This means that a 
taxpayer cannot be denied a hearing based on issues that he or she 
intends to raise--even frivolous arguments challenging the Federal 
Government's authority to levy and collect income taxes (i.e., ``tax 
protestors''). The IRS currently instructs its Appeals employees that 
it is not appropriate to deny a CDP qualified taxpayer a hearing 
because the only issues they raise are frivolous or otherwise do not 
qualify for consideration.\12\ Moreover, Appeals must grant a face-to-
face hearing, even to a tax protestor, if one is requested.\13\
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    \10\ See ``Bogged Down With Collection Cases, IRS Appeals Is Hot on 
Fast Track,'' 2002 TNT 211-2 (Oct. 31, 2002) (summarizing comments of 
IRS Appeals Chief David S. Robison made at AICPA's Fall Tax Division 
Meeting in Washington, D.C.).
    \11\ I.R.C.  6320 and 6330; Treas. Reg.  301.6330-1(d).
    \12\ I.R.M.  8.7.2.3.3 (11-13-2001).
    \13\ Treas. Reg.  301.6330-1(d), Q-D7; I.R.M.  8.7.2.3.3 (11-13-
2001) (making an exception only for potentially dangerous taxpayers).
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    Because Appeals does not have any discretion to deny CDP hearings, 
it is forced to process tax protestor cases that serve only to 
frustrate IRS collection efforts and to delay other taxpayers' cases. 
Invariably, tax protestors seek judicial review of Appeals' 
determination of their case. Although courts have willingly upheld the 
imposition of penalties in response to such frivolous arguments, they 
have not been able to prevent tax protestors from misusing and bogging 
down the judicial process.\14\
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    \14\ See, e.g., Pierson v. Commissioner, 115 T.C. 576 (2001); 
Davidson v. Commissioner, 84 TCM 156 (2002); Lemieux v. United States, 
2002-2 USTC  50,220 (D.C. Nevada 2002).
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    Reducing the impact of the frivolous use of collection due process 
has been a strategic goal of the IRS for more than a year.\15\ 
Accordingly, legislation should be passed that would provide statutory 
authority to deny requests for CDP hearings that are based on frivolous 
arguments. Legislation is currently pending which would permit the IRS 
to treat portions of CDP hearing requests based on frivolous positions 
(to be defined and listed periodically by the IRS) as never having been 
submitted, and would deny administrative or judicial review of such 
portions.\16\ Additionally, this legislation would preclude a taxpayer 
from raising frivolous issues at a CDP hearing.\17\ The passage of such 
legislation would be a step toward ensuring that collection due process 
serves the purpose originally intended by the 1998 Reform Act. However, 
we have some concern about granting the IRS unfettered discretion to 
determine when a position is frivolous. Consideration should be given 
to requiring that a ``reasonable basis'' (as described in Treas. Reg. 
sec. 1.6662-3(b)(3)) support any taxpayer request for a CDP hearing.''
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    \15\ See, e.g., JCS-2-02, Joint Review of the Strategic Plans and 
Budget of the Internal Revenue Service, as Required by the Internal 
Revenue Service Restructuring and Reform Act of 1998, (May 8, 2001) 
(containing a statement by Commissioner Charles O. Rossotti that he 
would like the collection provisions of RRA 1998 to be changed).
    \16\ See Tax Administration Reform Act of 2002, H.R. 5728, 107th 
Cong.  307.
    \17\ Id.
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    Short of legislation that denies CDP hearings based on frivolous 
positions, Treasury and the IRS should consider promoting legislative 
efforts that would amend the statute to deny further judicial or 
administrative review of Appeals determinations with respect to CDP 
hearings in which frivolous positions are advanced. Likewise, the Tax 
Court could be granted jurisdiction to enjoin further frivolous claims, 
and new criminal penalties could be enacted for application to 
taxpayers who have repeatedly requested CDP hearings based on frivolous 
positions and/or who have repeatedly advanced frivolous positions 
during CDP hearings. Additionally, legislation should be passed to 
specifically deny face-to-face hearings to tax protestors. Such a 
provision would still allow Appeals to process these types of cases 
more efficiently, and it would be consistent with Appeals' practice of 
terminating CDP hearings in situations where a taxpayer persists in 
raising frivolous issues.\18\
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    \18\ I.R.M.  8.7.2.3.3 (11-13-2001).
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    Administrative measures might also be implemented in this area. For 
example, Treasury should consider amending the regulations to deny tax 
protestors the right to request an ``equivalent hearing,'' which is a 
hearing that is available to taxpayers who have failed to timely 
request a CDP hearing.\19\ Equivalent hearings are not required by 
statute and, therefore, administrative action alone may be taken to 
deny their availability to tax protestors. Furthermore, the IRS should 
develop a policy of prioritizing or fast-tracking frivolous CDP hearing 
requests. These claims should receive expedited consideration by 
Appeals and be promptly rejected using appropriate standard language.
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    \19\ Treas. Reg.  301.6330-1(i).

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B. Priorities on Collection: Trust Fund Taxes

    The next issue is the priority being given to collection of trust 
fund taxes. This issue involves employers who fail to pay over to the 
IRS the employment taxes which they withhold from employees' wages.
    This is a critical enforcement priority but, in practice, we find 
that enforcement is frequently tardy and relatively ineffective. 
Perhaps more importantly, this is an area in which the announced, and 
often widely publicized, refusal of certain employers to withhold and 
pay over these taxes encourages tax non-compliance and disrespect for 
the tax system.
    Our system of payroll taxes serves a double function: it supports 
the revenue needs of our government, while simultaneously funding 
health and welfare benefits for broad segments of our society under the 
Medicare and Social Security programs. While enforcement of individual 
income tax liabilities will always be important, in a practical world 
in which competing claims for enforcement resources must be weighed and 
reconciled, we believe that the continued failure by the IRS to enforce 
payroll tax obligations aggressively is fundamentally detrimental to 
our tax system. In aggressively seeking to enforce employment tax 
obligations, however, the IRS must ensure that it carefully determines 
which employees may be personally liable for the penalties associated 
with the enforcement action.

C. Treatment of Nonfilers

    Another perennial problem is nonfilers, taxpayers who simply do not 
file tax returns. Since 1979, the General Accounting Office has issued 
at least three studies, and one report to Congress, dealing with the 
nonfiler problem.\20\ The GAO studies provide the following 
recommendations to improve filing compliance:
---------------------------------------------------------------------------
    \20\ See ``Internal Revenue Service--Results of Nonfiler Strategy 
and Opportunities to Improve Future Efforts,'' GAO/GGD-96-72 (May, 
1996); ``Tax Administration--Improving IRS's Business Nonfiler 
Program,'' GAO/GGD-89-39 (March, 1989); ``Tax Administration--IRS Could 
Reduce the Number of Unproduced Business Nonfiler Investigations,'' 
GAO/GGD-88-77 (May, 1998); and ``Report to the Congress--Who's Not 
Filing Income Tax Returns? IRS Needs Better Ways To Find Them And 
Collect Their Taxes,'' GGD-79-69 (July 11, 1979).

     The IRS should contact delinquent taxpayers as soon as 
possible to get returns filed and to prevent delinquency over a number 
of years.
     The IRS should consider using non-audit personnel to 
``man the phones'' to follow up with delinquent taxpayers.
     The IRS should develop a better statistical model to 
identify nonfiling situations and to use information obtained from 
various state agencies and other information sources more effectively 
to identify and track nonfilers.
     The IRS should allocate sufficient funds and personnel to 
the nonfiler issue on an on-going basis.

    About a decade ago, the IRS tried a new approach to this problem by 
instituting its ``Nonfiler Initiative,'' intended to get nonfilers back 
into compliance.\21\ The basic feature of the program was to allow 
taxpayers to file delinquent returns in exchange for the assurance that 
no criminal prosecutions would occur. In addition, the IRS told 
taxpayers that people who could not pay their outstanding liabilities 
would be allowed to enter into installment agreements, or that the 
liabilities might be reduced or eliminated under the offer-in-
compromise program. The IRS was successful in obtaining the help of 
outside tax professionals who volunteered their time to help with the 
preparation of delinquent tax returns.
---------------------------------------------------------------------------
    \21\ See ``IRS Reaches Out To Bring Nonfilers Back Into The Tax 
System, IR-News Rel., 1992-94 (September 30, 1992); and ``IRS Says 
Nonfilers Who Come Forward Are Not Prosecuted,'' IR-News Rel., 1992-114 
(December 7, 1992).
---------------------------------------------------------------------------
    The Nonfiler Initiative ran from 1993 through mid-1995. The program 
was a success because it (1) reduced the size of the nonfiler 
inventory; (2) eliminated unproductive cases; and (3) increased the 
number of returns secured from individual nonfilers. The GAO, however, 
had concerns about the results of the program because (1) the IRS had 
not set a goal for the number of nonfilers it wanted to bring into 
compliance; (2) the IRS had not prepared a plan to prevent recidivism 
of nonfilers; and (3) the IRS had not prepared a cost-benefit analysis 
with respect to the results achieved.
    Anecdotal evidence indicates that public perception of the program 
was mixed. Seriously delinquent taxpayers were brought into compliance, 
at least temporarily. In addition, a number of states instituted their 
own Nonfiler Initiative that helped increase state tax revenue. The 
Nonfiler Initiative did not provide, however, for a blanket waiver of 
either interest or penalties. As a result, a number of taxpayers 
decided not to enter into the program because of the significant tax 
bill that would clearly result.
    Where are we today? In 2001, the IRS issued roughly 1.4 million 
notices to nonfilers,\22\ and it made assessments totaling roughly $1.9 
billion with respect to substitute returns prepared on account of 
nonfilers.\23\ In addition, the IRS has once again identified nonfilers 
as a significant problem. The IRS website indicates that ``IRS has 
implemented a `multifunctional, comprehensive effort called the 
National Nonfilers Strategy.' The overall goal of the strategy is to 
bring taxpayers back into compliance and keep them there.''
---------------------------------------------------------------------------
    \22\ See ``Internal Revenue Service--2001 Data Book'' (September 
30, 2001) at Table 25.
    \23\ Id.
---------------------------------------------------------------------------
    To help preserve the integrity of our tax system, it is essential 
that the IRS undertake serious efforts to bring nonfilers into 
compliance. This is especially true considering that many taxpayers now 
believe that the IRS has become a ``paper tiger,'' and that failure to 
file one's tax return will not bring serious repercussions. We strongly 
recommend that the Oversight Subcommittee indicate its full support for 
any Nonfiler Initiative that the IRS may undertake. Moreover, we fully 
support any legislative or administrative proposal that:

     Increases funding which directly supports the IRS's 
Nonfiler Strategy.
     Increases trained personnel whose sole job is to identify 
and work with nonfilers.
     Develops statistical models and other information sources 
that will help to identify and track nonfilers.
     Develops methods to track and handle repeat nonfilers.
     Expands the ``substitute-for-return'' program, and 
institutes a ``refund hold'' program for habitual non-filers until all 
returns are brought current.
     Increases use of criminal prosecution with a dynamic 
publicity campaign. Considers another voluntary ``Nonfiler Initiative'' 
that will allow abatement of penalties and/or interest before 
implementing enforcement measures.

D. Repeat Abusers of the System

    Many repeat delinquent taxpayers create new tax debts after being 
allowed to repay prior obligations. The IRS uses a scoring system for 
field collection efforts, and we believe that more emphasis should be 
placed on aggressively pursuing collection from repeaters. In the case 
of trust fund repeat delinquencies, the IRS should place the highest 
priority on field contact. The IRS Automated Collection System is ill-
equipped to deal with sophisticated delinquent trust fund liabilities 
whereas Revenues Officers have the skills to intervene to stop new 
liabilities. The IRS should also consider requiring repeaters to file 
returns monthly, not quarterly.\24\
---------------------------------------------------------------------------
    \24\ IRC Sec. 7512

---------------------------------------------------------------------------
E. Collection Outsourcing

    It is our understanding that the IRS is considering the use of 
private vendors to assist in the collection process. We believe that 
this idea warrants additional study and consideration. We would note 
however, that paying vendors a percentage of collections appears to be 
inconsistence with the prohibition of collection statistics in the 1998 
Revenue Reconciliation Act.\25\ That provision was passed by Congress 
to prevent abusive conduct by IRS employees. A private system that 
rewards and encourages aggressive collection activities by private 
collectors may only revive the abusive conduct which gave rise to the 
protections passed in 1998. Some of our members have related abuses by 
private collectors hired by state tax agencies. We therefore recommend 
that private collection agencies be hired if studies find that the 
bounty incentives inherent in private collection efforts can be 
reconciled with taxpayer protection and rights.
---------------------------------------------------------------------------
    \25\ Sec. 1204 Revenue Reconciliation Act, This section repeals an 
earlier statute which prohibited the Service from using records of tax 
enforcement results to (1) evaluate employees directly involved in 
collection activities or their immediate supervisors; and (2) impose or 
suggest production quotas or goals upon employees described in (1) 
above. The new section keeps those prohibitions but expands them to 
include ``employees''--not just those directly involved in collection 
activities. Additionally, this section expands the certification 
requirements by requiring ``appropriate'' supervisors to certify 
compliance with the law. The earlier law required only the District 
Directors to certify compliance. Finally, this section requires that 
the Internal Revenue Service use the fair and equitable treatment of 
taxpayers by employees as one of the standards for evaluating employee 
performance. As described above, the new law expands the prohibitions 
on the use of records of tax enforcement results to ``employees,'' no 
longer limiting the prohibitions to those directly involved in 
collection activities. Similarly, the new law imposes a certification 
of compliance requirement upon all ``appropriate'' supervisors, not 
just District Directors as in the earlier law. Finally, it requires 
that the fair and equitable treatment of taxpayers be a standard for 
evaluating employee performance.

---------------------------------------------------------------------------
F. Inadequate Training of IRS Employees

    Many of our members have expressed concern that collection 
employees are not being trained to the standards observed in prior 
decades. Controversies often arise merely because inadequately trained 
collection employees do not follow the Internal Revenue Manual. Greater 
resources should be dedicated to providing quality continuing 
professional education to IRS employees. As a related matter, we 
believe that the IRS should consider raising the standards for initial 
employment. Raising the hiring standard, over time, will raise the 
quality and efficiency of IRS collection efforts.
                                 ______
                                 
    I hope that the foregoing observations and suggestions are helpful 
to the Oversight Subcommittee in discharging its important 
responsibilities. Other representatives of the ABA Tax Section and I 
would be happy to meet or otherwise communicate with Subcommittee 
members in order to further discuss these views or any other matter on 
which our input might be considered helpful.

                                 

    Chairman HOUGHTON. Thank you very much, Mr. McKenzie. Mr. 
McCormally?

STATEMENT OF J.A. (DREW) GLENNIE, INTERNATIONAL PRESIDENT, TAX 
EXECUTIVES INSTITUTE, INC., AS PRESENTED BY TIMOTHY MCCORMALLY, 
       EXECUTIVE DIRECTOR, TAX EXECUTIVES INSTITUTE, INC.

    Mr. MCCORMALLY. Thank you, Mr. Chairman, Members of the 
Subcommittee. I am Timothy McCormally, Executive Director of 
TEI. Our International President, Drew Glennie, had flown to 
Washington yesterday from Calgary to testify today, but is 
unable to be here due to illness.
    The TEI is an international organization of 5,300 
individuals who work in the tax departments of 2,800 companies 
in the United States, Canada, and Europe. I am accompanied 
today by our General Counsel, Fred Murray.
    The TEI is pleased to be here today to speak on three 
general topics. First, efforts of the IRS to implement 
effective enforcement strategies. Second, the IRS's budget for 
fiscal year 2004. Finally, some tax administration issues that 
are present in the budget and in pending legislative bills.
    Mr. Chairman, for enforcement to succeed, the law must be 
clear because the ability to understand the law and to comply 
with it in an efficient fashion is a critical component of our 
tax system. Current law is marked by many ambiguous provisions 
that often produce unintended consequences, and we urge 
Congress and the Department of the Treasury to continue their 
efforts to simplify and clarify the law, both statutorily and 
administratively.
    In this regard, TEI commends the Department of the Treasury 
and the IRS for their efforts through the use of de minimis 
rules and safe harbors in recent regulations relating to the 
capitalization of expenditures. The consultative process that 
the government used in this case produced a good product and 
should be encouraged.
    An effective enforcement strategy also depends on a 
committed, well trained, and stable workforce. It is not enough 
just to announce new procedures from the national office in 
Washington. There must be buy-in and training in the field, and 
as Ms. Williams pointed out, qualified individuals must be 
recruited to replace the many seasoned agents who will be 
retiring in a few years.
    Both the IRS and taxpayers have a common goal in completing 
audits in a timely and efficient manner, and we commend the IRS 
and specifically the Large and Mid-Size Business (LMSB) 
Division for several innovative procedures, including fast-
track settlement, accelerated issue resolution, and limited 
issue focused examinations. These programs will improve the 
examination process and promote currency. The increased 
attention on front-end activities can reduce contentious audits 
and expensive litigation.
    As business executives, TEI Members know how critical it is 
to invest in and plan for the future, and it is important that 
there be adequate resources devoted to core functions such as 
customer service and employee training. We applauded the IRS's 
decision, Congress's decision, to have the IRS restructured 
along taxpayer oriented service lines. Much has been 
accomplished under the modernization effort, but as you already 
heard and you already knew, much remains to be done. If the IRS 
is to continue its efforts to improve its credibility and 
effectiveness, the agency must have adequate resources for its 
programs.
    We believe the agency has made substantial progress in 
dealing with its management systems and other aspects of its 
operations, but this Subcommittee and Congress and all of us in 
the private sector must remain vigilant to monitor the 
progress. Critical systems, particularly those involving 
individual and business taxpayer master files, must be 
delivered successfully, on time, and within prescribed budget.
    We are encouraged that the President has nominated Mark 
Everson to be Commissioner of the IRS and are hopeful that the 
modernization effort will continue to progress under his 
tenure.
    Money and stability are also required for the agency to 
recruit, train, and retain qualified individuals. In the LMSB 
Division, which we are most familiar with, 46 percent of the 
workforce is eligible to retire or will be eligible to retire 
within the next 3 years. In 2001, 5.3 percent of the workforce 
did retire.
    Mr. Chairman, you have heard today certain concerns 
expressed by Mr. McKenzie and others about proposals to use 
private firms to collect Federal taxes. The TEI recognizes that 
the IRS must move to effectively resolve collection issues, and 
we share the Administration, the Chairman, and other Members' 
concerns about the level of uncollected taxes. Moreover, we 
commend the sensitivity to privacy and confidentiality issues 
that has led to the presence in many proposals of sound 
safeguards.
    Nevertheless, TEI believes that the better approach is to 
provide the IRS with sufficient resources to perform its core 
governmental duties in an efficient manner. Private collection 
agencies should generally not be used to perform core 
governmental functions. If, however, these proposals go 
forward, TEI believes it is imperative that the legislation 
adopt safeguards of taxpayer rights, particularly in respect of 
any lien and levy powers delegated to outside parties. Like Mr. 
McKenzie and the ABA, we have significant reservations about 
basing compensation on the amount of tax collected.
    Mr. Chairman, last summer, Senator Grassley inquired 
whether consideration should be given to the disclosure of 
corporate tax returns, both to the public and to the Securities 
and Exchange Commission (SEC). The disclosure proposal 
engendered serious discussions within Congress, the business 
community, and the public at large, and we understand that the 
Department of the Treasury and the SEC have voiced concerns 
about the proposal.
    For our part, TEI believes that the proposals go in the 
wrong direction. Confidentiality of tax return information is a 
key privacy right that should be vindicated because it is the 
cornerstone of voluntary compliance.
    We similarly have questions about proposals to require the 
chief executive officer (CEO) of companies to sign corporate 
tax returns. In our view, this proposal would adversely affect 
tax administration. The tax affairs of major corporations are 
extraordinarily complicated and their management is routinely 
delegated to the chief tax officer, someone who has been 
specially trained. The proposal that has been recommended would 
force companies to devote substantial time and resources to 
educating CEOs about the intricacies of the company's tax 
affairs, which in our view would distract them from more 
important items, including company and strategic vision and the 
overarching issues of corporate governance and accountability.
    Finally, Mr. Chairman, I wish to reiterate TEI's support 
for and our appreciation to you and others on the Committee, 
including Mr. Portman, for your efforts to advance the goal of 
tax simplification. As I mentioned at the beginning, for the 
law to be effectively enforced, it must be understood. We 
understand that budget pressures and other concerns may impede 
progress on broad simplification proposals, but we remain eager 
to work with you and your staff to achieve whatever we can.
    In this regard, I would note that TEI continues to believe 
that fundamental reform and simplification could occur by 
eliminating completely the individual and corporate alternative 
minimum tax.
    I would be happy to answer any questions you have about any 
statements I made here or in the written testimony. Thank you.
    [The prepared statement of Mr. Glennie follows:]

    Statement of J.A. (Drew) Glennie, International President, Tax 
    Executives Institute, Inc., as presented by Timothy McCormally, 
           Executive Director, Tax Executives Institute, Inc.

    Mr. Chairman, and distinguished Members of the Subcommittee:
    Good morning. I am Drew Glennie, General Manager--Tax and Insurance 
for Shell Canada Limited. I appear today as the International President 
of Tax Executives Institute, the preeminent association of business tax 
professionals. I am accompanied by the Institute's Executive Director, 
Timothy McCormally, and by our General Counsel and Director of Tax 
Affairs, Fred Murray. The Institute is pleased to participate in this 
hearing.

                               Background

    Tax Executives Institute was established in 1944 to serve the 
professional needs of in-house tax practitioners. Today, the Institute 
has 53 chapters in the United States, Canada, and Europe. Our 5,300 
members are accountants, attorneys, and other business professionals 
who work for 2,800 of the largest companies in North America and 
Europe; they are responsible for conducting the tax affairs of their 
companies and ensuring their compliance with the tax laws. Hence, TEI 
represents the business community as a whole, and our members deal with 
the tax code in all its complexity, as well as with the Internal 
Revenue Service, on almost a daily basis. TEI is dedicated to the 
development and effective implementation of sound tax policy, to 
promoting the uniform and equitable enforcement of the tax laws, and to 
reducing the cost and burden of administration and compliance to the 
benefit of taxpayers and government alike.
    The companies that employ TEI's members have almost without 
exception been assigned to the IRS's Large and Mid-Size Business (LMSB) 
Division. The largest 1,600 taxpayers within LMSB are subject to 
ongoing audits as part of the Coordinated Industry Case (CIC) program. 
The Institute's testimony is largely based upon our experience with 
this segment of IRS operations.
    We are pleased to offer our views on the enforcement challenges 
within LMSB, the IRS Budget for Fiscal Year 2004, the use of private 
collection agencies for collection of federal taxes, proposals 
regarding disclosure of corporate tax returns and requiring CEOs to 
sign income tax returns, and simplification of the complex tax system 
and its effects on our system of tax administration.

          The Components of an Effective Enforcement Strategy

    A successful enforcement strategy has the following 
characteristics:

     Clarity. The ability to understand the tax law--and to 
comply with it in an efficient fashion--is a critical component of an 
effective tax system. Taxpayers must understand their responsibilities 
and commit resources to comply with the law in as efficient a manner as 
possible. Sadly, the current law--which is marked in many cases by 
complex, ambiguous provisions that often may produce unintended 
consequences--leaves much to be desired. We recognize that true 
simplification begins with the Internal Revenue Code which we address 
below, but there are ways in which the law can be made simpler by the 
IRS. For example, the Treasury and IRS are to be commended for the 
inclusion of de minimis rules and safe harbors in the recent 
regulations on the capitalization of expenditures. We also believe the 
consultative process used by the government before issuing the proposed 
regulations--last year the government used an advance notice to invite 
comments on a broad range of issues--will produce.
     Confidence. Taxpayers must have confidence in the 
integrity of the tax system. The law must be applied evenhandedly, and 
taxpayers must believe that no one is getting a better ``deal'' upon 
audit. An effective enforcement strategy must be equitable and ensure 
that similarly situated taxpayers are being treated alike.
     Competence and Continuity. An effective enforcement 
strategy also depends upon a committed, well-trained, and stable 
workforce. It is not enough to announce new procedures and policies 
from the National Office; there must be buy-in from the field to make 
the policies work. In addition, field personnel must know and 
understand the tax law and how it relates to the businesses they audit. 
Qualified individuals must also be recruited to take the place of the 
many seasoned agents who will be retiring over the next few years.
     Currency. TEI's members generally work for companies that 
are under continual audit by the IRS. Both the taxpayer and the IRS 
have a common goal of completing these audits in a fair, timely, and 
efficient manner. Several innovative procedures--such as Fast Track 
Mediation and Settlement, Accelerated Issue Resolution, Early Referral 
to Appeals, and Limited Issue Focused Examination--have been introduced 
in the last two years to improve the examination process and promote 
currency. An effective enforcement strategy must promote the efficient 
use of government and taxpayer resources during the course of an audit. 
The lack of currency in audits creates significant recordkeeping 
burdens for taxpayers. If taxable years are closed in a timely manner, 
there is less need to retain records relating to those years.

             Implementing an Effective Enforcement Strategy

    LMSB has shown a refreshing openness to trying new and different 
ways of doing business. More than a year ago, the division announced 
several ``pre-filing'' initiatives, emphasizing the need to resolve 
issues before a return is filed. This increased attention on ``front-
end'' activities--by the use of pre-filing agreements and industry 
issue resolution techniques--potentially could reduce contentious 
audits and prolonged litigation.
    In order to substantially complete its change in focus from post-
filing to pre-filing activities, the IRS must improve the currency of 
its audits. Thus, we are pleased with LMSB's recent announcement of its 
limited issue focused examination or ``LIFE'' initiative. It is an 
innovative process to focus government and taxpayer resources on the 
most significant issues on a taxpayer's return. The new initiative 
requires the execution of a formal memorandum of understanding between 
the taxpayer and the IRS that will govern key aspects of the 
examination, including the imposition of a dollar threshold on a case-
by-case basis below which issues will not be raised.
    The use of materiality standards in examinations is an approach 
that TEI has long supported, and we commend LMSB for thinking outside 
the box to resolve the significant backlog of cases within the 
division. The LIFE initiative holds great promise for creating an 
atmosphere where the examination process is less time-consuming and 
more efficient for all parties.
    As the IRS has acknowledged, the new approach represents a major 
culture shift for LMSB. Critical to its success is the involvement--and 
training--of IRS field personnel. Without a commitment from the 
examination team and their supervisors, the new procedure could well be 
viewed as the latest ``flavor of the week,'' i.e., a mere reworking of 
other initiatives without an underlying change in philosophy. Reports 
from our members seem to indicate that not all specialists are yet on 
board with the new approach. However, we understand that LMSB has begun 
training its agents in the new process and remain hopeful that the LIFE 
process will succeed in institutionalizing ``best practices'' for IRS 
examinations and providing consistency in the treatment of taxpayers.
    Other innovative approaches to resolving issues may be found in 
IRS's use of new settlement initiatives. In October, the IRS announced 
proposed settlement options in three groups of tax shelter cases: 
corporate-owned life insurance (COLI), section 302/318 basis-shifting 
transactions, and contingent liability transactions. These cases have 
the potential for clogging the tax system, consuming undue resources, 
and preventing LMSB from making progress on other important issues.
    The three initiatives offered taxpayers an opportunity to settle 
these issues in a timely manner and were intended to bring the cases to 
a comprehensive resolution, based on the IRS's assessment of the 
strength and weaknesses of its legal positions. Although some may 
disagree with that assessment, the process demonstrates a willingness 
to let taxpayers resolve a contentious issue and move on. We 
understand, for example, that the COLI initiative has resulted in the 
resolution of nearly all outstanding cases. We understand that the IRS 
is working on settlement options for several other transactions and we 
encourage the agency to continue its undertaking to resolve issues on a 
wholesale, rather than a ``retail'' or case-by-case, basis.

         Possible Barriers to an Effective Enforcement Strategy

The IRS Budget for Fiscal Year 2004

    One barrier to implementing an effective enforcement strategy is 
the lack of adequate and reliable funding. As the preeminent 
association of business tax executives, TEI knows how critical it is to 
invest in and plan for the future. Our members know the importance of 
sound business processes and strict internal controls. Equally 
important, the companies represented by TEI's membership know that to 
be successful, they must plan ahead and ensure that adequate resources 
are devoted to core functions such as customer service and employee 
training. As a group, they applauded the decision to restructure the 
IRS to operate more like a business and to adopt a more taxpayer-
oriented service focus.
    The IRS's previous attempts at major technological modernization 
have not been successful. As a consequence, American taxpayers have had 
to endure customer service that has been less effective than it should 
be, and significant amounts of taxes that could have been collected 
were not. This failure to modernize has operated as an indirect tax 
increase on compliant taxpayers. Taxpayers trying to pay their taxes 
and IRS personnel trying to do their jobs have had to work with systems 
that are inadequate and seriously out of date. The current 
modernization effort is the most far-reaching yet, and at the five-year 
mark is approximately one-half of the way through the original planning 
horizon.
    If the IRS is to continue its efforts to improve the agency's 
credibility and effectiveness, the agency must be assured that the 
programs needed to implement its mission will be fully and consistently 
funded. Much has been accomplished under the IRS Restructuring and 
Reform Act, but much remains to be done. We recognize that the IRS has 
experienced problems in the past with its modernization programs, but 
we believe that the agency has made substantial progress in dealing 
with internal management systems. In addition, these concerns, while 
important, should not impede the IRS's efforts to deal with its broader 
mission. TEI respectfully suggests that reducing the IRS's funding is 
not the most efficient or effective way to address concerns about 
management of its modernization. OMB, the Treasury, and the IRS should 
directly address problems as they are encountered and find workable 
solutions to them. This subcommittee and others within the Congress 
should continue to assess and monitor the progress. It is imperative 
that we all work together, and that effective solutions to problems be 
found as soon as possible. Critical systems, particularly those 
involving the individual and business taxpayer master files, should be 
delivered successfully, on time, and within prescribed budgets. A 
failure of the current effort would have far-reaching effects on our 
government and American taxpayers. The current reorganization programs 
must be successful. If the IRS is to succeed as a modern, customer-
focused agency, it must have adequate funding for its service 
initiatives. We are encouraged that the President has nominated Mark W. 
Everson to be Commissioner of Internal Revenue and are hopeful that the 
modernization effort undertaken by former Commissioner Charles O. 
Rossotti will continue to progress under his tenure.

Staffing and Training Concerns

    Money and stability are also required for the agency to recruit, 
train, and retain qualified personnel. LMSB experienced a 5.3 percent 
attrition in 2001, and 46 percent of its workforce is eligible to 
retire within the next three years. With the additional emphasis on 
auditing tax shelter issues, the IRS will need to deploy its resources 
carefully. Modern technology is important, but the lack of qualified, 
experienced personnel will almost certainly hinder an effective 
enforcement strategy.
    Stated simply, whether the promise of the reorganization can be 
realized depends in large measure on the IRS's securing sufficient 
funds to do its job. TEI has consistently supported both adequate 
funding for the Internal Revenue Service and adequate oversight by the 
IRS Oversight Board, the Treasury, and Congress. We know the 
Subcommittee shares our concern and urge you to continue to support 
adequate funding of the IRS.

          Use of Private Collection Agencies to Collect Taxes

    The President's Budget proposes the use of private debt collection 
agencies to assist in the collection of delinquent taxes, and Chairman 
Houghton has recently introduced legislation to effect the same 
objective. Intended to reduce the number of deficiencies deemed 
uncollectible, the proposal would effect a significant and far-reaching 
change in the way federal taxes are collected in this country. While 
the intent of the proposals is laudable, TEI believes that the 
collection of taxes is a core governmental function, the outsourcing of 
which could potentially imperil taxpayer rights and erode taxpayer 
confidence in the fairness of the tax system.
    In testimony before the House Government Reform Subcommittee last 
year regarding plans to implement a filing and payment compliance (FPC) 
initiative to resolve collection issues quickly and fairly, then 
Commissioner Rossotti emphasized that ``[u]nlike private collection 
agencies, the IRS often takes inherently governmental actions involving 
judgment, such as discretionary decisions on liens and levies on 
delinquent accounts.''
    Because TEI's members are generally part of LMSB, they are not 
often involved with the IRS's collection function. Nevertheless, TEI is 
concerned about the effect of the proposal on tax policy and 
administration. Taxpayers' perception that the tax system is fair is 
essential to voluntary compliance. For the tax system to work, 
taxpayers need to know that, when they deal with their government, they 
will be treated in a fair and impartial manner. The use of private 
firms to perform a core function of government--the collection of taxes 
due--could undermine this goal. As a practical matter, collection 
agencies involved in performing ministerial functions might be unable 
to assist a taxpayer who questions the underlying tax liability. In 
addition, low-income taxpayers--who do not have access to 
representation--may be pressured to enter into unreasonable collection 
agreements.
    Moreover, using outside, for-profit contractors could impede 
taxpayer privacy and undermine the perception of fairness. Employing 
private collection agents provokes all of the concerns raised by the 
sharing of sensitive taxpayer information with persons not employed by 
the Internal Revenue Service, and in fact not employed by the Federal 
Government or any governmental entity. Such concerns are even more 
acute if the companies are compensated on a contingency basis, which 
raises significant due process issues.
    TEI recognizes that IRS must move to effectively resolve collection 
issues, and we share the Administration's and the Chairman's concern 
about the level of uncollected tax debts. Moreover, we commend the 
presence in the current proposals of sound safeguards. Nevertheless, 
TEI believes the better approach is to provide the IRS with sufficient 
resources to perform core governmental duties in an efficient manner. 
Private collection agencies should not be used to perform these 
governmental functions. If, however, the proposals are adopted, the 
legislation must also adopt safeguards of taxpayer rights, particularly 
with respect to any lien or levy powers delegated to outside parties, 
that are at least as protective as those applicable to federal 
employees. Further, contract fees should not be determined on a 
contingent basis.

               Public Disclosure of Corporate Tax Returns

    On July 8, 2002, Senator Charles Grassley wrote to the Treasury 
Department and the Securities and Exchange Commission (SEC), inquiring 
whether consideration should be given to requiring public companies to 
provide copies of their tax returns (or summaries thereof) to the SEC 
and to the public. The disclosure proposal has engendered important 
discussions within Congress, the business community, and the public at 
large, and we understand the Treasury Department and SEC have voiced 
concerns about the proposal. For our part, TEI believes that public 
disclosure of tax returns is wholly inappropriate. Confidentiality of 
tax return information is a key privacy right that should be vindicated 
not just for its own sake, but because it is the cornerstone of 
voluntary compliance.\1\
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    \1\ In computing their annual tax liabilities, corporate taxpayers 
must disclose not only the nature, sources, and character of their 
revenues and expenses, but also all manner of information relating to 
their corporate legal structures as well as other proprietary data. For 
example, disclosure of sales, licensing, and leasing revenues by legal 
entity and jurisdiction may enable a competitor to more clearly 
understand the location and, potentially, the identity of a company's 
customers, as well as other key data such as product pricing and gross 
margins. Together with advertising and other key selling expenses 
disclosed on the return, competitors would have clear insights into a 
company's marketing strategies. Similarly, the disclosure of the nature 
and location of a company's manufacturing costs by functional type 
will, in many cases, enable competitors to understand the company's 
manufacturing cost structure and permit them to identify potentially 
more cost-effective suppliers and more efficient ways of doing 
business. In summary, the greater the detail of information that is 
publicly available, the more a competitor can discern about a company's 
business model. Indeed, if the confidentiality of taxpayer information 
is breached, U.S. public company taxpayers would be substantially 
impaired in the global competition for capital, labor, customers, and 
suppliers.
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    As important, we do not believe that providing copies of the tax 
returns (or summaries thereof) as a matter of course to the public or 
the SEC will enhance the overarching goal of protecting public 
investors through the disclosure of full, fair, and meaningful 
information. Should it be determined that the SEC lacks sufficient 
authority under current law to obtain tax returns or tax return 
information and that such information is necessary and appropriate in 
the SEC's investigations or enforcement actions, TEI recommends that 
the SEC request a limited amendment to section 6103 of the Internal 
Revenue Code to clarify its authority to obtain expeditious access to 
confidential taxpayer information. Such limited authority, however, 
must be subject to appropriate privacy safeguards, including exemption 
from public disclosure under the Freedom of Information Act.
    TEI members share the concerns expressed by the Administration, 
Congress, and the public about recent allegations of financial 
reporting involving fraud and malfeasance. Such lapses in behavior, 
once investigated and proven, rightly merit not only public reproach, 
but also vigorous enforcement of applicable civil and criminal laws and 
sanctions. Moreover, if current laws and penalties are inadequate to 
deter, prevent, or punish such misconduct, they should be appropriately 
enhanced. But public disclosure of corporate tax returns is a solution 
in search of a problem; it is neither cure nor palliative for financial 
reporting irregularities. Indeed, public disclosure of corporate tax 
returns is not only contrary to the longstanding policy of protecting 
the confidentiality of taxpayer returns, but is potentially 
counterproductive to the goal of providing shareholders with meaningful 
information.\2\
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    \2\ Many provisions of the Code require companies to treat items of 
revenue or expense reported one way for financial accounting purposes 
in a vastly different fashion for tax purposes. By adhering to the 
different accounting treatments prescribed by Generally Accepted 
Accounting Principles (GAAP) and tax law in respect of the same item, 
companies are complying with legal requirements and business 
exigencies. For example, a major reason for differences between book 
and tax reporting lies in the determination of the reporting 
``entity.'' Consolidated financial statements are generally required to 
be prepared under GAAP where one entity has an effective economic 
controlling interest (i.e., more than 50-percent ownership) in another 
entity. For tax purposes, affiliated groups of corporation subject to 
control by a common parent corporation may elect to file a consolidated 
tax return only where 80 percent of the vote and value of a subsidiary 
is owned by the group. In addition to the different ownership control 
thresholds for consolidation, U.S. tax rules exclude foreign 
corporations from the consolidated return but foreign affiliates must 
be included in GAAP consolidated financial statements. Thus, 
consolidated financial statements report worldwide results whereas the 
U.S. consolidated tax return generally includes only U.S.-based legal 
entities (plus their foreign branches). Even before the determination 
of taxable income and tax liability can begin, the composition of the 
reporting ``entities'' for tax and financial reporting purposes can be 
so different, and the reconciliation between the amounts reported by 
the differing ``entities'' such a complex exercise, that significant 
confusion will be engendered by a side-by-side comparison of the tax 
returns and financial statements. Given the scope and degree of 
differences in tax and financial accounting requirements, public 
disclosure of corporate tax returns poses great potential for confusing 
rather than enlightening investors.
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                     CEO Signatures on Tax Returns

    Section 722 of the CARE Act of 2003, S. 476, as reported in the 
Senate by the Committee on Finance, would amend section 6062 of the 
Internal Revenue Code to require the chief executive officer (CEO) of a 
corporation to sign the corporation's income tax returns. Under the 
amendments, the Secretary of the Treasury would be authorized to 
designate other officers who may sign the income tax return where the 
corporation does not have a CEO. Because the provision misapprehends 
the CEO's role in the preparation of company tax returns and could 
adversely affect tax administration, TEI recommends that it be 
abandoned.
    The tax affairs of major corporations are extraordinarily 
complicated and their management is routinely delegated to the Chief 
Tax Officer (or similarly titled individual) who has been specially 
trained. While the senior officers (including the CEO and CFO) remain 
ultimately responsible for the company's compliance with the tax laws--
and all other laws--it would be rare that a CEO could be personally 
involved in, or knowledgeable about, the plethora of tax rules that 
apply to literally thousands of transactions that are reflected in the 
company's tax returns. Indeed, the level of detail and specialized 
knowledge demanded in the preparation and submission of complex 
corporate tax returns demands that the responsibility for signing the 
return--and affirming under penalties of perjury the completeness and 
accuracy of the return--be delegated to an employee with a significant 
level of professional tax expertise, training, and experience. In TEI's 
view, the senior tax official is the person in the best position to 
assess--and state affirmatively--that the return fulfills the company's 
legal obligations.
    Although TEI has consistently supported efforts to enhance the 
disclosure of transactions justifying IRS scrutiny and supported IRS 
appropriations sufficient to adequately fund the IRS, the Institute 
believes the proposal to require a CEO to sign a corporate tax return 
is flawed. We regret that it misapprehends the role of the tax 
department as well as that of the CEO. And while we believe it 
unjustifiably impugns the integrity and professionalism of both CEOs 
and corporate tax professionals, our fundamental concern is that the 
proposal is misdirected: It would force companies to devote substantial 
time and resources to educating CEOs about the intricacies of the 
company's tax affairs, distracting them (and the company's tax 
personnel) from activities that put their respective professional 
expertise to their best uses--including, in the case of the CEO, 
overarching issues of corporate governance and accountability. Indeed, 
in a typical year, corporate tax officials will sign under penalties of 
perjury hundreds, sometimes thousands, of federal, state, and local 
income, excise, and property tax returns--and the penalties can be 
quite severe.\3\ Further, while recent reports unfortunately document 
that some corporations have engaged in improper conduct, there has been 
no showing that the noncompliance is due to the lack of sanctions.
---------------------------------------------------------------------------
    \3\ At a minimum, the provision must be clarified to apply solely 
to the Federal income tax returns (Form 1120) filed by corporations. If 
this provision extends to other federal tax returns, or worse, is 
copied by other jurisdictions, CEOs will have little time to properly 
perform their other substantial duties. Moreover, depending on the size 
and scope of the company's Form 1120, chief tax officers currently 
devote considerable time to the ministerial act of signing dozens, if 
not hundreds, of different forms, schedules, statements, and elections 
within the return that are subject to a signature requirement. 
Presumably, regulations would clarify whether the CEO signing on page 
one of Form 1120 would also be required to sign each form or statement 
subject to a separate attestation, but the sheer number of such 
attestations reinforces our concern about the demands the proposal 
would impose on the CEO's limited time.
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    The CEO signature proposal would impose undue burdens on compliant 
taxpayers. Since most CEOs are not experts in the complexities of the 
tax law, they will of necessity turn to others (specifically, corporate 
tax officials or outside tax advisers) to compile the necessary 
background documents and review the thousands of pages and multiple 
volumes that constitute a complex, multinational corporate consolidated 
income tax return. The CEO's review of the income tax return would be 
redundant to the review process currently undertaken by the chief 
corporate tax officer, and the added resources required to comply with 
the proposal, again without demonstrable need, should not be ignored, 
especially since it would distract both CEOs and tax department 
personnel, including (in the latter case) dealing with the IRS to 
resolve outstanding tax issues.
    Moreover, Congress has recently undertaken steps to strengthen the 
accountability of CEOs and CFOs for corporate financial matters, as 
well as the audit committees of the boards of directors of such 
corporations, in the Sarbanes-Oxley Act of 2002.
    In summary, the proposal to require CEOs to sign corporate tax 
returns would impose a burden on CEOs that most are ill-trained to 
bear, would unnecessarily saddle companies with additional compliance 
costs, and would represent a step backward for efficient tax 
administration since the person signing the return would not be the 
employee in the best position to ensure the accuracy or completeness of 
a complex multinational tax return. TEI urges that the proposal be 
abandoned.

                           Tax Simplification

    It is often said that tax simplification has no constituency. TEI 
disagrees, and we know that many on this committee do, too. 
Complexities in the tax system have important ramifications for tax 
administration and tax compliance. A joint task force of the American 
Institute of Certified Public Accountants, the American Bar Association 
Section of Taxation, and Tax Executives Institute has worked over the 
past few years to sensitize the public, the Treasury, and the Congress 
to the urgent need for major simplification of the tax laws. We applaud 
the Chairman's ongoing efforts to make tax simplification a higher 
priority.
    In February 2000, the three groups submitted to the Treasury 
Department a list of ten areas of the Code as a starting point for 
simplification efforts. Others have identified a number of other worthy 
candidates for consideration. For example, the staff of the Joint 
Committee on Taxation produced a comprehensive study in April 2001 that 
contained numerous recommendations, and the National Taxpayer Advocate 
has also pressed for change. In addition, tax simplification 
legislation was recently introduced by Chairman Houghton, as H.R. 22 
and H.R. 285. In addition, recent bills introduced by Chairman Thomas, 
Representative Portman, and Representative Levin also include a number 
of simplification proposals worthy of consideration.
    The three groups in the joint task force of which we are a part 
continue to support the original proposals, but have more recently 
sought to emphasize three areas of reform in which modifications to 
present law would yield substantial and beneficial simplification: 
providing a uniform definition of a qualifying child; elimination of 
the many phase-outs for tax incentives, including child and education 
credits, personal exemptions, and itemized deductions; and, repeal of 
the individual and corporate alternative minimum taxes. We recognize 
that budget pressures and other concerns may impede progress on such 
wide reforms, but are eager to work with you and your staff in order to 
achieve them to the greatest extent possible and as soon as possible.
    We wish to stress today proposals relating to repeal of the 
alternative minimum taxes. When the alternative minimum tax was 
originally enacted in 1969, it was targeted at high-income individuals 
who paid no income taxes. It now hits middle-class taxpayers.\4\ Recent 
adjustments have provided some relief for those middle-class taxpayers 
seeking to take advantage of credits intended to benefit them, but soon 
millions will face the mind-numbing complexity of the AMT rules and 
find, to their great surprise, that they are subject to an extra tax 
that erodes the benefit of tax rates, deductions, and credits that 
Congress has specifically granted.
---------------------------------------------------------------------------
    \4\ The JCT Study indicates that more than 11 percent of all 
individual taxpayers will be subject to the individual alternative 
minimum tax by 2011. Study of the Overall State of the Federal Tax 
System and Recommendations for Simplification, Pursuant to Section 
8022(3)(B) of the Internal Revenue Code of 1986, Staff of the Joint 
Committee on Taxation, JCS-3-01, April 26, 2001, v. II at 10 (JCT 
Study).
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    No less complex is the corporate alternative minimum tax, which 
requires companies to keep two separate sets of books for tax purposes, 
and has the perverse effect of taxing struggling companies at a time 
when they can least afford it. These provisions no longer serve their 
intended purposes, and changes in the law in recent tax years have also 
changed the tax base in ways that address the concerns that originally 
gave rise to these taxes.\5\ The AMT creates enormous administrative 
burdens and undermines the policies underlying substantive provisions 
of the Code. Taxpayers should not be required to compute their taxes 
twice and to keep two sets of books. In addition, the AMT is 
counterproductive: It takes in more revenues during recessions and 
reduced revenues during periods of expansion. Thus, the AMT taxes 
corporations when they can least afford it--when they are struggling to 
survive in a downturning economy. Moreover, because the calculation and 
payment of AMT is driven in large measure by a slower depreciation 
schedule for capital investments, the AMT is a substantial drag on one 
of the potential engines of economic recovery: capital investment in 
plant and equipment.\6\ The AMT represented poor public policy when it 
was enacted and time has not tempered its lack of appeal.
---------------------------------------------------------------------------
    \5\ Initially enacted in 1969 and substantially modified to its 
present form in 1986, the corporate AMT today has little effect on its 
original target--companies with significant economic income that were 
paying little or no federal taxes. In its recent study on ways to 
simplify the Internal Revenue Code, the staff of the Joint Committee on 
Taxation concluded that the original purpose of the corporate 
alternative minimum tax is no longer served in any meaningful way. The 
AMT does not necessarily produce a more accurate measurement of income 
than the regular corporate income tax, especially after the provisions 
of the Tax Reform Act of 1986, and subsequent legislation, became fully 
effective. JCT Study, v. II at 16.
    \6\ The principal tax preference that contributes to taxpayers 
paying the corporate AMT is accelerated depreciation. Capital assets 
tend to produce a schedule of depreciation deductions that does not 
vary with economic conditions. As the economy enters a recession, 
business receipts fall. Consequently, corporate income as measured 
under the regular tax declines, but depreciation deductions generally 
remain the same. Because, in simple terms, a taxpayer becomes subject 
to the AMT when its AMT tax preferences and adjustments become large 
relative to its regular taxable income, a recession increases the 
likelihood that a business will become an AMT taxpayer.
---------------------------------------------------------------------------
    We reiterate our recommendation that both the individual and 
corporate alternative minimum taxes be eliminated.
    Congress is currently considering steps to provide an economic 
stimulus to offset the current economic downturn. In one stroke--repeal 
of the corporate AMT--Congress can eliminate a flawed tax policy that 
can only serve to exacerbate the downturn and simultaneously effect a 
major simplification of the Internal Revenue Code.\7\ In addition, to 
provide further economic stimulus and investment, corporate taxpayers 
with accumulated AMT credits--amounts that represent a prepayment of a 
company's regular corporate tax liability--should be afforded the 
opportunity to recover those credits.
---------------------------------------------------------------------------
    \7\ In addition to ameliorating the counter-productive nature of 
the tax, the repeal of the corporate AMT would have a salutary effect 
in reducing administrative burdens and costs comparable or greater in 
value than the foregone revenues. Many taxpayers must undertake the AMT 
calculation to determine whether, in fact, they are liable. For 
example, the GAO reported that while only 28,000 corporations actually 
paid corporate AMT in 1992, 400,000 corporations filed the AMT form. 
See General Accounting Office, Experience with the Corporate 
Alternative Minimum Tax, GAO/GGD-95-88 (April 3, 1995), at 3. The 
400,000 figure would understate the number of corporations that did the 
necessary calculations to determine whether they had an AMT liability.
---------------------------------------------------------------------------
    We recognize that AMT repeal would likely be an expensive fiscal 
step, but that cost will only continue to increase the longer the AMT 
remains in effect, and the cost to the tax system of retaining such a 
complicated regime is simply too great to bear. In the end, there can 
be little disagreement that the provisions must be repealed.
    At the very least, as an interim step toward full repeal, the 
temporary increase in the exemption amount enacted as part of the 
Economic Growth and Tax Relief Reconciliation Act of 2001 should be 
made permanent immediately. The Budget submitted by the President also 
contains modest incremental change.
    The international provisions of the Internal Revenue Code are among 
the most complicated provisions in the tax law. The last several years 
have seen several small steps taken to reduce tax law complexity for 
multinational corporations. For example, several years ago, Congress 
repealed section 956A of the Internal Revenue Code, which in our view 
was ill-conceived when it was enacted in 1993. And in 1997, Congress 
rectified an inequity that has existed for the past decade when it 
eliminated the overlap between the controlled foreign corporation and 
passive foreign investment company rules. Although laudable, these 
actions represent only a small step on the journey of simplifying the 
international tax provisions of the Code.
    TEI believes that the Code's foreign provisions need fundamental 
reform and simplification, and for this reason we support efforts like 
those in Chairman Houghton's bill to reform various complex provisions 
of the Code including reforms to subpart F, in particular the 
elimination of the foreign base company sales and service income rules, 
and the reforms of the foreign tax credit, in particular the reduction 
of the number of baskets under section 904(d) to three. These reforms 
will not only reduce compliance costs--thereby enhancing the country's 
competitiveness--but they will also signal Congress's continued 
commitment to the simplification of the tax law generally.
    We believe that implementation of simplification measures in each 
of these areas would significantly reduce complexity for large numbers 
of both individual and business taxpayers, and have the concomitant 
effect of making the tax laws far more administrable.

In Conclusion

    We will continue to work with you to refine them and to develop 
additional proposals for simplification of the system. We appreciate 
the opportunity to submit these recommendations and stand ready to 
provide whatever assistance may be necessary to bring them to fruition.
    Tax Executives Institute commends the Subcommittee for holding this 
public hearing. TEI looks forward to working with the Subcommittee to 
improve tax administration.

                                 

    Chairman HOUGHTON. Thank you, Mr. McCormally. Mr. 
Stevenson?

    STATEMENT OF WILLIAM STEVENSON, PRESIDENT, NATIONAL TAX 
CONSULTANTS, AND CHAIRMAN, FEDERAL TAXATION COMMITTEE, NATIONAL 
          SOCIETY OF ACCOUNTANTS, ALEXANDRIA, VIRGINIA

    Mr. STEVENSON. Good morning. In 1995, when you invited me 
to this table, Mr. Portman was sitting back there and I can 
remember you had asked me a question during the question and 
answer, and I am not exactly sure how we got into it, but my 
observation was that this Committee needed to provide more 
oversight to the IRS. That was 1995. Little did I know what 
would happen with the Commission and all the things that 
followed.
    Since then, the National Society of Accountants has been 
intimately involved with Mr. Portman and this Committee, and I 
do want to tell you how impressed I am with the staff that you 
have. They have a lot of perspective and they are very 
concerned people who work very hard, and I think we communicate 
probably once a week to stay connected about what is going on 
out in the field.
    I come to you today from the front lines of tax 
administration. Just like most other tax practitioners, we 
don't just deal with filing tax returns. We deal with every 
aspect of the IRS, and some of us even have to go into U.S. Tax 
Court to get relief.
    My goal here today is to make you guys feel connected with 
the American taxpayer, and so what I am going to try to do is 
just laser focus on one concept and give you a handful of cases 
that are actually live cases now, that are not closed, to show 
you the kind of problems that we are facing.
    First off, filing season has ultimately been excellent, and 
we compliment the IRS and tip our hat. They are really doing a 
fine job. There are some nitpicking things that we can talk 
about, but by and large, our Members have not complained about 
it. We have done surveys and we are very satisfied with it.
    The problem that we have is with post-season, post-filing 
problems. What we have discovered is, first of all, there is a 
lack of access to the IRS. You heard it discussed earlier 
today. Offices have closed. The reorganization has made it 
impossible for us to deal with people face-to-face. All the 
relationships that we used to have, where we had credibility as 
a practitioner to solve many taxpayer problems, are gone. We 
are dealing with people across the country, well-meaning, 
perhaps, but the situation is different and we are very unhappy 
about not only our relationship but their ability to solve 
problems.
    What we have discovered is that middle management has not 
bought into the service concept of the IRS. When this Committee 
went along with the Senate Finance Committee and adopted my 
recommendation to change the mission of the IRS to service, I 
had made another recommendation that you had adopted and that 
had to do with education. Training programs are critical to the 
success of delivering service to the American public.
    I am talking to you as a person who has a doctorate in the 
educational process, and I am here to tell you that the IRS's 
educational system is totally flawed. It is being run by middle 
management, middle managers who know nothing or very little 
about the educational process. In addition to that, many middle 
managers haven't bought into the service mission. So, you have 
well-meaning people at the top thinking they are doing a great 
job, but it is not being translated at the lower level.
    I think the educational process needs to be brought back 
into Washington. Experts in the field of education, people 
knowledgeable about tax administration need to develop a 
sounder education program and then put it out to the rest of 
the country.
    The IRS agents on the phone, from my perspective and the 
perspective of many of our Members, are not willing to solve 
problems. They don't want to take on cases. They just want to 
move the cases. Let me give you just a few examples just to 
show you.
    We have a woman by the name of Pat T. I won't give you her 
last name. Eight years ago, an IRS agent prepared seven tax 
returns for her. She was entitled to the EITC. He didn't give 
it to her. She had a tax debt for those 7 years hanging over 
her head--this woman makes less than $10,000, has a kid, on 
welfare--she had a $5,000 debt that is now over $20,000. Eight 
years later, the IRS is now doing enforced collections to try 
to get the money from her, and I am trying to work with the 
Taxpayer Advocate Service to get them to realize they made a 
mistake to begin with.
    Another person, Larry C., his company failed. He owed taxes 
as a responsible party. Another one of his partners paid off 
all of the taxes, but there is interest remaining that 
accidentally wasn't wiped off the books. I can't fix that 
problem. I talked to an IRS agent who said, on the phone, they 
knew what the problem was, they knew how much money had been 
paid, they told me that I had to file a Form 843 with the 
service center and close the case, which means this person 
could have solved the problem, and now I have to go to a 
service center to some unknown person who may or may not want 
to move the case.
    There's another case where a salary is levied. I called the 
Practitioner Priority Service. Please lift the levy. Lo and 
behold, they lifted the levy for me to allow me some time to 
work out the case, gave me 2 months. Two weeks later, the levy 
is back on. The man is in my office crying. He is going to lose 
his job because his boss doesn't want to deal with the IRS and 
the levy. I called the IRS. ``Oh, my God, we don't know how 
this levy got on. It was an accident.''
    I just wanted to make you feel connected. I will be happy 
to respond to many of those other questions. Incidentally, on 
your way back to Corning, if you want to make a right-hand turn 
and come out to Long Island, I would love for you to come and 
see what a battlefield really looks like.
    [Laughter.]
    [The prepared statement of Mr. Stevenson follows:]

 Statement of William Stevenson, President, National Tax Consultants, 
     and Chairman, Federal Taxation Committee, National Society of 
                   Accountants, Alexandria, Virginia

    Good morning, Mr. Chairman and members of the Committee. My name is 
William Stevenson. I am the chairman of the National Society of 
Accountants Federal Taxation Committee. I am an Enrolled Agent and 
President of National Tax Consultants, based in Merrick, New York.
    NSA and its affiliated state organizations represent approximately 
30,000 accountants, tax practitioners, business advisors and financial 
planners providing services to more than 19 million individuals and 
small businesses. Most NSA members are sole practitioners or partners 
in small- to mid-sized firms. NSA members agree to adhere to a code of 
ethics and professional conduct. NSA members are the champions of small 
business as we represent 20-25% of the small businesses in the United 
States.
    We appreciate the opportunity to testify before the Committee to 
share our views on the 2003 filing season and on tax administration 
issues of importance to practitioners.

THE 2003 FILING SEASON

    I am pleased to report that we have had a smooth filing season in 
2003. E-filing went well with no significant delays in processing 
returns and issuing refunds. The service campuses performed well. 
Indeed, the NSA national office received few complaints of any kind 
regarding the filing and processing of returns this season. On behalf 
of NSA members and the tax practitioner community at large, I 
congratulate the IRS for a job well done. The Congress did its part too 
and I wish to express our gratitude for not passing any tax legislation 
with effective dates retroactive to 2002 during the tax-filing season!
    Although the filing season went well, that does not mean all is 
well in the area of tax administration. The IRS does a very good job in 
processing millions of routine forms and documents. Where NSA 
encounters significant problems is in the post-filing environment--
dealing with small business and individual taxpayer problems such as 
IRS notices, levies, and audit issues, to name a few. Tax practitioners 
repeatedly cite the current difficulty in accessing IRS decision makers 
who are willing to take responsibility for a case in order to solve it 
in an expeditious manner. We also see a critical need for additional 
training for IRS personnel to improve their ability to serve the 
American taxpayer and administer the tax system. These problems are not 
insurmountable but they must be addressed expeditiously if the IRS is 
to become the world-class agency Congress envisioned when it passed the 
IRS Restructuring Act of 1998.

LACK OF ACCESS TO THE IRS

    Part of the current access problem stems from the IRS 
reorganization. The need for the IRS to organize along business lines 
is not at issue. However, it appears that IRS senior management has yet 
to obtain the necessary buy-in from middle managers in the operating 
divisions to make the reorganization an actual success.
    One unfortunate consequence of the reorganization was to break up 
longstanding relationships between practitioners and IRS managerial 
employees. Before, practitioners knew whom to call to solve a problem. 
This is no longer the case and building new working relationships is 
proving to be difficult.
    We hear complaints by many IRS employees that they do not know how 
much authority they have, what their role is, or who they can turn to 
within the IRS to solve a taxpayer's problem. Many employees fear that 
they will be criticized for making decisions and accepting 
responsibility. We continue to see a disconnect between the national 
office and field offices in the communication of new policies and 
procedures. Under the new structure, solving all but the easiest of 
taxpayer problems is becoming increasingly difficult.
    The results of inadequate access and poor communications are chaos 
and confusion. Here is a real life example. A taxpayer received a 
collection notice (CP 504) for a tax year that was part of an offer-in-
compromise accepted by the IRS two years ago. An IRS employee working 
in the Automated Collection System (ACS) advised the practitioner 
handling the case that the Taxpayer Advocate Service (TAS) will need to 
resolve the problem. The practitioner contacted TAS and was informed 
that one of the two centralized offer processing centers will handle 
the case. The practitioner informed the TAS employee that the offer was 
accepted by the IRS before the creation of the centralized sites. The 
TAS employee responded that it might be necessary for the original 
revenue officer handling the case to resolve the problem. The 
practitioner asked what if that revenue officer is no longer with the 
IRS? The practitioner was placed on hold until the TAS employee found 
someone who might be available to handle the case. The TAS employee 
returned to the line and gave the practitioner the name of someone who 
could help, but unfortunately, that person was out of the office until 
the following week. The TAS employee opened a case file so no 
accidental levy would take place.
    Later, the ACS worker's supervisor contacted the practitioner and 
said that this erroneous notice case would not be handled by the TAS 
after all but would go to one of the centralized offer centers. The 
practitioner explained, once again, that the offer was accepted prior 
to the formation of the centralized sites and that the original revenue 
officer may not be able to handle the case. The supervisor stated that 
the practitioner should not worry because a hold is placed on the 
account and no levy will occur. The practitioner responded that no 
account could exist because the accepted offer wiped the slate clean. 
After all of this activity and wasted time, the practitioner was no 
closer to getting the problem solved than at the outset. More 
importantly, the resolution of the problem--an erroneous account making 
wrongful enforcement measures possible--has not occurred and the 
practitioner is not being informed by any IRS or TAS personnel of any 
steps being taken to resolve the problem.
    Chaos and confusion will continue until IRS senior management 
clearly defines the duties and responsibilities of field personnel and 
IRS employees are trained and empowered to resolve cases at the lowest 
possible level as envisioned by then Commissioner Rossotti.
    We were encouraged by the remarks of Mark Everson, nominee for 
Commissioner of Internal Revenue, at his confirmation hearing before 
the Senate Committee on Finance on March 18, 2003. Mr. Everson stated:

    L``In order to realize the full benefits of the '98 Reform Act, 
line managers and employees at all levels must fully embrace the 
changes which began under Commissioner Rossotti.''

    We hope that improving internal IRS communications, developing 
clear lines of authority and responsibility and employee empowerment 
will be top priorities of the next commissioner.

TRAINING

    We see a widening training gap at the IRS. NSA members deal with 
IRS personnel on a daily basis. Increasingly, we experience instances 
where IRS employees lack the expertise and skills to handle difficult, 
problem cases. Complex problems are shoved to the side. Often, the only 
way to get action on a case is to take it to the Taxpayer Advocate 
Service. This bogs down the TAS system and is a source of aggravation 
and concern to both taxpayers and practitioners who have hardship cases 
that should receive the undivided attention of TAS personnel. The 
resulting confusion erodes confidence in the tax system.
    Unfortunately, over the years, IRS training budgets have been 
slashed to deal with other funding problems. We ask that Congress 
reverse this trend and provide adequate funding to support critical 
training programs. Without adequate training, all the funds invested in 
systems modernization will be wasted.
    Also, NSA has grave concerns over the manner in which the IRS 
program of employee training has evolved. The IRS should introduce a 
concentrated training program, developed by experienced educators and 
implemented by individuals who understand and embrace the new IRS 
structure. The program must be supported, coordinated and directed from 
the highest levels of IRS.

IMPROVING ACCESS

    Many access issues would be resolved if IRS would publish an on-
line directory of IRS phone numbers for use by practitioners. The IRS 
has promised an on-line service for sometime now, but has yet to 
deliver. The need and importance of this directory information was well 
documented by the National Taxpayer Advocate in her 2002 report to 
Congress. We understand that IRS is working on this application and we 
encourage this effort. But it needs to come on-line quickly.

FIRST CALL PROBLEM RESOLUTION

    Another opportunity is for the Service to empower its employees and 
adopt a policy of ``First Call Resolution.'' Such a program would lead 
to more timely problem resolution, improve IRS employee job 
satisfaction and lessen practitioner reliance on other tools, such as 
collection due process hearings. The IRS could model its program after 
any number of systems operated by complex organizations in the private 
sector.
    Here is a real life example of how a ``First Call Resolution'' 
program could resolve a problem. One of my clients, a responsible party 
in a failed business, received a notice of taxes, penalties and 
interest now personally owed. After contacting the ACS, I learned that 
one of the other responsible parties in that failed business had 
previously paid the debt in full. The problem was that IRS records were 
not properly updated and between $10,000 and $15,000 of interest 
remained on the IRS books, hence the notice to my client. The ACS 
worker informed me that this was an unusual situation and that I needed 
to file a claim (Form 843) with the appropriate service campus to 
resolve the problem.
    In this situation the ACS worker recognized the problem, understood 
the problem, knew how to fix the problem, but did not have either the 
authority or willingness to do so. A ``First Call Resolution'' program 
would have enabled the ACS worker to fix the problem. Now, I am at the 
mercy of an anonymous service campus employee who must start at square 
one to understand the problem and then, hopefully, will take 
appropriate action to resolve the issue. Under present practice, 
accountability for problem resolution is non-existent.

CONCLUSION

    We commend the IRS for a successful 2003 tax-filing season. 
However, much work remains to be done in the post-filing tax 
administration environment. To improve this stage of tax 
administration, NSA recommends the following:

    1. Senior IRS management needs to secure the buy-in of middle 
management and rank-and-file employees on the need for and benefits of 
IRS restructuring.
    2. IRS must revamp its employee training process. Programs should 
be developed by trained educators and taught by IRS staff dedicated to 
the new structure.
    3. Congress should provide adequate funding to support state-of-
the-art training for IRS personnel.
    4. IRS should complete work on the directory for practitioners as 
soon as possible.
    5. IRS should empower its employees and give them the tools and 
responsibility to resolve problems as early in the process as practical 
and adopt a policy of ``First Call Resolution'' to expedite problem 
resolution.

    NSA believes that these steps will start the IRS toward a post-
filing tax administration system that will meet with the same success 
as its filing season administration.
    This concludes my remarks. Thank you, Mister Chairman.

                                 

    Chairman HOUGHTON. Well, thank you very much. I might just 
do that. Thank you. We will get to the questions afterward. Ms. 
Hill?

  STATEMENT OF CLAUDIA HILL, GOVERNMENT RELATIONS COMMITTEE, 
NATIONAL ASSOCIATION OF ENROLLED AGENTS, GAITHERSBURG, MARYLAND

    Ms. HILL. Mr. Chairman and Members, I am representing the 
NAEA. I am Claudia Hill from Cupertino, California. I am an 
enrolled agent, and I am a return preparer. My firm will 
prepare over 1,100 returns this filing season for individuals, 
small businesses, estates, trusts, gift tax returns. Almost 
half of those, we filed electronically. We work directly with 
taxpayers wishing to voluntarily comply with their annual 
filing rituals.
    Overall, this filing season has gone very smoothly, but 
every year as filing season approaches, I get prepared to hear 
my clients' annual litany of commentary on the fairness of the 
tax system and what other people get away with.
    Last filing season, for example, a client called to let us 
know that she wouldn't be needing the return we prepared for 
her, and she asked if we would discount our fee. She complained 
to her brother-in-law about how much taxes she was having to 
pay and he volunteered to prepare her return for her using 
software he had purchased, and he assured her that when he 
finished, she wouldn't owe any taxes.
    Although this is just one obvious example of a client 
choosing not to volunteer last year, it was not the only 
challenge to our role as preparers in a voluntary compliance 
system. I am asked by my clients constantly, how will IRS know 
about this money? Is it true IRS isn't doing audits anymore? 
These situations are played out in tax preparation offices 
throughout this country this time of year, and to me, they 
bring home quite vividly the meaning of declining enforcement 
statistics.
    It is a good thing most taxpayers aren't aware of the 
significant areas of noncompliance in reporting income that 
exists or the significant and growing backlog of collection 
cases involving individual taxpayers who know their tax 
liabilities and simply do not pay them. Currently, over $13 
billion in delinquent tax liabilities are going uncollected 
because IRS cannot continuously pursue every taxpayer with an 
outstanding liability.
    The NAEA strongly supports the efforts that focus attention 
on serious compliance issues such as these and promotion of 
abusive shelters, misuse of devices such as trusts and offshore 
accounts, and corporate tax avoidance schemes, underreporting 
of income, and failure of employers to file and pay over 
employment taxes. While such activities go unchecked, honest 
taxpayers wonder whether they are being chumps for paying more 
than their fair share.
    There are three key proposals in the budget proposed that 
are aimed at improving the fairness of the tax system and 
addressing compliance and collection issues. The first proposal 
focuses resources on high-income taxpayers and businesses in 
areas where noncompliance is likely to be greatest. The second 
proposal permits private collection agencies to support IRS 
collection efforts, and the third proposal strives to improve 
the effectiveness of EITC.
    Generally, we applaud these new proposals. We believe to 
ensure fair and effective enforcement of the laws is essential 
to the perception of fairness in the system. Stable funding for 
the IRS is essential to permit them to focus their attention on 
the most serious compliance problems. However, we have 
reservations about the proposal to permit private collection 
agencies to collect tax debt. We encourage efforts to focus on 
those taxpayers who choose not to file returns.
    About a decade ago, IRS promoted a non-filer initiative 
with strong threats of consequences for those that didn't come 
forward. Although many were brought into the system at that 
time, we have once again seen IRS become lax in following up on 
taxpayers who they know have not filed taxes and/or who have 
vastly underreported their income.
    As an active observer of our tax system for almost 30 
years, I cannot understand why IRS would turn their backs on 
the highly cost-effective document matching programs and non-
filer substitute for return programs. In efforts to reallocate 
resources to other customer services, IRS has done a disservice 
to those who consistently file and pay their taxes. The IRS 
must be given the budget to support continuing and consistent 
enforcement of tax laws. Honest taxpayers need to know there 
are consequences to noncompliance.
    I have additional comments on IRS communications with 
taxpayers and tax professionals. Acting Commissioner Wenzel 
reported just recently that for fiscal year 2002, IRS 
compliance work involved more than 11 million contacts with 
taxpayers. When it comes to IRS contacts with taxpayers, many 
of them result in requests for tax practitioners to intervene. 
The IRS Practitioner Priority Support Services is an essential 
tool in that intervention effort. It is cost effective and it 
allows us to resolve problems at the lowest administrative 
level. However, recent tinkering with that system is causing us 
to have problems.
    Recently, the system switched from a regional routing to a 
national routing. Our Members' experience has not been good to 
date on this. There are many instances where, on a national 
basis, a phone call can lead to several different locations. In 
resolving one problem recently, I contacted Ogden, 
Philadelphia, and Memphis all in one attempt to resolve one 
issue because none of them could get back to the center that 
started and needed additional information.
    Our Members have a similar complaint when it comes to 
national routing of the automated collection system. If the IRS 
is concerned by national routing as the most efficient way to 
use their toll-free telephone resources, I can assure them that 
practitioners would be glad to pay for the telephone calls if 
it would actually be routed to the center where they had 
previous contact and needed to provide additional information 
that would resolve the account.
    It also seems incongruous to me that the IRS Internal 
Investigation Division would focus on return preparer fraud 
deterrence and enhancing compliance in the preparation return 
industry, at the same time the IRS electronic tax 
administration is rushing to offer what could be access to 
information that would be an identity thief's dream come true.
    In its zeal to meet the Congressionally mandated e-filing 
returns by 2007, IRS again has let the ends justify the means. 
The history of IRS e-filing has been replete with this. At this 
point we are much concerned with the proposal to offer e-filing 
services to any electronic return originator (ERO) that would 
give them access to taxpayer accounts that indicate bank 
accounts and brokerage account numbers on them.
    Thank you for your concerns. I would be glad to address any 
further questions.
    [The prepared statement of Ms. Hill follows:]

  Statement of Claudia Hill, Government Relations Committee, National 
         Association of Enrolled Agents, Gaithersburg, Maryland

    Mr. Chairman and members of the Oversight Subcommittee, I am 
honored to present this testimony on behalf of the National Association 
of Enrolled Agents (NAEA), which is the professional society of 
Enrolled Agents.
    I am Claudia Hill, EA from Cupertino, California and I am a member 
of NAEA's Government Relations Committee. I am a tax return preparer. 
My firm will prepare over 1,100 individual, small business, estate, 
trust and gift tax returns during this filing season. As one who works 
directly with taxpayers wishing to comply with their annual filing 
rituals, I know it is important that hearings such as this take place 
so that concerns and frustrations of America's taxpayers can be heard.
    Today, I am representing the National Association of Enrolled 
Agents whose 10,000 members are tax professionals licensed by the U.S. 
Department of the Treasury to represent taxpayers before all 
administrative levels of the Internal Revenue Service.
    Enrolled Agents were created in 1884 to ensure the ethical and 
professional representation of claims brought to the Treasury 
Department. Members of NAEA ascribe to a Code of Ethics and Rules of 
Professional Conduct and adhere to annual Continuing Professional 
Education standards that exceed IRS requirements. Like attorneys and 
Certified Public Accountants, Treasury Circular 230 governs us in our 
practice before the Internal Revenue Service. We are the only tax 
professionals who are tested by the IRS on our knowledge of tax law. 
Each year, we collectively work with millions of individual and small 
business taxpayers. Consequently, Enrolled Agents are uniquely 
positioned to observe and comment on the average American taxpayer's 
experience within our system of tax administration.
    As our members are on the front lines of tax administration, we are 
pleased to share with you the views of these practitioners.

IRS Filing Season Readiness

    Filing season began even earlier this year than last year. We had 
reports of members starting the process as early as January 3. We 
attribute this phenomenon to a couple of factors: taxpayers seeking 
early refunds and increased use of electronically generated W-2s by 
businesses.
    Overall, tax season has run very smoothly. We are particularly 
pleased with the wealth of information and resources made available to 
the public through the IRS Internet web site, www.irs.gov. This season 
IRS has also been pro-active in release of news alerts to practitioner 
groups in a way that leverages the efforts of those of us in the 
preparer community.
    For example, publicity has been given to tax frauds and schemes via 
coordination information from the Department of Justice about 
prosecutions of tax evaders as well as fraudulent preparers. 
Publicizing the convictions of promoters has been very helpful to 
practitioners who find they are dealing with clients considering 
inappropriate or abusive techniques to avoid their tax 
responsibilities. This information is vital to maintaining taxpayer 
confidence in our system of tax administration and we strongly 
encourage the continuation of this effort.
    There have been very few glitches. Among those few were:

    (1)  Problems with the automated refund hotline and refund inquiry 
web site indicating when refunds would be deposited in bank accounts. 
Although this enhancement in availability of refund information is much 
welcome, it was very troubling to taxpayers and practitioners who 
relied on the technology. IRS managed to get things stabilized by March 
1.
    (2)  Many tax preparers, public libraries and volunteer tax 
clinics rely on IRS provided forms reference books annually (Package X) 
to assist them during filing season. Volume 1 of Package X came out 
January 3 but Volume 2 did not appear in mailboxes until mid to late 
March. Reports are that some forms, like the new Form 8880, Retirement 
Savers Credit, were missing. The IRS CD-ROM was also late. We attribute 
both the delay in Package X and the CD-ROM to the possibility of late 
tax legislation.
    (3)  The paper IRS E-file Handbook (Pub 1345), a required 
reference for electronic filers, did not arrive until as late as March 
27th. E-filing demand peaks by the second week of February. This did 
not inspire confidence in tax practitioners new to e-filing.
    (4)  We had reports that clients whose returns were e-filed and 
had scheduled automatic payment withdrawn for their IRS tax bills were 
sent letters stating that they owed the amount that was supposed to be 
withdrawn automatically. This could have been merely a confirmation 
letter. However, it was confusing to taxpayers who misread the letter 
and paid. The IRS still withdrew the automatic payments, so taxpayers 
paid twice. This will need to be straightened out after filing season.

IRS Budget Request

    We are aware that Congress is considering the President's budget 
proposals requesting $133 million in new funding for audits and other 
law enforcement work. Over all, the IRS would receive $10.4 billion, a 
5.25 percent increase, but still less per tax return, after adjusting 
for inflation, than it got five years ago.
    The IRS has identified the following as some of the most serious 
compliance problem areas:

    (1)  the promotion of abusive tax schemes;
    (2)  the misuse of devices such as trusts and offshore accounts to 
hide or improperly reduce income;
    (3)  the use of abusive corporate tax avoidance transactions;
    (4)  the underreporting of income by higher-income individuals; 
and
    (5)  the failure by employers to file employment tax returns and 
pay large amounts of employment taxes.

    NAEA strongly supports efforts that focus attention on these areas 
of noncompliance. While such activities go unchecked, honest taxpayers 
wonder whether they are being chumps for paying more than their share.
    There are three key proposals in the budget aimed at improving the 
fairness of tax administration and addressing the compliance and 
collection issues. The first proposal focuses resources on high-income 
taxpayers and businesses in areas where noncompliance is likely to be 
greatest. The second proposal permits private collection agencies to 
support the IRS's collection efforts while affording full protection of 
taxpayer rights, allowing the IRS to devote resources to more complex 
enforcement and collection issues. The third proposal strives to 
improve the effectiveness of the Earned Income Tax Credit (EITC) 
program by ensuring that benefits go to those who qualify for 
them.[i]
---------------------------------------------------------------------------
    \[i]\ Id.
---------------------------------------------------------------------------
    Generally, we applaud these new proposals, because we believe a 
comprehensive strategy to ensure fair and effective enforcement of the 
tax laws on the part of the Treasury is essential to the perception of 
fairness in the tax system. Stable funding for the IRS is essential to 
permit them to refocus their attention on the most serious compliance 
problems, aggressively combat abusive tax avoidance transactions and 
schemes, and better detect new areas of non-compliance.
    However, we have strong reservations about the proposal to permit 
private collection agencies to collect tax debts. The opportunities for 
disclosure of taxpayer information combined with the potential for 
aggressive collection approaches inherent in a bounty-incentive 
approach runs counter to the protection of taxpayer rights.
    We encourage efforts to refocus on those taxpayers who choose not 
to file returns. About a decade ago, the IRS promoted a non-filer 
initiative, with strong threats of consequences for those that did not 
come forward. Although many were brought into the system at that time, 
we have once again seen IRS become lax in following up on taxpayers 
they know have not filed or have vastly under reported their income.
    As an active observer of our tax system for almost 30 years, I 
cannot understand why IRS would turn their backs on the highly cost 
efficient document matching programs and non-filer/substitute for 
return programs. In efforts to re-allocate resources to other customer 
services, IRS has done a dis-service to those who consistently file and 
pay their taxes. IRS must have the budget support to make their tax 
compliance activities once again have a presence in people's lives.
    Honest taxpayers need to know there are consequences to non-
compliance.

The Offer in Compromise program

    Since the adoption of Policy Statement P-5-100 in 1992, the IRS has 
struggled with the design and administration of the offers-in-
compromise program. In recent years, the volume of applications for 
offers in compromise has increased enormously, as have the frustrations 
of practitioners representing taxpayers in the process. This year it 
ranked as one of the ``Most Serious Problems'' encountered by taxpayers 
in the FY 2002 Annual Report of the Taxpayer Advocate Service.
    Pursuant to the IRS Restructuring and Reform Act of 1998 (P.L. 105-
206), the IRS is required to develop employee guidelines for 
determining whether a proposed offer in compromise is adequate and 
should be accepted to resolve a dispute. The guidelines must include 
national and local allowances (standards) under which the IRS must 
determine basic living expenses of the taxpayer. However, the IRS must 
determine, based on the facts and circumstances of each taxpayer, 
whether use of the standard allowance is appropriate.
    The standards are not to be used if they would deprive a taxpayer 
of adequate means to provide for basic living expenses.[ii] 
Temporary Reg.  301.7122-0T and Temporary Reg.  301.7122-1T were 
issued by the IRS to comply with these requirements. Temporary Reg.  
301.7701-1T(a) provides that the grounds for compromise may be based on 
doubt as to collectibility or doubt as to liability.
---------------------------------------------------------------------------
    \[ii]\ Code Sec. 7122.
---------------------------------------------------------------------------
    The effectiveness of the OIC program is being severely undermined 
in certain cases by the manner in which it is being 
implemented.[iii] Although compromise based upon effective 
tax administration (``ETA'') grounds is still relatively new, and final 
regulations on ETA were only issued in July of 2002, the ability of 
taxpayers to compromise on these grounds is being frustrated by a lack 
of clear policies concerning the processing of ETA offers. The final 
ETA regulations did not provide a meaningful indication of what kinds 
of cases have a chance of succeeding on ETA grounds. The continuing 
lack of guidance in this area has brought an already slow and 
cumbersome process to a standstill, with little willingness to even 
consider making a pro-taxpayer decision by IRS personnel.
---------------------------------------------------------------------------
    \[iii]\ Statement of Robert E. McKenzie on behalf of the American 
Bar Association Section of Taxation, IRS Oversight Board Hearing, 
Washington, DC January 27, 2003. Panel 3: Effective Collection 
Strategies. The complete testimony can be found at www.abanet/tax.org.
---------------------------------------------------------------------------
    For over a year, the IRS has worked to develop an OIC user fee 
proposal. The purpose of the OIC user fee would be the same as the 
purpose of the installment agreement user fee: to defray the 
administrative costs associated with providing a specialized service to 
a limited segment of taxpayers. The Office of Management and Budget 
(OMB) and the Department of Treasury have approved the IRS's proposed 
user fee regulations for offers.
    The proposed fee is $150 [iv] Most taxpayers who submit 
an offer would pay the proposed fee. However, when a taxpayer is at the 
poverty level or is applying under doubt as to liability the fee will 
not be charged, or will be refunded to the taxpayer if their case 
successfully meets effective tax administration criteria. NAEA 
continues to oppose such user fees generally, and is not able to 
reconcile the reasoning behind imposing an additional fee on taxpayers 
who are currently in such financial straits they are not able to pay 
the tax. It seems to simply compound the problem, not contribute to a 
solution.
---------------------------------------------------------------------------
    \[iv]\ News Release IR-2002-118--IRS Proposes User Fee For Certain 
Offer-In-Compromise Request and Frequently Asked Questions

---------------------------------------------------------------------------
IRS communications with taxpayers & tax professionals

    On March 21, 2003, Acting IRS Commissioner Bob Wenzel issued a 
statement on compliance results and activities for Fiscal 2002. In 
terms of compliance activity, fiscal 2002 may be a sign of changing 
times at IRS. Revenue from IRS collection activity increased to more 
than $32 billion, reaching the highest level in eight 
years.[v] Overall, Wenzel observed that IRS compliance work 
involved more than 11 million contacts with taxpayers in 2002.
---------------------------------------------------------------------------
    \[v]\ IRS Data Book for Fiscal Year 2002 (IR-2003-38; Publication 
55-A)
---------------------------------------------------------------------------
    When it comes to IRS contacts with taxpayers, many of them result 
in requests for practitioners to intervene. Those practitioners who 
have used the former Practitioner Hotlines and the new Practitioner 
Priority Service (PPS), know that it has been an essential tool in 
resolving taxpayer issues at the least expense to the taxpayer, 
quickly, and at the lowest administrative level. However, just as we 
are learning to work with the new system, IRS has started ``tinkering'' 
with the process.
    Recently the PPS system switched from ``regional'' routing of calls 
to ``national'' routing. Our members' experiences with national routing 
to date have not been positive. It seems that all the technology and 
training is not in place to allow access to the full variety of account 
inquiries that come in on a National basis, nor is the ability to 
transfer calls to the sites that are able to handle site-specific 
issues. The change from regional to national was expected to reduce 
hold times, but having a phone answered quickly is not always the same 
as resolving an issue quickly. Let us hope IRS reconsiders how this one 
should be administered.
    With IRS attempting to collect more unpaid taxes, we are seeing an 
erosion of the kinder, gentler IRS we have been hearing about in recent 
years. To cite just one example, several members have told us that when 
they have contacted the Practitioner Priority Service (PPS) about a 
client with a balance due, the PPS Customer Service Representatives 
(CSRs) appear to be taking on the role of collection officers seeking 
levy sources if the taxpayer's account shows a balance due. In fact, 
most account related issues practitioners call about do involve a 
balance due; often an incorrect one, and that is why they make the 
call. This line of questioning is a significant departure from the 
friendly, information-providing, problem-solving approach we have come 
to appreciate.
    Although practitioners often see their role as being a buffer 
between the taxpayer and the Service, that role still focuses on 
assisting the taxpayer in resolving their tax obligations. This new 
policy will hinder case resolution if practitioners become reluctant to 
call PPS, fearing it will speed up enforced collection efforts or 
otherwise cause harm to their clients.
    Practitioner Priority Service is a program IRS benefits from as 
well, leveraging the resources of practitioners who are able to assist 
taxpayers with account resolutions or in coming back into the tax 
system and confronting their tax deficiencies. Practitioners are able 
to obtain needed information and chart a plan to remedy their clients 
account discrepancies or work out payment arrangements without fear of 
creating more imminent problems for the client. However, if the ``levy 
source'' line of questioning continues, practitioners will not utilize 
this resource, and both IRS and taxpayers will suffer.
    While on the subject of the Practitioner Priority Service, let me 
say that many members have expressed the view that IRS employees 
continue to strive to provide excellent service but run into systemic 
roadblocks. For example, since PPS is primarily a ``call in'' site, 
accommodations are not routinely made to allow CSRs to ``call out'' to 
follow-up on accounts that need that additional level of service. To 
circumvent this problem, IRS employees are giving up their lunch hours 
and breaks to call us back so we can close the loop and resolve issues 
more quickly. There really needs to be some kind of call back mechanism 
built into the system.
    Our members have a similar complaint when it comes to national 
routing and the Automated Collection System. Those cases, even more 
frequently, require more than one contact. If IRS is concerned that 
national routing is most efficient utilization of their toll-free 
telephone access system, I can assure them that practitioners would be 
glad to pay for the telephone call if it would actually be routed to 
the center where they had previous contact and needed to provide 
additional information that would resolve the account.

Third Pary Authorization & E-Services for Tax Professionals

    NAEA supports increasing the number of tax returns filed 
electronically and understands that incentives to those in the tax 
industry, particularly tax return preparers, are needed to achieve the 
electronic filing goals established by Congress. The ``e-services'' 
program for practitioners fosters this goal and has, within its scope, 
many opportunities beneficial to practitioners in serving their 
clients.
    Over the last two years IRS has expanded the types of access they 
offer well beyond that afforded with the traditional Form 2848 Power of 
Attorney and Form 8821 Taxpayer Information Authorization. Electronic 
return filers are provided limited authorization with the Form 8453, 
1040 returns now have ``third-party designees'' and Oral Tax 
Information Authorization [vi] (OTIA) can be used to allow a 
taxpayer to call IRS and establish disclosure authority for all types 
of tax accounts.
---------------------------------------------------------------------------
    \[vi]\ Disclosure of returns and return information to designee or 
taxpayer and oral tax information authorization is discussed in Temp. 
Regs. Sec. 301-6103(c)-1T.
---------------------------------------------------------------------------
    The issue of limitations of practice, access to taxpayer 
information and expansion of third party authorizations should be of 
concern to those who place a high priority on protection of taxpayer 
information as well as those who have studied, taken tests and earned 
designations recognized by IRS and the public as qualified to represent 
taxpayers. While IRS is charged with protecting the confidentiality of 
taxpayer information, they are also expected to make whatever 
accommodations they legally can to reduce taxpayer burden in allowing 
for assistance in resolving tax related matters. NAEA is concerned that 
the trade-off to rapidly expand access be tempered by imagining the 
field day identity thieves would have if given access to the third-
party information reports IRS provides by social security number and 
account number listing.
    It seems incongruous that while the IRS Criminal Investigation 
Division focuses on return preparer fraud deterrence and enhancing 
compliance in the return preparer community, the IRS Electronic Tax 
Administration will rush to offer what could be access to information 
that would be an identity thief's dream come true. In its zeal to meet 
the congressionally mandated 80% e-filed returns by 2007, IRS has once 
again let the ends justify the means. The history of IRS e-filing is 
replete with shortsightedness in this regard. If one goes back to the 
origination of the program in the late 1980's, we find that refund 
anticipation loans were seen as the draw that would create the market 
demand for electronic services. They certainly did, and today we view 
these extremely high interest rate loans, as an onerous mechanism to 
take entitlement money out of the pockets of low-income, working 
taxpayers.
    Our current concern: In an effort to reward electronic filers, IRS 
has announced an intention to expand ``e services for the third-party 
community'' defined as ``web-based products that allow practitioners to 
interact with the IRS electronically.'' ``e-services '' are expected to 
include, ``disclosure authorization, electronic account resolution, 
transcript delivery system, and TIN matching.''
    The system is envisioned to allow authorized practitioners to 
electronically submit Power of Attorney and Tax Information 
Authorization forms over the Internet. The user may also review, revoke 
and modify authorization records online. It would allow authorized 
practitioners to submit account related inquiries for their clients' 
individual and business accounts and support payment tracing, complex 
refund analysis, installment agreements, notice resolution and account 
problem resolution. It would provide request and delivery of the 
following information items: account transcripts; return transcripts, 
records of account, wage and income statements, and verifications of 
non-filing.
    Access to such information and ability to more quickly resolve 
client problems sounds like a beneficial service to all practitioners 
admitted to practice before IRS. However, IRS intends to ``authorize'' 
this service initially to a very select group of return preparers--
those that are enrolled in the electronic filing program and who file a 
minimum number of returns online. This leaves out most attorneys, CPAs, 
and many Enrolled Agents. Yet, makes such services available to return 
preparers least likely to be qualified to represent taxpayers in the 
first place. Unless those return preparers are also ``authorized to 
practice before IRS,'' this suite of ``e-services'' will see very 
limited usage. Moreover, those who would use it most will not be able 
to access it.
    To qualify for this enhanced level of access to account information 
would only require the preparer to be an Electronic Return Originator 
who has filed 100 returns. According to a report by the Treasury 
Inspector General for Tax Administration, ``E-File Providers Are Not 
Adequately Screened'' in June 2002:

      ``Our review identified that the IRS does not have effective 
screening procedures to adequately determine who should be allowed to 
participate or to continue to participate in the e-file program. 
Specifically, we found that the IRS does not independently validate age 
and citizenship requirements. Our analysis of IRS data identified e-
file providers who were not United States citizens, were under the age 
of 21, or were identified as deceased. In addition, screening checks 
publicized to the taxpaying public as being extensive were found to be 
limited primarily to whether an individual filed tax returns and paid 
taxes due. For those individuals that file electronic tax returns as 
part of IRS's volunteer income tax preparation program, no checks are 
performed. We also identified that for those limited number of 
individuals selected for a criminal background check, 60 percent of the 
individuals received authorization to participate in the e-file program 
before results from the Federal Bureau of Investigation (FBI) were 
received and analyzed by the IRS. Finally, testing found that once 
individuals are authorized to participate in the e-file program, no 
subsequent non-tax related screening checks are performed to ensure 
these individuals continue to maintain a high degree of integrity and 
adhere to the highest professional and ethical standards.''

    NAEA is concerned about unauthorized disclosure of taxpayer 
information and the disclosure of tax account information to persons 
not authorized to represent taxpayers before the IRS. In this regard, 
many EROs' activities are limited to return preparation; a great number 
engage in this endeavor during the filing season only. They have no 
training or education equipping them for tax practice and are not 
eligible to so practice. Hence, much of the information that would be 
made available to them would serve no valid purpose, would not be 
helpful to taxpayers, and/or would be counterproductive to effective 
and efficient tax administration.
    We believe adequate safeguards have not been placed into this 
program. In view of this, we recommend that this aspect of e-services 
be broken into two sections: Section One would allow all participating 
EROs (1) to apply for EINs for taxpayers who have executed the third 
party authorization on Form SS-4 and (2) to resolve processing issues 
on returns where the ``check-box'' authorization has been executed. 
Section Two would allow access to all other account information only to 
EROs who meet the eligibility to practice requirements and who have 
been authorized by the taxpayer to receive such information.
    As a result and in view of the sensitivity of the information that 
would be made available, it is our belief that access to Section Two 
information documents should be limited to credentialed practitioners, 
i.e. attorneys, Certified Public Accountants, and Enrolled Agents.
    We are particularly distressed that many Circular 230 practitioners 
who do not engage in tax preparation work will be denied access to e-
services because they only do representation work. This strikes us as 
inherently unfair and counter productive to what should be a mechanism 
to assist all taxpayers in resolving account related problems at the 
least expense.

The Impact of Tax Law Complexity on IRS Employees

    As we have told you in past years, we believe that tax law 
complexity is an area that requires your attention as it affects IRS 
employees and we respectfully urge you to press for simplification of 
the tax code. As we have reviewed proposals currently under 
consideration, our great fear is that you will fail to consider the 
administrative difficulties of implementing the changes before you pass 
on the legislation. If taxpayers (and their preparers) cannot 
understand the law, they are not likely to comply with it.
    As the National Commission on Restructuring the IRS found, there is 
a clear connection between the complexity of the Internal Revenue Code 
and the difficulty of tax law administration and taxpayer frustration. 
Clearly, how the public perceives how well the agency is doing its job 
is tied directly to the level of frustration taxpayers have with the 
constantly changing tax code.
    As frontline practitioners, we believe Congress could provide 
significant relief and make the job of IRS employees easier by making 
immediate changes in three areas. First, Congress needs to repeal or 
dramatically restructure the alternative minimum tax (AMT) for 
individuals. Second, phase-outs and phase-ins (such as those for IRA 
contributions, education incentives, child credit, itemized deductions 
and personal exemptions) need to be standardized. Finally, the rules 
for qualifying for the Earned Income Tax Credit need to be streamlined.
    Once again, the Alternative Minimum Tax is providing nightmares to 
taxpayers and practitioners. Here is a representative sampling of what 
our members say:

     From a California EA: I am seeing so many people with 
small/large AMT taxes due to the disallowance of state income, real and 
personal property taxes. Since there have been almost no changes to the 
AMT exemptions or rules since 1986, could something be done to 
alleviate this problem before next year?
     AMT is hitting quite a few of my clients this year--
middle class taxpayers it was never intended to hit: senior citizens 
with a once in a lifetime bonanza of selling property that they've sat 
on for 45 years, low income folks with inherited stock, and middle 
class managers with bonuses. Not only are they hit with AMT, they lose 
Schedule A deductions and personal exemptions. They don't get to take 
their rental losses. AMT should be abolished or adjusted for the times. 
``Stealth taxes'' should be abolished in favor of honest tax rates.
     I personally prepare over 1200 tax returns per year and I 
am seeing an increasing incidence of the AMT being applied to the 
workforce and adversely affecting them in a way that I do not believe 
was the intent of the law. Employee business expenses are NECESSARY 
expenses incurred for conducting one's employment. Outside sales 
persons are particularly hard hit when their expenses for travel 
already take a significant portion of their income. The employee is 
required to incur job related expenses to earn the income yet they are 
forced to absorb the equivalent of 2% of their AGI before any deduction 
can be claimed, and then the amount claimed cannot be taken for AMT 
purposes so often they lose the benefit completely.
     More families with children are seeing the AMT this year 
since the personal exemption amount of $3000 per person is not allowed 
against AMT. Even with ``normal'' amounts of state & local property 
taxes itemized on Schedule A, we are seeing a much higher percentage of 
middle-income filers with AMT.

    Since most self-prepared returns do not calculate the AMT, IRS ends 
up sending change notices to affected taxpayers. On the more complex 
cases, IRS does not have the information on the return to calculate the 
correct AMT, so those taxpayers benefit from the complexity. Changes to 
these three areas would provide significant relief to taxpayers as well 
as allow the IRS to free up compliance resources within the agency for 
other purposes.

Conclusion

    Mr. Chairman and members of the subcommittee, I am pleased to have 
been able to share with you our members' views of the filing season and 
the IRS budget. If I may answer your questions or provide you with any 
additional information, I am happy to do so.
    Thank you.

                                 

    Chairman HOUGHTON. Thank you very much. I just have a 
series of questions. The first one, I think, is Mr. McKenzie 
and Ms. Hill have talked about the outside collection systems 
and they worry about it. Could you add a few additional 
comments about that?
    Also, as far as Mr. McCormally is concerned, it is pretty 
frightening, isn't it, to think that half the employees in the 
IRS are eligible to retire in 3 years. Then, also, Mr. 
Stevenson, in terms of the training, what do you suggest we do, 
just bring it back to Washington or what? So, maybe each of you 
would like to comment on those. Do you want to start, Mr. 
McKenzie?
    Mr. MCKENZIE. Yes. The outsourcing, again, we think it 
could work, but we have noted to State agencies, and myself in 
particular, I have dealt with agencies all over the country. I 
have written a book on how to represent people in collection 
matters and I do it every day, and I found that not all the 
private collection agencies are very concerned about individual 
rights. On many occasions, I have had to invoke the procedures 
of the Fair Debt Collection Practices Act (P.L. 90-321) to 
protect my clients from overly aggressive State collection 
agencies.
    So, again, we think we need more efforts to collect. It is 
unfair that many people file their returns and don't pay them, 
and I applaud the efforts to look to outside collection. If we 
are going to do it, let us make sure that all the protections 
are in place before we allow an outside collector to call and 
abuse an American taxpayer.
    Chairman HOUGHTON. Is that possible, all the collection 
procedures are in place? Obviously, there are going to be some 
glitches along the line here. What are the fundamental things 
that you worry about most?
    Mr. MCKENZIE. Well, somebody calling and demanding the 
money repeatedly from the taxpayer without telling them their 
rights under the Fair Debt Collection Practices Act. We have 
the requirement that the IRS give each taxpayer a Publication 1 
and tell them of their rights. If we are going to have private 
collectors calling on the phone, they should, before they even 
begin any interview with the taxpayer, have to give a full 
range of rights to the taxpayer, including the right to decline 
to discuss the matter with that collection agency as required 
by the Fair Debt Collection Practices Act.
    If we are going to have phone collection efforts and we are 
going to use private collectors, we have to assure that they go 
to the same high standards we hold the IRS collection agents 
to, and I want to assure that all those protections are within 
any legislation authorizing this.
    Chairman HOUGHTON. Mr. McCormally?
    Mr. MCCORMALLY. Mr. Chairman, I think actually there is a 
connection between the concerns that some of us have about the 
use of private collection agencies and the point that was made 
earlier during the hearing and in my testimony about training 
and education efforts with respect to agents. The tax law is 
not a simple thing. Tax administration is not a simple thing.
    I know that the Taxpayer Advocate has expressed some 
concerns, especially with respect to one of her core 
constituencies, low-income taxpayers who don't have the 
wherewithal to understand fully their rights and what they can 
request when contacted by an IRS employee. The IRS employee 
currently has an obligation to know the processes and to make 
assistance available. I think what Mr. McKenzie was saying is 
that those same rights and that same knowledge don't 
necessarily follow naturally from the IRS to a private debt 
collector.
    More generally, with respect to the concerns of TEI Members 
and large businesses in general, we believe it is essential 
that the IRS have adequate funding to hire new agents and 
really to stay the course with respect to training those 
agents. The LMSB Commissioner Langdon has testified before that 
it is a minimum of a 3- to 5-year process to create a good 
international agent, a good revenue agent that can understand 
and audit the complicated transactions that TEI Members engage 
in. So, funding on an ongoing basis to secure adequate 
personnel and to train them, I think are essential for the 
agency to address the challenges that lie ahead.
    Chairman HOUGHTON. Thank you very much. Mr. Stevenson?
    Mr. STEVENSON. First off, the Restructuring and Reform Act 
1998 places a very high priority on education, and the IRS is 
really required by that bill to provide you with a multi-year 
layered plan of an educational process.
    I don't know if this is quality time to discuss a whole 
educational mode, but off the top of my head, I suppose what I 
would consider doing is I would set up--I would formalize the 
educational process in such a way that I would have an academy 
inside the IRS, that this academy would be staffed by people 
who understand the mission, understand the educational process 
and also understand that they are working to change the culture 
of the IRS. If the plan stays the way it is, with middle 
management who haven't bought into it, you are never going to 
change the culture of the IRS unless those 43 percent retire 
and you get all new people in place.
    Chairman HOUGHTON. Thank you very much. Ms. Hill, any other 
comments?
    Ms. HILL. On this specific subject?
    Chairman HOUGHTON. Any subject you want, particularly the 
privatization issue which you talked about.
    Ms. HILL. The NAEA concern about the privatization is will 
taxpayers' rights be protected. That is our primary concern.
    Chairman HOUGHTON. Right.
    Ms. HILL. Our other concerns have to do with the 
confidentiality of information that the IRS seems to be making 
available through its programs to encourage electronic filing 
by offering e-services, and that is where they would make 
available through the Internet access to taxpayer accounts and 
charts of accounts, as well as listings of accounts for those 
people who are electronic filers rather than those people who 
are prepared to represent taxpayers.
    Chairman HOUGHTON. Okay. Thanks very much. Mr. Pomeroy?
    Mr. POMEROY. It is a very difficult line, trying to put in 
place protections that are meaningful for taxpayers without 
creating inadvertently shelters for those who want to avoid 
their tax obligations.
    I was very interested in the comments of your testimony, 
Mr. McKenzie, but let me ask you a little more broadly 
something referenced by Ms. Hill, that there is almost a--let 
me put it this way. There was some publicity a year ago that 
there was a public attitude that audit functions were not as 
aggressively pursued by the IRS anymore and cheating, 
especially with more affluent filers, was increasing. I would 
like to just run across the panel and have your thoughts in 
terms of whether or not you sense in the areas where you work 
any changed public attitude about the IRS and its rigor 
relative to collections.
    Mr. MCKENZIE. As someone on the frontlines every day with 
the taxpayers, I certainly have seen a view that the IRS is not 
as aggressive, and many of my clients take the attitude when 
they first arrive in my office, perhaps, of who is to know, and 
the numbers bear them out. When the IRS is only doing about a 
third of the face-to-face audits it was doing 6 years ago, 
there is good reason for the taxpayers to believe that they can 
get away with more. More people are getting away with more.
    When in fiscal year 2001, we audited more poor people than 
we did wealthy people, something is wrong. I know Congress gave 
a mandate to come after EITC, but there are all types of 
inefficiencies. When I audit somebody poor in the 10 percent 
tax bracket and I find $1,000 wrong with their return, that is 
$100 into the Department of the Treasury. I audit a wealthy 
person in a 37.6 percent tax bracket and find $1,000 wrong with 
that return, I get $376 into the Department of the Treasury. 
So, there are huge inefficiencies.
    Going to Mr. McCormally's comment, the IRS is the only 
profit center in the Federal Government. Why don't we devote 
the resources to hire adequate people to go out and collect the 
money, because many taxpayers think it is unfair that a lot of 
people are not paying their fair share. Until we give the IRS 
adequate enforcement means to come after the tax cheats, the 
system is always going to be perceived as unfair.
    Mr. POMEROY. In your substantial practice, you see it 
deteriorating at present?
    Mr. MCKENZIE. Yes. I do not prepare returns. I only 
represent people who have come face-to-face with the IRS for 
some misconduct. Either they haven't paid their taxes or they 
may not have reported everything or they may even face 
potential criminal prosecution. The attitude of those people I 
represent who do finally essentially get caught is, ``Why me? 
Everybody else is getting away with it. Why am I caught?''
    Mr. POMEROY. Very interesting. Mr. McCormally?
    Mr. MCCORMALLY. Mr. Pomeroy, the Members of TEI don't have 
the luxury of engaging in the audit lottery for the most part. 
They are part of this coordinated industry case program that 
the IRS runs. They have IRS agents living with them in their 
offices on a year-round basis.
    That doesn't mean, however, that there aren't ways that the 
IRS can do its job better and can bring efficiency. I think the 
question here, as in all things, is the appropriate balance to 
be struck between how aggressive the IRS is in pursuing certain 
issues and how helpful their employees are in helping taxpayers 
find better ways of doing things. As my written testimony 
elaborates, there are a number of initiatives that the LMSB 
Division, in particular, has instituted in the last few years 
that have really brought a lot of efficiency to the audits and, 
I think, have opened up a realm of possibilities to getting 
issues and cases resolved earlier.
    Certainly, the attention that this Committee and Congress 
as a whole has shown on questionable activities by some 
corporations in recent years has resonated throughout not only 
the IRS, but the entire business community. I do not think that 
the sense that Mr. McKenzie has with respect to the individual 
taxpayers at all obtains in respect to the large business 
community whose members make up TEI.
    Chairman HOUGHTON. Thank you.
    Mr. STEVENSON. Let me take a little different approach. I 
think the lack of enforcement plays a role in noncompliance. 
The behavior is manifest in a cadre of new tax preparers who 
have come into the business and never had to face an audit of a 
tax return that they have prepared. I think these people tend 
to be more cavalier. I think some of the people who have been 
around the barn a few times who know what it is like to have to 
face an audit of something you have done are less inclined to 
push the envelope beyond what they feel is reasonable.
    The practitioner community prepares about 50 or 60 percent 
of the tax returns in this country and I think if there were 
some education, not education, but enforcement where the 
younger people started getting a taste of the action, I think 
they would probably tighten up their practice, too.
    By the way, I will give you three ways to increase money 
flowing into the Department of the Treasury without having to 
go to outside third parties. Consider interest and penalty 
amnesty, not tax amnesty, but interest and penalty amnesty. 
Improve the offer and compromise program, not the 
administration of it, but the program, and adopt less than full 
pay installment agreements and you will probably get that $12 
billion you were talking about a little while ago.
    Mr. POMEROY. Thank you I know my time is up, but Ms. Hill, 
if you could just briefly respond.
    Ms. HILL. I see a tremendous drop. Wage and investment 
sector examinations have almost totally disappeared in the area 
that I live in in the last 3 years. Small business 
examinations, I had two last year out of a client base that is 
primarily individual small businesses. This is an extremely low 
number.
    What amazes me that has dropped has been the follow-up on 
known non-filers, where IRS has third party information and has 
not contacted them with substitute for returns and instances 
where people who have underreported their income and that has 
not been followed up on. Now, those kind of contacts are cost 
effective. It is very inexpensive for IRS to make these kind of 
contacts, but they do indicate an IRS presence when those 
contacts go out. That lack of IRS presence is what makes my job 
difficult in working with clients when they sit there and ask, 
how do they know?
    Mr. POMEROY. You have professional exposure for not doing 
it right, dealing with a clientele that no longer thinks there 
is a penalty for doing it wrong.
    Ms. HILL. Mr. Pomeroy, when I have people who say, well, 
you don't have to put that income down because I don't think it 
got reported, I have to put that income down. We prepare 
returns competently and professionally knowing that we have 
standards to meet.
    Mr. POMEROY. Thank you very much.
    Mr. PORTMAN. Thank you, Mr. Pomeroy. I thank the panel. 
First, I hope the IRS is here and listening, because there 
continue to be major concerns, and yet I do think we are 
beginning to address some of them. Certainly, the IRS is 
focused more on the audit side as well as compliance in 
general.
    I would say to Mr. McKenzie, I agree with what you are 
saying, but remember with regard to going after wealthy 
taxpayers versus poor taxpayers, this is in specific response 
to the huge concerns we have with EITC and all audits are not 
equal. The amount of time the IRS puts into these EITC audits, 
as you know, is far less than they would put into, say, a small 
businessperson's audit, which might result in a larger return 
to the Department of the Treasury. Sometimes these audits on 
the EITC side are minimal in terms of the IRS involvement, but 
that is all we can do right now.
    We talked about $12 billion being out there. We also talked 
about $9 million in missed payments every year, or erroneous 
payments under the EITC system. Again, as I said at the outset, 
I am not sure the IRS is equipped, nor would any entity that is 
always looking at taxpayers in terms of whether they are 
underreporting income, to deal with the EITC problem, which is 
often over-reporting in order to get EITC. I think it is a very 
different mindset, and I think there are some real concerns 
about whether the IRS and their employees, even trained up 
better, Mr. Stevenson, than they are now, are trained to go 
after the EITC problem and go to a person's home and possess a 
rented television set or whatever assets are there. It is a 
very different kind of approach.
    So, I just throw that out and I don't particularly expect a 
response, but if you had any great ideas as to how to change 
EITC so it could work better, we would appreciate it.
    With regard to some of the input you have given us, all of 
which is excellent, and I appreciate your comment on training 
in particular, Mr. Stevenson, and it concerns me that you think 
middle management is not accepting the reforms, my sense is 
that, over time, we have begun to see some movement down not 
just to middle management, but people on the line, or maybe you 
are saying on the line they are getting it and at the top they 
are getting it, but middle management isn't yet understanding 
this lack of exclusivity between service and enforcement, which 
is what Ms. Williams talked about.
    Could you comment on that for a second, and then I would 
love to follow up with Ms. Hill on some of her comments, in 
terms of middle management and their acceptance of the new 
attitudes at the IRS.
    Mr. STEVENSON. My comments are pretty much supported, by 
the way, by people across the country in my organization, and 
so it is not just my own observation. It just seems to us that 
in the IRS's current culture, there is no profit in the lower-
level people resolving problems. The only profit they have is 
closing a case. It doesn't make a difference whether the 
problem is resolved. Well, that is really poor training. They 
are not empowered, and even if they were empowered, they are 
afraid to make a decision. So, what they will do is move the 
case or push it aside or bury it.
    This is the fault of middle management, who have not bought 
into what it means to be a service organization. It is like 
buying a car. Everything is great, it is nice and shiny, and 
what happens when there is a problem? If you go back to try to 
fix the problem and you can't fix it, then that says something 
about the agency.
    The quality of an organization is not how well it performs 
its function, it is how well it solves problems. The IRS does a 
very good job at pro forma stuff, but when it starts getting 
into people problems, where you have to make decisions and you 
have to have perspective, this agency is not doing very well, 
from my perspective.
    Mr. PORTMAN. Well, thank you, and ``empowerment'' is 
probably a good word to use because that is part of the vision 
here, is to empower people at that level to be able to make 
decisions to solve problems and to close cases in that way, not 
just to move the cases along. Thank you for your help. Since 
1995, we have made a lot of progress, but we have got a long 
way to go.
    I was just following up, Ms. Hill, on your written 
testimony as well as your oral testimony. You didn't have a 
chance to get into this as much in your oral statement, but you 
talked a lot about this confidentiality issue, and in response 
to Mr. Houghton, you talked about it again. You mentioned 
access to bank account and brokerage information being a 
problem. In your testimony, you talk about the Circular 230 
practitioners and the EROs. Can you tell the Committee, what is 
the difference between the EROs and the Circular 230 
practitioners?
    Ms. HILL. Circular 230 practitioners includes enrolled 
agents, CPAs, and attorneys. They have established, and are 
held accountable to, standards of practice and professional 
responsibility. They are regulated by the Department of the 
Treasury and they have required continuing professional 
education (CPE) requirements.
    An ERO makes an application to IRS to file returns 
electronically. There are no standards, no CPE requirements, no 
level of expertise required, and it includes Mailboxes USA, 
used car dealers, anyone who is wishing to set up shop offering 
refund anticipation loans, as well as a number of very well-
qualified practitioners. I am an ERO, but there is a 
difference.
    Mr. PORTMAN. What is the significance of that difference in 
terms of your recommendation to the IRS on electronic filing 
and confidentiality?
    Ms. HILL. The IRS is offering, as an incentive to become an 
electronic filer, a program called e-services. It is a suite of 
services that would authorize products electronically to 
practitioners who would be able to obtain disclosure 
authorization, that is, power of attorney, electronic account 
resolution, taxpayer identification number matching and 
transcript delivery over the Internet. These are items that are 
very, very useful to a person who practices tax. However, the 
people that IRS is going to authorize this access to are EROs 
who file more than 100 returns. This leaves out most attorneys, 
most CPAs, and many enrolled agents, people who could take 
advantage and use this service.
    What is of most concern to me is that in my review of the 
program so far, it appears that IRS has not built the 
safeguards into it to protect client information that is 
available when they offer electronic account services, 
including transcripts of accounts. There is a variety of 
transcripts. They go from the point of just proving that a 
person has filed to showing account status, but I have along 
with me today an example of one that gives actual bank account 
names and account numbers for each taxpayer.
    Now, a person who is looking at the access that they would 
be able to obtain without talking to an individual, 
electronically over the Internet, is going to receive this kind 
of information. They are people that IRS does not hold to 
standards of practice, that are difficult to control in terms 
of their practice before them, have no CPE requirements, no 
other kind of requirements. This is of real concern to us, that 
there are not safeguards being built in this program at the 
front end to prevent this kind of access.
    Mr. PORTMAN. My time is more than expired. I appreciate 
your indulgence, Mr. Chairman, and thank you for raising that 
point again. I hope that is something that we will take a very 
serious look at as we put together the final e-file proposal 
that Acting Commissioner Wenzel talked about. Thank you, 
gentlemen and ladies.
    Chairman HOUGHTON. Thank you very much, Ms. Hill, Mr. 
Stevenson, Mr. McCormally, Mr. McKenzie. We certainly 
appreciate your testimony. The hearing is adjourned.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
    [Submissions for the record follow:]

                 American Institute of Certified Public Accountants
                                               Washington, DC 20004
                                                     April 21, 2003
The Honorable Amo Houghton
Chairman
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives
1136 Longworth House Office Building
Washington, DC 20515

RE: Hearing on the 2003 Tax Filing Season and the IRS Budget for Fiscal 
Year 2004

    Dear Chairman Houghton:

    The American Institute of Certified Public Accountants appreciates 
the opportunity to submit this statement for the Subcommittee on 
Oversight's April 8, 2003 hearing record on the 2003 tax filing season 
and the IRS budget for fiscal year 2004. The AICPA is the national, 
professional organization of certified public accountants comprised of 
more than 350,000 members. Our members advise clients on federal, 
state, and international tax matters, and prepare income and other tax 
returns for millions of Americans. They provide services to 
individuals, not-for-profit organizations, small and medium-sized 
businesses, as well as America's largest businesses. It is from this 
broad base of experience that we offer our comments.
    The AICPA is pleased to report that the 2003 filing season is 
progressing largely without any significant problems. American 
taxpayers and practitioners are reasonably pleased with the Service's 
performance during the 2003 tax filing season.
    Our comments herein focus on the IRS budget for fiscal year 2004 
and a number of critical programs administered by the Service. 
Specifically, we are pleased to address (1) the IRS budget, (2) 
Electronic Tax Administration, (3) enforcement, (4) collection 
strategies, and (5) the IRS workforce.

1. THE IRS Budget

    The AICPA urges Congress to support full funding of the Internal 
Revenue Service's fiscal year 2004 budget. The AICPA has long advocated 
funding levels which would allow the IRS to efficiently and effectively 
administer the tax laws and collect taxes. Without sufficient funding, 
taxpayers and practitioners will encounter unnecessary problems and 
frustrations.
    The IRS performs an essential role by collecting the revenue needed 
to operate our government. To continue improving collection efficiency, 
the IRS needs adequate funding. This does not eliminate the need to 
implement and monitor reforms to address the problems which exist 
within the Service. However, budget cuts should not be used to penalize 
the IRS.
    Many AICPA members are tax practitioners. As such, we have seen 
first-hand the problems caused by an IRS that is not responsive to the 
taxpaying public as customers. We are encouraged by the remarks of Mark 
W. Everson, President Bush's nominee for IRS Commissioner, at his March 
18, 2003 confirmation hearing before the Senate Finance Committee. Mr. 
Everson testified that (as Commissioner) he is committed to (1) staying 
the course on the reorganization, (2) continuing the emphasis on 
modernization, and (3) enhanced enforcement activities. By providing 
the IRS with full funding for the agency's fiscal 2004 budget, the 
Congress would be going a long way towards helping Mr. Everson meet 
these commitments, commitments that we believe the Congress and the 
nation's taxpayers expect.
    The AICPA has long advocated that funding for the IRS must be 
sufficient for the Service to efficiently and effectively administer 
the tax laws and collect tax. It is vital to our voluntary compliance 
tax system that the Service be provided the necessary resources to 
properly enforce the tax laws. When the IRS is, or appears to be, 
unable or unwilling to actively administer and enforce the tax law, 
serious damage to the effectiveness of our tax system results. 
Therefore, we encourage Congress to strongly support the IRS's budget 
needs. Obviously, we expect the Service to identify responsible ways to 
allocate any additional resources it receives over prior years, and 
Congress will through its oversight responsibilities ensure that those 
resources are properly utilized. We also believe Congress should pursue 
multi-year funding (i.e., budgeting for multiple years at once) to 
ensure stable funding for the IRS in the future.
    The American taxpaying public is just beginning to benefit from the 
Internal Revenue Service that Congress envisioned when it passed the 
IRS restructuring legislation. While the preliminary results are 
promising, it is critical that Congress facilitate moving the reform 
process ahead without delay by providing the necessary funding.

2. Electronic Tax Administration


    The AICPA supports the IRS's long-range goals for electronic tax 
administration in general, and electronic filing (ELF) in particular. 
Last year, the IRS implemented a number of improvements in the 
electronic filing program that we believe practitioners who file 
returns electronically should find positive. We especially appreciate 
that (1) nearly all Form 1040 forms and schedules have been made 
available to electronic filers; (2) electronic filers are no longer 
required to use a paper signature document; and (3) the electronic 
payment options have been expanded. Similarly, the IRS continues to 
expand the electronic filing options for business taxpayers.
    The AICPA has been frustrated in recent years by the Service's 
response to our attempts both to partner with the IRS in promoting ELF 
to our membership and in explaining to the IRS the effects of the 
current systems' limitations on our constituency. As the IRS shifts its 
electronic filing focus from individual returns to business returns, 
the importance of involving, listening to, and responding to the 
various stakeholder groups will become all the more critical.
    We appreciate the many hurdles on the road to achieving the goals 
established for the electronic filing program by Congress. And to this 
end, we look forward to being a positive partner in the ELF system.

3. ENFORCEMENT CHALLENGES

A. The IRS's Enforcement Agenda

    The AICPA appreciates public concerns regarding how non-compliance 
and aggressive taxpayer behavior threatens to overwhelm IRS resources. 
To counteract these tax administration trends, the IRS has announced a 
number of major compliance initiatives. Tax shelters are the primary 
focus for the Large and Mid-Sized Business (LMSB) Division. The Small 
Business/Self-Employed Division is emphasizing offshore credit cards, 
the unreported income and underreporting of income by high-income 
taxpayers, and promoter investigations and abusive schemes.
    These LMSB and SB/SE initiatives are resource intensive, and will 
change the allocation of resources which would otherwise fund 
enforcement initiatives targeting traditional and mainstream taxpayers. 
In order for the IRS to maintain a high level focus on compliance areas 
like tax shelters and abusive schemes, the IRS is forced to focus its 
remaining resources on mainstream taxpayers by principally basing their 
examination and collection efforts towards these taxpayers on the 
concept of materiality; that is, by emphasizing the more material 
issues under investigation. This materiality focus underlies the IRS's 
efforts to reengineer the examination and collection efforts.

B. Reengineering of Examination

    The AICPA supports the goals behind the reengineering of the 
examination function. These goals include: (1) streamlining the 
examination process, by reducing the taxpayer's time and expense in 
responding to an IRS examination, (2) increasing SB/SE's effectiveness 
and timeliness in examining returns, and (3) enabling the Service to 
reduce and redirect resources to major compliance initiatives.
    At the beginning of the ``reengineered examination'' audit, the 
examiner and taxpayer will conduct an audit engagement meeting; it is 
expected that the examiner and the taxpayer will discuss the audit 
issues, the information needed for resolution of the examination, and 
the time estimated to complete the audit. The IRS expects to establish 
materiality guidelines for examining critical audit issues, and for 
manager involvement in the early stages of the audit to facilitate 
quick and effective problem resolution.
    Like SB/SE's examination reengineering initiative, LMSB has 
announced its Limited Issue Focus Examination (LIFE) program. LMSB 
Commissioner Larry Langdon recently stated that this program is the 
Service's ``gold-card'' treatment for taxpayers ``who want to be 
cooperative and professional in sharing documents.'' Under LIFE, the 
IRS will start building its case before referral to a Revenue Agent by 
identifying the material issues for review. LMSB expects to conduct a 
periodic review to ensure that Revenue Agents are not routinely 
extending the scope of the audit beyond the material issues that have 
been identified during the case building stage. The IRS and taxpayer 
would sign a memorandum of understanding at the start of the audit 
outlining the examination's focus.
    We support the IRS's quest to reengineer the examination function. 
These efforts are constructive ways to better target the overall scope 
of examinations; and practitioners believe the reengineered process 
offers significant opportunities to reduce taxpayer burden in terms of 
the time and cost of an examination.

4. EFFECTIVE COLLECTION STRATEGIES


    The AICPA strongly supports IRS implementation of effective 
collection strategies designed to improve taxpayer compliance. Two 
particular collections areas that we believe warrant careful 
consideration are the Offer in Compromise program and the frivolous 
filing penalty.

A. Offer in Compromise User Fee

    The IRS issued proposed regulations on November 5, 2002 that would 
impose a $150 user fee for Offer in Compromise filings. However, the 
user fee would not be imposed on Offers: (1) filed by ``low income'' 
taxpayers; (2) based on doubt as to liability; (3) based on doubt as to 
collectibility due to economic hardship; or (4) which promote effective 
tax administration.
    The AICPA commends the Service for seeking to alleviate its 
workload in processing Offers in Compromise, a burden that often 
results in taking more than a year to process, evaluate, or reach a 
final determination on an Offer. Nevertheless, we are concerned that 
the proposed regulations do not address the dire need to improve 
customer service in the Offers in Compromise program. We fear that 
taxpayers will pay a new fee without receiving improved customer 
service or reduced processing time in return.
    We generally do not support the IRS's proposal because the user fee 
would place additional administrative and financial hardships on 
taxpayers. Instead, we suggest that consideration be given to a 
broadening in the scope of the frivolous filing penalty to cover 
frivolous Offers. We view this penalty proposal as potentially a more 
effective means of addressing problems with administering the Offer 
program. (See subsection B below, ``Frivolous Tax Returns and 
Submissions.'')

(1) The Concept of Imposing a User Fee

    Based on our review of user fees in other IRS programs, the AICPA 
believes that the proposed Offer in Compromise user fee is not 
consistent with the use of such fees in other administrative programs. 
Most user fees routinely involve voluntary requests for advice from the 
Service, such as private letter rulings and determination letters. 
Moreover, we do not agree with those who suggest that an Offer user fee 
is similar to the current $43 fee assessed to set up an Installment 
Agreement. This Installment Agreement fee reimburses the IRS for the 
costs associated with monitoring and administering the Installment 
Agreement program over an extended period of time. In contrast, filing 
an Offer in Compromise is not a voluntary request for IRS 
administrative guidance. Rather, an Offer is a request of last-resort 
for administrative relief; one that provides the taxpayer with a 
possibility of making a fresh start financially.

(2) Taxpayers' Inability to Pay the User Fee

    To the extent a taxpayer does not qualify for an exemption from 
payment of the user fee, section 300.3(b)(3) of the proposed 
regulations states that ``the fee will not be refunded to the taxpayer 
if the offer is accepted, rejected, withdrawn, or returned as 
nonprocessable after acceptance for processing.''
    Many practitioners feel that the IRS uses overly rigid criteria in 
processing and evaluating Offers. As a result, they fear that clients 
will be forced to pay multiple user fees, because clients must often 
submit Offers two or three times before reaching final resolution of 
their tax problem. These practitioners believe the user fee is being 
proposed solely to discourage taxpayers from filing Offers in 
Compromise, particularly since persons who file Offers typically have 
insufficient funds or lacks financial resources.
    Under certain circumstances, the AICPA respects the need to 
establish user fees that are fair and reasonably approximate 
governmental costs for administering a program. Although we don't agree 
with the suggestion that the user fee is being imposed solely to 
discourage Offer filings, we doubt that this user fee will result in 
any meaningful revenue increases for the IRS's administrative budget or 
even for the U.S. Treasury.

(3) Cost of Administering the User Fee Program

    Administering a new user fee program is not cost-free. Systems must 
be created to determine who is required to pay, and when refunds or 
exemptions from payment are appropriate. As previously stated, there 
will be a waiver (or in some cases, a refund) of a user fee for 
taxpayers filing Offers involving doubt as to liability, low income 
status, or Offers based on effective tax administration or economic 
hardship grounds. In all likelihood, a specific form, accompanied by 
potentially complex instructions, will be needed to apply for, and 
explain the grounds for waiver of, the fee. These costs will further 
reduce any revenues the Service hopes to collect from the fee.

(4) The Definition of Low-Income

    The proposed regulations would exempt low-income persons from 
paying the user fee. A low-income person is defined under the 
regulations as a taxpayer falling at or below the Department of Health 
and Human Services' annual poverty guidelines--for 2002, $18,100 for a 
family of four.
    This definition of ``low income'' is too low and would force many 
taxpayers of limited means, who happen to earn more than the HHS 
poverty guidelines, to pay the user fee. A more equitable--and 
consistent--definition for low-income can be found in IRC section 
7525(b)(1)(B). This Code section defines a low-income taxpayer clinic 
(among other criteria) as a facility that represents taxpayers who 
generally do not have incomes exceeding 250 percent of the poverty 
level. If $18,100 represents 100 percent of the poverty level for a 
family of four, then 250 percent of the poverty level amounts to 
$45,250. Few, if any families of four with incomes of $18,100 or less 
pay any tax at all, and are unlikely to use the Offer in Compromise 
program.

B. Frivolous Tax Returns and Submissions

    Under current law, the IRS has the authority to impose a $500 civil 
penalty against individuals who file frivolous original or amended 
returns. Section 107 of H.R. 1528 addresses submissions raising 
frivolous positions or intending to delay or impede tax administration. 
This proposal would modify present law by (1) increasing the frivolous 
filing penalty to $5,000 and (2) expanding the penalty's scope to cover 
collection due process hearings, installment agreements, offers-in-
compromise, and taxpayer assistance orders. The bill would also require 
the IRS to publish a list of positions, arguments, requests, and 
proposals that the Service has determined to be frivolous.
    The AICPA supports increasing the frivolous filing penalty to 
$5,000 and the proposed expansions in its application. However, we 
would not want the frivolous penalty proposal to be used to stifle--
overtly or inadvertently--legitimate taxpayer submissions involving 
collection due process hearings, installment agreements, offers in 
compromise, and taxpayer assistance orders.
    Although we are pleased that the proposal would require the IRS to 
publish guidance regarding what constitutes a frivolous position, we 
recommend expanding this requirement to also provide guidance regarding 
the meaning of the language of section 107 involving ``a desire to 
delay or impede the administration of Federal tax laws.'' It is 
particularly critical that the guidance regarding what constitutes ``a 
desire to delay or impede the administration of Federal tax laws'' be 
restricted to truly frivolous positions or actions. Such guidance would 
go a long way to ameliorate concerns about the potential misuse of the 
expanded penalty's application, especially if the IRS consults with the 
practitioner community in the development of such guidance.

5. Workforce Empowerment

A. IRS Employee Training

    There are many practitioners and IRS personnel who do not have a 
good grasp on how the overall IRS reorganization is supposed to work. 
When an IRS employee in the field is unsure how it implements a new 
program or procedure, that person will invariably fall back on his or 
her old ways of doing things. Nevertheless, the old way of doing things 
is not an option for the IRS or its employees in 2003.
    Some of the most frustrating experiences realized by taxpayers and 
tax practitioners in dealing with the IRS occur because of a lack of 
training on the part of the IRS employees. It is much easier to work 
out a solution that is fair to both the tax system and the taxpayer if 
the individuals resolving the issue are knowledgeable and well trained. 
Given the ``taxpayer segmented'' nature of the new IRS organization, it 
is more important than ever that IRS employees acquire the technical 
skills and insights that correspond to the needs and issues of their 
different taxpayer constituencies.
    The IRS needs to target meaningful resources toward the training of 
Service employees, particularly with the need to overcome any cultural 
inertia of mid-level and rank-and-file personnel toward the 
reorganization overall. The AICPA strongly supports such efforts. IRS 
executives must continue their resolve to hire and train new employees 
and replace its aging workforce.
    We believe we can be of immense help to the Service with the 
training of its employees. First, whenever the IRS seeks to implement a 
new program, we suggest that the Service seek input from key 
stakeholders on the details and development of any new program. Second, 
the Service could benefit from the constructive suggestions of the 
AICPA and other stakeholders regarding materials that will be used in 
the training program for the new IRS initiative. Third, we recommend 
that the IRS utilize CPAs and other stakeholders in teaching part of 
the training curriculum for IRS personnel involved with any new 
program.
    An excellent example of how this process can work and benefit the 
overall tax administration process is the IRS's roll-out of the 
National Research Program. In fact, the IRS did share the initial NRP 
program details and the training materials with critical stakeholders. 
Also, the IRS successfully utilized CPAs in the training of IRS 
personnel for the NRP program. We firmly believe private sector 
involvement in the training process helps sensitize IRS employees to 
the need to conduct new programs in a way that proves effective for the 
tax administration process, but which remains non-intrusive and 
minimizes taxpayer burden. By including taxpayer representatives in the 
training of IRS personnel, the Service will help the public learn about 
a new compliance program, thereby potentially mitigating the emotional, 
and sometimes political, reactions of the public to a new IRS program.

B. Coordination Between Divisions

    One of the greatest challenges for the IRS is to implement a 
strategy that promotes positive communications and coordination between 
the Large and Mid-sized Business, Small Business and Self-Employed, 
Wage and Investment, and the Tax Exempt and Government Entities 
Divisions. Such coordination is necessary to avoid confusion among the 
public regarding how to respond to an inquiry from one of the four 
operating divisions. Some early commentators on the reorganization were 
concerned that instead of one IRS, taxpayers might now face responding 
to four IRSs as represented by the operating divisions. During the last 
several years, IRS senior executives have done an excellent job of 
setting the tone for the overall organization, and the tone for proper 
coordination and cooperation among the operating divisions. At this 
juncture the IRS national office has successfully steered the 
organization in the direction of a united structure, overseeing its 
critical (but integral) components.
    We encourage the Service to stay the course with respect to the 
reorganization. While the AICPA recognizes that the reorganization 
effort remains in transition, with further work to be done, we believe 
that the general rationale underlying the formation of the four 
operating divisions--focusing on specific taxpayers and their needs--is 
the right one. Furthermore, we believe that any more significant 
changes to the IRS's organizational structure would only serve to 
confuse taxpayers and practitioners who only now are beginning to 
become comfortable with the new organization.
            Sincerely,
                                                   Robert A. Zarzar
                                     Chair, Tax Executive Committee

                                 

           Statement of Gerald E. Scorse, New York, New York
    I wish to make a written statement regarding the Subcommittee's 
April 8th hearing on the 2003 tax return filing season and the IRS 
budget for fiscal 2004.
    My statement takes the form of the article which appears 
immediately below. Pursuant to formatting requirement No. 3, a 
supplemental sheet also follows.
                                 ______
                                 
                 The Sweet Math of Capital Gains Taxes
    My name is Peter Privilege. Along with millions of other Americans, 
I'll be filing my Form 1040 with the Internal Revenue Service by April 
15th. Unlike wage earners, however, the income that I report can be 
whatever I want it to be. I'm a capital gains taxpayer, which gives me 
a loophole so big you could drive a Hummer through it.
    Really, you say? Yes, really.
    And it's ever so simple.
    Every year, I get a statement that lists my stock and bond sales. 
The IRS gets the same information: it tells them what I sold, when, and 
how much the proceeds were.
    But the statement doesn't say what I paid in the first place. I 
could put down whatever I please, and the IRS would never know.
    Let's say I bought 500 shares of IBM at $50 and sold them at $100. 
Commissions aside, that's a capital gain of $25,000. But I could wipe 
it out entirely, or even claim a loss, by simply reporting that I paid 
$100 or more for the stock. Remember, the IRS receives no information 
on how much I paid in the beginning.
    And there's almost no way it could find out.
    As long as my tax return jibes with the information the IRS has (in 
this case, a sale of 500 shares of IBM at $100 a share), why would they 
ever question me?
    The answer is, they wouldn't.
    It's the same with short-term gains, which incur higher taxes, and 
long-term gains, on which the taxes are lower. The IRS has only the 
sell date, which essentially tells them nothing. It's left to me to 
report the gains as short-term or long-term.
    Didn't I tell you it was simple?
    On my good days, when I feel virtuous, I'm inclined to report the 
real numbers and let my taxes fall where they may.
    But there are other days, I have to admit, when I'm tempted big-
time.
    On those days I feel like jumping right through that loophole, and 
maybe buying myself a Hummer.
    I'm no angel, you know.
    (Author's Note: If this gets your Irish up, do something. Contact 
your Congressman and demand third-party reporting of capital gains 
income by brokerage houses and mutual funds. Be sure to carbon Bill 
Thomas (R-CA), chairman of the Ways and Means Committee of the House, 
where all tax legislation originates. Why should capital gains not be 
reported, anyway?)

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