[Senate Hearing 108-]
[From the U.S. Government Publishing Office]



 
  DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND 
          RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2004

                              ----------                              


                        WEDNESDAY, APRIL 9, 2003

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:02 p.m., in room SD-124, Dirksen 
Senate Office Building, Hon. Richard C. Shelby (chairman) 
presiding.
    Present: Senators Shelby and Murray.

                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

STATEMENT OF ROBERT E. WENZEL, ACTING COMMISSIONER
ACCOMPANIED BY TODD GRAMS, CHIEF FINANCIAL OFFICER

             OPENING STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. The Committee will come to order. With the 
April 15th tax filing deadline less than a week away I believe 
it is appropriate that we review the Internal Revenue Service's 
(IRS) fiscal year 2004 budget request. Since the newly 
nominated Commissioner of the Internal Revenue Service has not 
been confirmed we will hear from Bob Wenzel, the Acting 
Commissioner of the IRS today. I would also like to thank you 
for appearing before the committee this morning.
    Although I am the Chairman of the newly created 
Transportation, Treasury and General Government Subcommittee, 
these are not necessarily new issues for me. Many of you may 
recall that I was the Chairman of the Treasury and General 
Government Subcommittee several years ago when the 
reorganization and modernization of the IRS was in its infant 
stage. Since those days, the IRS has improved its service to 
the taxpayers, but there's still a great deal more to be 
achieved.
    I am relieved to know that today, unlike the last time I 
chaired a hearing on these issues, taxpayers are receiving 
courteous service, refunds are being processed in a timely 
manner, and more individuals are filing their taxes 
electronically. The Offer in Compromise program is working 
efficiently to help the taxpayers eliminate tax debts, and the 
Innocent Spouse program, I am told, is also making progress 
because only the guilty party is now being assessed the tax 
liability.
    Even with the success of all these programs, the IRS still 
has a long way to go to provide the service that taxpayers 
deserve and expect. I believe that the IRS should provide top 
quality service to America's taxpayers by helping them to 
understand and to meet their tax obligations, and by applying 
the tax laws with integrity and fairness. Americans deserve and 
expect no less from the Service.
    Turning now to the IRS budget request, I would like to 
point out that your fiscal year 2004 request is $10.4 billion, 
an amount that comprises over 90 percent of the overall budget 
for the Department of the Treasury. The IRS' ongoing business 
systems modernization efforts will require $429 million in the 
year 2004. The Subcommittee appreciates the efforts that 
continue to go into this massive upgrade that we hope will 
improve the speed, timeliness, and accuracy of IRS' 
administration of the tax system.
    I am aware that last year's efforts encountered some 
setbacks and I am interested to learn how the Service has 
gotten back on track and will ensure that such issues will not 
occur again because I expect positive results from such an 
investment.
    While the IRS' traditional role is to implement and enforce 
our tax laws, it has also been charged with administering the 
earned income tax credit. The earned income tax credit has 
expanded since its enactment in 1975 and at the same time has 
become politically controversial. This budget proposes a number 
of changes to that program because of the high level of fraud 
associated with the program's administration. Each year the IRS 
makes approximately $9 billion in erroneous earned income tax 
credit payments. This is a direct and permanent cost to the 
American taxpayer because it is virtually impossible to 
recapture these payments once they have been made.
    You are requesting $251.2 million in 2004 for the EITC 
program, and of that amount, $100 million is requested to 
implement the earned income tax credit task force 
recommendations to address the problems associated with current 
program administration that results in these overpayments. 
Eliminating erroneous payments and ensuring the proper 
administration of this program are certainly goals with which I 
completely agree.
    Compliance is a problem and you are requesting an 
additional $133 million for staff to strengthen compliance. I 
am interested in hearing of the abusive tax schemes you will be 
targeting and how you will deal with them.
    With the IRS' progression into the information age, I am 
keenly interested in how the electronic filing system is 
working, who is using the system, under what conditions, and 
finally, what kinds of systemic cost savings are being 
realized.
    The IRS promotes electronic filing as ``free'' but I have 
been made aware that most, if not all, of the programs or 
services that are requested do charge a fee. I do not know 
anyone that would agree that is free. I am interested in 
exploring this more.
    Along those lines, the IRS has initiated a new program 
called Free File, which is a public-private partnership between 
the IRS and a consortium of tax software companies that offer 
free filing services to qualifying taxpayers. I applaud this 
effort and the assistance that it provides low income 
taxpayers. It is my understanding that savings identified 
because of electronic filing and increases in productivity will 
enable the IRS to close one of its processing sites. I would 
think that the closure of this processing site will realize 
some savings. Additionally, I am interested in how you think 
continued increases in electronic filing will change the nature 
of the IRS and its workforce.
    Another significant change is this budget proposes to 
employ private collection agencies to track down taxpayers that 
owe billions of dollars in delinquent taxes. I do support the 
effort of collecting delinquent debt, but this is of serious 
concern because in addition to having a responsibility to 
protect taxpayers' privacy, I cannot imagine IRS as having the 
resources to administer and oversee such an undertaking.
    While this is a fairly straightforward budget, the IRS 
proposes a significant number of changes in the way that it 
does business. As I mentioned, I am very interested in these 
changes and look forward to your explanation of the proposal 
that is included in the budget.
    Senator Murray.

                   STATEMENT OF SENATOR PATTY MURRAY

    Senator Murray. Thank you, Mr. Chairman. We are now less 
than a week away from tax day, and 2002 was a very rough year 
for America's working families. The economy has continued to 
decline, hundreds of thousands of Americans were put out of 
work, and many of them still have not found jobs. Even those 
who have found jobs have had to take big pay cuts. Six days 
from now many of those families will be hard-pressed to cover 
their check to the IRS. At a time when our national economy is 
struggling and when individual families are hurting, the 
President is pushing for tax cuts that overwhelmingly favor our 
wealthiest citizens. That has got to be pretty disheartening to 
the many families who are struggling through no fault of their 
own.
    Today I want to shine a light on a similarly, I believe, 
unfair proposal in the President's budget that could mean less 
help for low income families. An initiative in the President's 
2004 IRS Budget seems to be targeted at throwing working 
families off of the rolls for receiving the earned income tax 
credit or EITC. This is a tax credit that is targeted at the 
working poor. The EITC is probably the most targeted means-
tested tax benefit in the entire Federal Code. It was started 
by President Gerald Ford and it was greatly expanded under 
President Reagan.
    While many working families are eligible to receive it, as 
many as 25 percent or more of those families do not even apply 
for it. We should be taking steps to allow more eligible 
families to get the help they need, but I believe the 
President's proposal goes the other away. It would require many 
of these working poor families to basically pre-certify that 
they are eligible to receive the EITC. This proposal is 
designed, we are told, to minimize fraud in the earned income 
tax credit program.
    Mr. Chairman, you will not find one Senator on this 
committee or anywhere in the U.S. Senate that supports citizens 
perpetuating fraud on the IRS. Tax fraud by any taxpayer should 
never be tolerated. It is a disservice to every other family 
that works hard and pays its share.
    As we work to eliminate fraud we need to be careful that we 
do not penalize the families who rely on this credit. As I 
understand it, under the Administration's proposal, within a 
couple of months, tens of thousands of families will receive 
Federal forms requiring a great deal of documentation in order 
to qualify them to take the Earned Income Tax Credit later in 
the year. Much of this required documentation will be hard to 
get, and the Federal tax assistance centers for the poor will 
not be up and running during the summer months. By this time 
next year more than 2 million families are expected to be 
subject to this procedure. The average earned income tax is 
roughly $1,660. That makes a pretty big difference for families 
that are struggling.
    I will repeat, I believe each and every case of tax fraud 
should be prosecuted. Given the fact that the IRS never has and 
never will have enough resources to audit every return, I am 
mystified by its decision that $100 million in scarce funds 
should be committed to going after the working poor. No amount 
of fraud should be allowed for any taxpayer at any income level 
and I think we need to be very cautious of proposals that could 
have an adverse effect on families getting the benefits that 
they deserve.
    The IRS should go after people that are cheating the system 
to receive the EITC when they are not eligible. But I believe 
the IRS also carries the responsibility to make sure that these 
enforcement efforts do not undermine the whole purpose of that 
the EITC program and the families that rely on it.
    I hope that we will pursue this critical issue of fairness 
in our tax collection system today, Mr. Chairman. Thank you.
    Senator Shelby. Mr. Wenzel, your written statement will be 
made part of the record in its entirety. Proceed and sum it up, 
if you would.

                     STATEMENT OF ROBERT E. WENZEL

    Mr. Wenzel. Mr. Chairman and distinguished members of the 
Subcommittee, thank you for this opportunity to discuss the 
President's fiscal year 2004 budget for the IRS. Accompanying 
me today is Mr. Todd Grams, the IRS' chief financial officer.
    The President's overall fiscal year 2004 budget request 
increases discretionary spending by 4 percent. Seen in this 
context, the proposed 5 percent funding increase over the 
fiscal year 2003 request for the IRS is greatly appreciated. We 
will work hard to justify this confidence and investment.
    Mr. Chairman, we also share your commitment to make the 
most efficient and productive use of the taxpayers' dollars. 
Indeed, beginning with the fiscal year 2004 budget, strategic 
planning, budgeting, resource allocation and performance goals, 
are much better aligned at the IRS.
    Moreover, we are now integrating the development of our 
budget with the establishment of performance measures, a key 
part of the President's management agenda, and we believe we 
are on the right track.
    Mr. Chairman, let me briefly discuss the President's fiscal 
year 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, 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 enforcement activities. Last October we realigned 
our audit resources to focus on key areas of noncompliance, 
such as offshore credit card users and promoters of abusive 
schemes and scams.
    To strengthen enforcement programs across the board, the 
IRS budget request includes $133 million to fund numerous 
initiatives. For example, new revenue agents and revenue 
officers will be added to address offshore credit cards, 
abusive trusts and shelters, high risk high income taxpayers, 
and other priority work. We also will increase staff devoted to 
frivolous returns and refund claims to counteract recent growth 
and aggressiveness by promoters in this area.
    A legislative proposal is also in the budget that would 
authorize us to contract with private sector collection 
agencies to supplement current IRS tax collection efforts. By 
using these private collection agencies we expect to be able to 
handle more collection cases at an earlier stage, before the 
accounts become stale and uncollectible. Moreover, we can then 
concentrate our resources on more complex cases and issues.
    The second focus of the proposed budget is reinvestments. 
Through the IRS' strategic planning and budgeting process, the 
agency's senior managers identified a significant potential for 
more effective and efficient use of current resources. A total 
of $166 million and 2,145 FTEs were identified for reallocation 
within the base budget for fiscal year 2004. By reinvesting 
$166 million, primarily from increased productivity, we will be 
able to increase performance in key tax administration areas.
    For example, electronic filing success provides a great 
opportunity to reduce and reallocate resources from submission 
processing. The fiscal year 2004 budget reflects the first-ever 
closing of a submissions processing pipeline as paper filings 
decrease. We can use these reinvestments to strengthen 
enforcement and improve customer service.
    The third and final focus is business systems 
modernization. The BSM program requests a total of $429 
million, an increase of $65 million over the current fiscal 
year 2003 budget level. 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 boosting tax receipts.

                           PREPARED STATEMENT

    Mr. Chairman, in conclusion, current trends in customer 
service and enforcement are pointing in the right direction. 
The President's budget will help us to maintain this upward 
course and to succeed in achieving our mission.
    Thank you.
    [The statement follows:]

                 Prepared Statement of Robert E. Wenzel

                              INTRODUCTION

    Mr. Chairman, and distinguished Members of the Subcommittee, thank 
you for this opportunity to discuss the President's proposed fiscal 
year 2004 budget for the Internal Revenue Service. Accompanying me 
today is Mr. Todd Grams, IRS Chief Financial Officer.
    I also want to thank the President and Treasury Secretary Snow for 
their strong and visible support of the IRS and our critical mission 
during these challenging times. The President's overall fiscal year 
2004 budget request increases discretionary spending by 4 percent. Seen 
in this context, the proposed 5 percent funding increase over the 
fiscal year 2003 request for the IRS is greatly appreciated and we will 
work hard to justify their confidence and this investment.
    The funding provided in the President's budget will help us to 
build on the improvements we have made in compliance, service and 
productivity while continuing to make longer-term investments in our 
Business Systems Modernization (BSM) program.
    Mr. Chairman, I also welcome the opportunity to work closely with 
you and we share your commitment to make the most efficient and 
productive use of the taxpayers' dollars. Indeed, beginning with the 
fiscal year 2004 budget, strategic planning, budgeting, resource 
allocation and performance goals are better aligned. Moreover, we are 
now integrating development of our budget with the establishment of 
performance measures--a key part of the President's Management Agenda. 
We believe we are on the right track.

                     BUILDING ON A GOOD FOUNDATION

    Mr. Chairman, the IRS continues to make steady progress on the 
mandates and new direction set forth by the IRS Restructuring and 
Reform Act of 1998 (RRA 98). We continue to make gains on our three 
strategic goals: top quality service to each taxpayer in every 
interaction; top quality service to all taxpayers through fair and 
uniform application of the law; and productivity through a quality work 
environment.
    Although still unacceptable in some areas, service to taxpayers has 
improved. Returns, payments and refunds are better processed. Taxpayers 
are getting better service over the telephone, in person and over the 
Internet. Most are getting the right answers to their tax law and 
account questions. New incentives, such as the innovative Free File 
program, are breaking down the last barriers to e-file.
    After careful study, we are redirecting our resources to the key 
areas of noncompliance, such as offshore tax avoidance schemes. New 
programs such as the Offshore Voluntary Compliance Initiative are 
producing promising results.
    The four customer-focused operating divisions are also meeting the 
varying needs of their taxpayer segments. After years of planning, the 
BSM program is entering a new, challenging but risky phase: producing 
the flexible systems, technology and tools needed to provide service to 
taxpayers on a par with the best private sector financial services 
companies and to administer an increasingly complex tax system.
    Clearly, we are doing a better job than when RRA 98 was enacted 
into law although we are far short of providing the level of service 
envisaged in the legislation. We still have a long way to go, but if we 
stay the course we began almost five years ago, we can still succeed.

Customer Service
    The IRS has made steady gains in better serving America's 
taxpayers. Each filing season and year is appreciably better than the 
previous one and we are building on those successes. With only one week 
left in the filing season, we can detect some very positive trends.
    For the 2002 filing season, the agency processed over 128.7 million 
individual returns, and issued over 99.5 million refunds totaling 
$191.2 billion. We believe we will exceed these numbers by the end of 
this filing season.
    In 2002, web site usage smashed all records with 2.7 billion hits 
and 336 million files downloaded. For the 2003 filing season, usage on 
our newly designed web site is already running almost 25 percent ahead 
of last year's torrid pace.
    IRS representatives also answered 25.9 million telephone calls 
during fiscal year 2002; the automated telephone system handled about 
62.4 million calls. For the 2003 filing season, total assistor calls 
answered are running about level with last year, with automated calls 
down dramatically. This drop can be most likely traced to the high 
volume of calls we received last year related to the advance refund 
checks.
    The big news is assistor level of service. It is up 20 percent over 
last year. This can be attributed to the implementation of new 
telephone lines, less complicated scripts and lower demand. Time spent 
waiting, while still below private sector standards, improved 
substantially. Average wait time is down 26 percent from the previous 
year.
    Quality of service is as important as access to service. Taxpayers 
expect not only to get through on our toll-free telephone lines but to 
get the correct answer to their tax law or account question. For the 
2002 filing season, taxpayers were receiving correct responses to 82.76 
percent of tax law questions and 88.89 percent of account questions. So 
far this filing season, the numbers stand at 82.02 percent and 86.42 
percent respectively.
    In 2002, more than 46.7 million taxpayers (36 percent) filed 
electronically--a 16.4 percent rise from last year. This filing season, 
all e-file is up by almost 9.23 percent and e-filing on line has grown 
by 29.28 percent. Much of this surge can be attributed to the Free File 
program that will help us reach the RRA 98 mandated goal of 80 percent 
of individual returns filed electronically by 2007.
    On January 16, 2003, the Treasury Department, the Office of 
Management and Budget (OMB) and the IRS launched the free online tax 
preparation and filing service called Free File. It was made possible 
through a partnership agreement between the IRS and the Free File 
Alliance, LLC--a private sector consortium of tax software companies.
    The partnership agreement requires that the Alliance as a whole 
provide free tax preparation and filing to at least 60 percent, or 
approximately 78 million American taxpayers. The primary candidates for 
Free File are those taxpayers who prepare their own taxes and still 
file paper returns.
    Initial Free File reports are most encouraging. As of March 19, 
Alliance members have processed and transmitted more than 2.0 million 
tax returns. This represents approximately 25 percent of the total 8 
million online e-filed returns.
    Improved service to taxpayers has not gone unnoticed. On the 2001 
American Customer Satisfaction Index Survey (ACSI), taxpayers gave the 
IRS an overall score of 62, an 11 percent increase among individual tax 
filers over 2000, and a 22 percent increase over 1999. This was the 
largest favorable gain of the 30 federal agencies surveyed by the ACSI. 
The 2002 annual rating for IRS in the Roper Starch customer 
satisfaction survey was 44 percent--a 38 percent increase over its 32 
percent nadir in 1998. However, it reflects a small decrease from 2001.

Compliance
    The IRS does not have the resources to attack every case of 
noncompliance. Therefore, it must apply its resources to areas where 
noncompliance is greatest while still maintaining adequate coverage in 
other areas. After careful study, the IRS identified some of the most 
serious compliance problem areas. These include: (1) promoters of tax 
schemes of all varieties; (2) the misuse of devices such as trusts and 
offshore accounts to hide or improperly reduce income; (3) abusive 
corporate tax shelters; (4) underreporting of tax by higher-income 
individuals; (5) accumulation and failure to file and pay large amounts 
of employment taxes by some employers; and (6) the high rate of 
erroneous earned income tax credit (EITC) payments.
    Our goal was to stop the long-term decline in compliance while 
beginning to focus effectively and efficiently on the key areas of 
noncompliance. In most areas, the IRS achieved this goal. For example, 
in fiscal year 2002, the IRS closed 140,737 Tax Delinquent 
Investigation cases. It also examined 60,894 individual returns for 
taxpayers with incomes exceeding $100,000 and 528 Large Cases 
(corporate). All of these show gains over the previous fiscal year and 
the audits of individuals with incomes over $100,000 represented a 22 
percent increase. However, the 724,430 Tax Delinquent Account closures 
represent a small drop over the same period last year.
    Our new emphasis against promoters of abusive tax devices has also 
shown results. As of March 19, 2003, the IRS had 25 promoter 
injunctions granted, 17 promoter injunctions pending in District Court 
and 17 pending at the Department of Justice, 216 promoter exams and 
information requests underway, and 464 ongoing criminal investigations 
of promoters of various tax schemes. The Offshore Voluntary Compliance 
Initiative, which ends April 15, is also producing promising leads on 
promoters and is bringing back taxpayers into compliance.
    In addition, an abusive tax shelter disclosure initiative was 
launched in 2002. The IRS processed 1,664 disclosures from 1,206 
taxpayers who came forward. The disclosures cover 2,264 tax returns and 
involved more than $30 billion in claimed losses or deductions.
    Also, key to successfully executing a compliance program is better 
data. The IRS failed to detect new areas of noncompliance in part 
because of a reliance on increasingly obsolete data from the old 
Taxpayer Compliance Measurement Program. (TCMP was last conducted in 
1988.) The agency designed and is implementing a National Research 
Program that will obtain the essential information with far less burden 
on the taxpayer. New scoring models are being developed using 21st 
century techniques, with interim models already deployed.

Technology and Modernization
    Critical to our success is better managing our massive technology 
and Business Systems Modernization program. From 15 separate 
information systems operations, we created one MITS (Modernization and 
Information Technology Services) organization that has the job of 
serving all of our operating units and managing our modernization 
program.
    As part of this major transition, standards were established and 
largely implemented for hardware and software. We consolidated 
mainframes from 12 centers to three and established one standard for 
desktop and laptop hardware and software. We implemented nationwide e-
mail and voice messaging systems, standard office automation software, 
and security certifications and standards. We deployed important 
interim applications systems, including Intelligent Call Routing, 
Integrated Case Processing and the Integrated Collection System.
    Business Systems Modernization laid the foundation for success of 
this massive program. Both the long-term vision and enterprise 
architecture were established and embedded as a living blueprint for 
all business and technology improvement programs.
    BSM has finally begun delivering the first projects with tangible 
benefits to taxpayers, such as moving the first set of taxpayers to a 
modern, reliable database in 2003. This year, taxpayers also began 
using the new Internet Refund/Fact of Filing (IR/FoF) application that 
allows them to check on the status of their return and refund 24 hours 
a day, 7 days a week. Of paramount importance, we implemented the first 
project on our new security system, which provides one standard for 
ensuring the security of all IRS data and systems. IR/FoF usage has 
already exceeded our expectations. So far this filing season, there 
have been more than 8.7 million uses of ``Where's My Refund?''; we 
project that number will rise to 15 million by the end of the year.
    Over the next five years, all individual taxpayers will be moved to 
the new database, cutting times for refunds on e-filed returns to less 
than a week and allowing us to provide taxpayer and employees with up-
to-the-minute accuracy on their accounts.
    All major management processes, which are needed to manage this 
program on a continuing basis, were improved. Indeed, we are only the 
second agency in the federal government to obtain Level Two 
certification in the Software Engineering Institutions Capability 
Maturity Model.

                   FISCAL YEAR 2004 RESOURCE REQUEST

    For fiscal year 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 percent) over the President's fiscal 
year 2003 request.
    Mr. Chairman, the fiscal year 2004 budget request can be best 
viewed through its three strategic drivers that are derived them from 
the IRS performance-based budgeting process.
    First is Compliance.--The principal strategic focus of the 
President's fiscal year 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 fiscal 
year 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' 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 percent 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 fiscal year 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. 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 the 
most serious compliance problem areas described earlier in my 
testimony.
    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 fiscal 
year 2002 and 206 FTE projected in fiscal year 2003 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' 
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 Fiscal Year 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 fiscal year 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' 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 fiscal year 2004. Examples of sources for reallocations 
include:
    Submissions Processing/Electronic Filing (-$13.5M and -366 FTE).--
IRS' 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 
fiscal year 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 fiscal year 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 fiscal year 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 fiscal year 2003 and fiscal year 2004 BSM 
funding totals, we are currently reviewing the fiscal year 2004 
allocation project-by-project to determine the optimum plan. They are 
discussed in greater detail below.
Achievements and Benefits
    In fiscal year 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 
fiscal year 2003 and fiscal year 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 fiscal year 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 percent 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 fiscal year 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 fiscal year 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 fiscal year 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 fiscal year 2004 delivery project), it is likely 
        to be our most work-intensive project during fiscal year 2003.
  --Modernized e-file.--The Modernized e-file project will be in pre-
        deployment testing for all of fiscal year 2003, with initial 
        deployment in early calendar year 2004, with Forms 1120 and 990 
        e-file capabilities.
    BSM benefits delivered in fiscal year 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 percent 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 fiscal year 2003, the President proposed a budget for the IRS 
that included 98,727 FTE (less EITC). However, the total FTE for fiscal 
year 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 fiscal year 2003 FTE down below the President's 
request by 1,925.
  --The unfunded increase in the fiscal year 2002 annual pay raise from 
        the President's 3.6 percent request to the 4.6 percent 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 fiscal year 2003 FTE projection is 1,249 FTE less 
than what was requested in the President's fiscal year 2001 Budget. It 
is also important to note that the fiscal year 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 fiscal year 2003 budget request.
 modifications to the irs restructuring and reform act of 1998 (rra 98)
    Mr. Chairman, in the fiscal year 2004 budget submission, the 
Administration 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.

                               CONCLUSION

    Mr. Chairman, in conclusion, the President's proposed fiscal year 
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.

                           ELECTRONIC FILING

    Senator Shelby. I want to talk to you a little about 
electronic filing. This process clearly makes your job easier 
and maximizes efficiency within the Service, but there are 
serious concerns about the inability of the average American to 
fill out his or her own tax return and press a button on the 
IRS's web site and file their return electronically. I 
understand that there are a number of reasons floating out 
there but I would like to hear from you, why can't I or 
somebody else go to the IRS' web site, fill out my tax return 
and file it unless, of course, I print it out and put it in the 
mail?
    Mr. Wenzel. This year, for the first time, we do offer the 
opportunity to have individuals come into the IRS.gov site and 
avail themselves of a program we refer to as Free File. There 
are 17 commercial software firms that make up the consortium. I 
need to back up and explain that a little bit.
    The electronic filing program started from very humble 
beginnings in 1996 at the IRS. The first year we had 26,000 
returns filed. This year we expect about 53 million returns 
filed electronically of the 132 million individual income tax 
returns that will be filed this calendar year. So there is a 
significant increase.
    As you are aware, the Congress in 1998, as a result of the 
Restructuring and Reform Act of the Internal Revenue Service 
set a goal for the IRS that by the year 2007, 80 percent of 
individual and business tax returns will be filed 
electronically. While we have had, as I mentioned, some 
significant success, attracting 53 million electronically filed 
individual returns this year, we still have quite a ways to go 
for not only individual returns, but also business returns, to 
reach that goal in 2007.

                          FREE FILE INITIATIVE

    Senator Shelby. Can you file an electronic return from your 
home if you had the software?
    Mr. Wenzel. You can file, beginning this year, with the 
consortium that we entered into, this agreement with the 
private sector. One of the efforts that we are--as I mentioned, 
it is the first year--trying to increase the number of returns 
filed electronically. We have a long-standing position at the 
IRS, that we were not going to compete with the private sector 
software vendors, to offer free software. That was a position 
that the IRS took, Treasury took.
    As a result of that position we contacted the private 
sector to form this consortium. As a result of it, this Free 
File initiative has come up on the IRS.gov web site. Over 68 
percent of individuals required to file a return are able to 
use that right now, at no cost to them. Because all they have 
to do is pick one of the 17 sites, go into it and have the 
opportunity to file a return at no cost.
    Senator Shelby. They would have to have the proper software 
to do this, would they not?
    Mr. Wenzel. No, it is there. It is on our system. So far 
this year over 2.1 million individuals have opted to use one of 
those 17 software products. Since it is still a week to go----
    Senator Shelby. How much does that cost?
    Mr. Wenzel. There is no cost.
    Senator Shelby. No cost to it?
    Mr. Wenzel. No cost.
    Senator Shelby. Free?
    Mr. Wenzel. Maybe the confusion here----
    Senator Shelby. There is some confusion.
    Mr. Wenzel [continuing]. Because you can go in and use the 
programs at no cost, but what we agreed to with these 17 
vendors is they would have the opportunity to use what is 
called pop-up screens. So if an individual went in, there is a 
screen that pops up and says, ``Would you be interested in 
getting some additional information, some products and services 
that we offer?'' If you said no, the pop-up screen would go 
away and you can continue to file your return. But if you said 
yes, that screen will open up and there are other products and 
services there.
    That is where the confusion may be, Mr. Chairman, because 
some individuals have availed themselves to take advantage of 
the additional services offered where there is a cost. But to 
file a return, there is no charge for that.
    Senator Shelby. The system that I understand is currently 
in place requires, for example, me to seek an IRS-approved e-
file partner to file my return electronically; is that right? 
Do you want me to repeat that?
    In other words, the system I understand that is currently 
in place would require me to seek an IRS-approved e-file 
partner to file my tax return electronically. Is that what you 
were talking about?
    Mr. Wenzel. Yes, the partner----
    Senator Shelby. That is what I thought.
    Mr. Wenzel [continuing]. Would be one of these 17----
    Senator Shelby. Seventeen of them?
    Mr. Wenzel. Yes, for this first-year effort.
    Senator Shelby. Now that costs some money, does it not? It 
cost something. I do not know how much.
    Mr. Wenzel. Not for the taxpayer to go in and file their 
return.
    Senator Shelby. But as I understand, my staff did a quick 
search on your web site and found a few examples I want to 
share with you. There is a $6.95 senior special, the number one 
tax forms for beginners is $9.95, and finally, there is the 
complete tax package for $24.95 and when you are finished you 
can e-file them for free. In other words, you have got to do 
that first, is my understanding. Am I wrong?
    Mr. Wenzel. Mr. Chairman, I have received e-mail, I have 
received correspondence----
    Senator Shelby. I do not know if I am wrong or not. I am 
just asking the question.
    Mr. Wenzel [continuing]. From individuals of the 2-million-
plus that have used this that have said, this is great because 
it has been free. It was no cost to me in terms of filing.
    Senator Shelby. In other words, they did not have to pay 
that other money?
    Mr. Wenzel. No. I need to check on the examples given here 
because----
    Senator Shelby. We will furnish those for you, because we 
would be interested----
    Mr. Wenzel [continuing]. I would really need to look into 
that immediately.

                     BUSINESS SYSTEMS MODERNIZATION

    Senator Shelby. Business systems modernization, something 
we have been working with a long time. The Service has informed 
the staff that the IRS' current IT infrastructure is not 
equipped to receive and process electronic transactions 
directly from individual taxpayers. Given our discussion here, 
I am interested to know if, in fact, the Service's massive 
business systems modernization project includes an upgraded 
capability to receive and process electronic transactions 
directly from individual taxpayers. And if not, why not.
    Mr. Wenzel. One of our initiatives and programs in the 
future, as it relates to the business systems modernization, is 
to make that a reality in terms of account information.
    Senator Shelby. Would that not help a lot and move a lot of 
people into electronic filing?
    Mr. Wenzel. Absolutely.
    Senator Shelby. And that is what you really want.
    Mr. Wenzel. That is one of our e-services that we have been 
trying to make a reality because it is done so much already in 
the private sector. The timeliness improves significantly, less 
cost.

                      PRIVATE COLLECTION AGENCIES

    Senator Shelby. I want to move into debt collection. It is 
my understanding you are planning to use private collection 
agencies to collect some of the $280 billion owed in taxes. I 
remember Senator Kerry and I were involved in this committee at 
one time and we tried that. But actually it did not work very 
well at that time. Maybe it will work now.
    But what will IRS do to ensure that this will be a 
worthwhile project and cost effective this time?
    Mr. Wenzel. As you mentioned, there was a pilot in 1996-
1997. We learned from that experience, in terms of benefiting 
from that limited pilot. We also, in getting ready for this 
proposal, in terms of the budget request, included three 
private sector companies; a large organization, medium-size, 
and a small business organization to get their input.
    You are right in the sense that the total number of 
accounts receivable, what we call now potentially collectible 
inventory, is well over $200 billion. A lot of that, as you 
know, is corporations out of business or deceased taxpayers. 
The reality is that we know for a fact there are at least $13 
billion right now just waiting for a contact to be made that 
has an opportunity to potentially be collectible. The reality 
is that the best we can do at the present time is, once a year, 
send out a notice to remind that taxpayer they still owe that 
money.
    There is a 10-year statute period which we have to collect 
the potentially collectible inventory. Every year there is a 
significant amount of money dropping off because we have not 
attempted a telephone call, for example.
    Senator Shelby. How do you plan to ensure the protection of 
taxpayers' rights and the confidentiality of taxpayers to 
taxpayer information when you contract this out to private 
contractors?
    Mr. Wenzel. This is a very important area for us, Mr. 
Chairman, in terms of----
    Senator Shelby. Very sensitive too.
    Mr. Wenzel. Absolutely. We expect the private sector 
collection agencies, when they go out and hire people, the 
people they are hiring will have to meet the same kind of 
requirements that we expect of IRS employees in terms of 
background checks and so forth.
    We have included our National Taxpayer Advocate in the 
development of this whole proposal for this very--for obvious 
reasons, but particularly for this reason, to ensure that 
taxpayer rights are not violated.
    Senator Shelby. It is very important.
    What will be the cost of these contracts compared to the 
cost of collecting the same debts using IRS employees? Have you 
done any comparisons there?
    Mr. Wenzel. Mr. Chairman, we are finalizing what the 
projected cost would be. This is not the first time this kind 
of effort has been done. Forty-two States currently use 
collection agencies as do the Department of Education and also 
Financial Management Services, which is part of the Treasury 
Department. We are having discussions with them about the cost 
for this, but our proposal is basically that the costs would be 
recaptured in the proceeds that are collected by these agencies 
or companies.
    Senator Shelby. So that leads me to the compensation of the 
contractors, the people you contract out with. Is their 
compensation a percentage of what they collect?
    Mr. Wenzel. Yes, that is generally what the States and the 
two Federal agencies that I mentioned that have entered into 
these kinds of agreements do, and there is a certain percentage 
of the receipts that are collected.
    Senator Shelby. Okay.
    Senator Murray?

                        EARNED INCOME TAX CREDIT

    Senator Murray. Thank you, Mr. Chairman. In the fiscal year 
2004 President's budget, the IRS is proposing a so-called pre-
certification initiative for the EITC program, and while you 
are asking for the money for this in the next fiscal year, you 
are planning to send verification documents as soon as this 
July, I understand, to about 45,000 individuals requiring them 
to provide additional documents to ensure their EITC 
eligibility. These taxpayers, I understand, will have until 
this December to submit verification documents and your agency 
intends to delay the EITC portion of their refund until IRS can 
review that documentation.
    Can you tell me how quickly IRS expects to review that 
documentation?
    Mr. Wenzel. The proposal, in terms of the $100 million, is 
that we would send out letters to 45,000 taxpayers to ask them 
to pre-certify things like what we call a ``qualifying child.'' 
The intent is not to put more burden on the taxpayers as it 
relates to how we are doing business today. As you are aware, 
the EITC program for some time has been determined to be a high 
risk program because it is a tax credit. For a number of years 
now we have been funded additional monies, not only to do the 
outreach, the informing and educating to make sure that 
individuals who are eligible for EITC are in the program, but 
also there was certain direction given to us to make sure we 
minimized the amount of fraud that goes into the program.
    Senator Murray. I was not actually asking about your 
rationale. I was asking, because you are sending 45,000 
questionnaires out and you are telling taxpayers that it may 
delay their refund, how long can we tell these people that it 
is going be, that it will take you to review this 
documentation?
    Mr. Wenzel. We would try to make sure that we keep that 
time span to the absolute minimum. Right now, Senator, we are 
still talking with some interest groups on the outside. We have 
not even finalized the form that would be used. We have had two 
meetings that have been coordinated by our National Taxpayer 
Advocate to make sure that the form and what we are requiring 
for the documentation is kept to the absolute minimum, so that 
once the information comes in to us, we can immediately review 
it, turn it around and issue the refund.
    Senator Murray. Do you expect a lot of EITC payments to be 
delayed this year?
    Mr. Wenzel. Delayed in the sense of, in the past that--yes, 
that would be a correct statement. There would be a delay and 
we hope to keep it to an absolute minimum.
    Senator Murray. Can you give us any kind of time line on 
that?
    Mr. Wenzel. I think what is key here, Senator, is to really 
finalize--as I mentioned, we are still finalizing some of those 
decisions, working with considered outside stakeholders. That 
would be key. I would be happy, once we get that--it should be 
done----
    Senator Murray. If you could let us know. We will be 
hearing from our constituents and we need to give them a 
response on that.
    Then I understand that you expect to expand this project 
next year and require pre-certification by two million EITC 
recipients. I am curious if before you expand it from the 
45,000 to the two million, are you going to do any kind of 
evaluation?
    Mr. Wenzel. Absolutely. That is why we are starting out 
with a much smaller number; that is correct.
    Senator Murray. And you will have the results of that 
evaluation before you send out pre-certification documents to 
two million people?
    Mr. Wenzel. We will carefully track that and make sure that 
we completely analyze what has occurred here, and then make a 
decision in terms of what is the correct number. We think the 
two million is a fair estimate, but that does not mean that 
that would not be modified based on what we see.
    Senator Murray. But you are going to take a look at what 
happens with the 45,000, and if we are seeing tons of delay and 
a lot of problems then you will relook at that?
    Mr. Wenzel. We will try to make sure that we do this right 
the first time, and not incur any delay, even with the 45,000. 
But if that is the case, we will make sure we modify our 
process and carry that into the next year and the year after 
that.
    Senator Murray. GAO estimates that in 1999 25 percent of 
eligible households, or about 4.3 million households, did not 
know even how to claim this credit. The Government Performance 
and Results Act requires you to set quantifiable goals for your 
agency's objective. Does your fiscal year 2004 performance plan 
set a numerical goal to increase the participation rate for 
EITC?
    Mr. Wenzel. We have not quite finalized that goal yet, but 
it is important, based on the feedback we received from GAO, to 
make sure that we have an appropriate performance measurement 
in that area.
    Senator Murray. Why has it not been done yet?
    Mr. Wenzel. We are still working through what the right 
percentage should be in terms of first time effort and setting 
the right goal.
    Senator Murray. So you have not set a numerical goal. When 
do you expect to do that?
    Mr. Wenzel. We should be able to do that within, probably 
within the next 45 days.
    Senator Murray. The IRS has identified other high risk 
compliance areas such as promoters of tax schemes, misusers of 
trusts and offshore accounts, and under-reporting of tax by 
higher income individuals. The average EITC credit is estimated 
to be only $1,660 while the average dollar-level fraud by those 
upper income individual is obviously much higher. Do you really 
believe that focusing $100 million on EITC is how the taxpayer 
gets the biggest bang for their buck?
    Mr. Wenzel. Our intent is to make sure that we continue to 
devote a significant amount of our resources, as I mentioned in 
our budget proposal for 2004, to address the other areas that 
you just mentioned. But I also would say that we feel that the 
$100 million is appropriate because almost one-third of the 
program right now, $9 billion, is going out to individuals that 
are not entitled to the EITC. Based on trending, that percent 
may continue to increase unless we try to do something like the 
pre-certification. That is a real concern on our part as far as 
how a significant tax credit program like the EITC where 
already a large proportion, the money is going to the wrong 
individuals.
    Senator Murray. You have estimated that almost one-third of 
the EITC claims in tax year 1999 should not have been paid due 
to taxpayer errors. But that percentage does not take into 
account the changes that were made in the 2001 tax act. 
Shouldn't that figure be lower now?
    Mr. Wenzel. We have not been able to validate that. We 
should, based on this national research program that we just 
recently have gone out and done, a random audit, receive 
information to verify what you just mentioned; however, the 
information will not be available until next year, about this 
time, to see what the results were.
    Senator Murray. So we will not know whether it is still 
that high until a year from now?
    Mr. Wenzel. It is true, we are----
    Senator Murray. We made changes in the 2001 tax act that 
should have reduced that. But you are basing what you want to 
do now back on what happened before we did that act.
    Mr. Wenzel. That is correct. That is the latest information 
that we have that we cited. And despite our efforts in terms of 
how we approached this in the past, we have not been successful 
to reverse this trend.
    Senator Murray. But shouldn't we wait until we get a more 
accurate estimate of what occurred with the 2001 tax act before 
implementing this kind of regime that could cause a lot of 
disruption among many taxpayers?
    Mr. Wenzel. Senator, our assessment of this is that we 
really need it--we could not wait any longer. We needed to go 
ahead and try this pre-certification as a better way to 
identify and stop the 30 percent and reduce it significantly.
    Senator Murray. Your documentation actually indicates that 
one reason that we have a high error rate is because taxpayers 
are confused about many of the complex EITC rules. What steps 
have you taken to simplify these rules so that we can avoid 
taxpayer confusion?
    Mr. Wenzel. We continue to get the input from our National 
Taxpayer Advocate and her advocates around the country. We 
ourselves at the IRS are always trying to learn from interested 
outside groups that give us input, to try to make sure that--
the example I gave, in terms of this current effort, is to come 
up with a form that is easily understood, simplified, as much 
as possible, including the instructions, so people are not 
confused.
    Senator Murray. Mr. Chairman, I would just say that if we 
do pre-certification and confuse people even more, then we are 
doing a real disservice to people who actually should be 
getting the EITC for very good reasons that we have set out 
before. So I think we have to be very careful. If we have 
confusing rules now and we add more confusing rules, I do not 
think it is very fair to low income taxpayers.
    Mr. Wenzel. Senator, just in terms of the $100 million I 
just--and I am sure you are aware of this, but I just wanted to 
point out that of the $100 million, we asked for about 650 
FTEs. About 20 percent of the 650 FTEs will be spent on 
educating and informing again, trying to reach out and make 
sure that people know they are entitled to the EITC and trying 
to clarify for them any misunderstanding. So it is not all 
totally devoted towards the enforcement side.
    Senator Murray. Thank you, Mr. Chairman.

                        IRS FREE FILE INITIATIVE

    Senator Shelby. I want to go back to the free filing and so 
forth. Are there two separate systems here? One, the free file 
alliance is free for qualifying taxpayers.
    Mr. Wenzel. Yes.
    Senator Shelby. And by that, do you have to have a certain 
income to qualify?
    Mr. Wenzel. Yes, what is referred to as the adjusted gross 
income, Mr. Chairman. But what these different sites offer in 
the way of----
    Senator Shelby. What would that be before they could----
    Mr. Wenzel. It varies by site. But when you add them all 
up, at least 68 percent of all taxpayers that would want to 
avail themselves of one of the 17 sites will have the 
opportunity to free file. It is not 100 percent.
    Senator Shelby. In other words, you have to have a certain 
income before you can go to these sites. So it is not for all 
taxpayers.
    Mr. Wenzel. Not right now.
    Senator Shelby. Do you expect it to be for all taxpayers?
    Mr. Wenzel. This is a first-year effort.
    Senator Shelby. So you are trying.
    Mr. Wenzel. We are trying. It is truly a pilot. The 
response has been tremendous; 2.1 million people to date have 
used this option that would not have otherwise. They have had 
the opportunity to come in and file a return at no cost.
    Senator Shelby. Now the e-file partners are the only 
entities that the IRS allows to file tax returns; is that 
correct?
    Mr. Wenzel. Through that site, yes. Through IRS.gov, yes.
    Senator Shelby. I wanted to clear that up.

                            CUSTOMER SERVICE

    The IRS' budget request proposes to reduce the individual 
call service workforce. Some of us are concerned about the 
implications of the workforce reduction in the individual call 
service area. The IRS has come a long way in terms of customer 
service in the years since I chaired this committee last, and 
we are concerned that a reduction of this size will have a 
negative impact on the provision of customer service to 
individual taxpayers.
    Mr. Wenzel. We fully agree with you in that regard, Mr. 
Chairman. We do not want to step back and reduce the service, 
what we have been able to achieve. Just to give you one 
measurement----
    Senator Shelby. Because, in a sense, if you reduce the 
service it will reduce your efficiency, will it not?
    Mr. Wenzel. We have a responsibility to provide the best 
products and services to citizens of the United States, and one 
of the ways we do that is through our telephone call centers. 
We want to make sure we maintain and continue to improve the 
way we do business. We have been successful in improving the 
efficiency of the telephone operations, particularly in the 
last 12 months, but our performance goals, as you would review 
them, would continue to show that we want to improve in all 
areas, including the quality of the responses we give and also 
the level of service that we offer on our telephones. We do not 
intend to step back.

                          CAMPUS CONSOLIDATION

    Senator Shelby. Electronic filing again. We do not want to 
get away from that, I think. As more returns are filed 
electronically, what is the impact on IRS staffing in 
facilities? It has to go down.
    Mr. Wenzel. Absolutely. Because of the 53 million that I 
mentioned earlier, as a result of that, we are closing one of 
what we call our submission processing centers.
    Senator Shelby. Brookhaven service center?
    Mr. Wenzel. That is the Brookhaven service center, yes. We 
have eight, what we call individual tax return submission 
processing centers, and two for just business returns. As of 
September 30th of this year, not too many months from now, the 
submission processing operation in Brookhaven will shut down 
completely and we will go to seven, with plans as electronic 
filing continue----
    Senator Shelby. What savings will you realize by closing 
this facility?
    Mr. Wenzel. Significant savings.
    Senator Shelby. How will the savings be used?
    Mr. Wenzel. We hope in terms of reinvesting back into the 
IRS to put the savings into our customer service, into 
enforcement.
    Senator Shelby. What formula or criteria did you use to 
determine which centers to close and the order in which to 
close the centers?
    Mr. Wenzel. I would be happy to share that with you and 
your staff, Mr. Chairman, but things like labor and rent 
savings, the impact on----
    Senator Shelby. Just management positions basically?
    Mr. Wenzel. Yes. A whole list of criteria that we came up 
with.
    Senator Shelby. Okay, we would be interested in seeing it.
    Since all taxpayers are still not filing their taxes 
electronically, are there plans to upgrade the paper returns 
processing system?
    Mr. Wenzel. We are always looking for ways to continue to 
improve every part of the IRS' operation. The submission 
processing paper side has been in business for a long time, and 
even though it has been around for a long time, we have made 
substantial improvements, and we continue to realize efficiency 
savings. We will continue to look for additional efficiency 
savings.

                     BUSINESS SYSTEMS MODERNIZATION

    Senator Shelby. The IRS has developed an expenditure plan 
for Congressional approval detailing how funds are to be spent 
before the funds can be released. The key component of systems 
modernization is the customer account data engine (CADE), and 
it is scheduled to be released in June or July of this year. It 
has experienced numerous delays. Will CADE be rolled out as 
scheduled, and will it offer improved service to taxpayers?
    Mr. Wenzel. This is, of any major business systems 
modernization project that we have, the most significant 
project because what it does is completely overhaul our master 
file. Right now we expect that the first iteration of CADE will 
be available to us later this year, around July and August. 
What that is, basically as I mentioned, is the first phase of--
--
    Senator Shelby. Master file, tell me what you mean.
    Mr. Wenzel. Master file is every individual, business, 
exempt organization, employee plans----
    Senator Shelby. The whole matrix?
    Mr. Wenzel. Everything, in terms of individuals and 
businesses that are housed, currently, on a very outdated 
system. So it is very sophisticated, very difficult. The PRIME 
contractors that we have, some of the best companies in the 
world, realize the challenges here. They are the ones that are 
doing this work for us, as you know. Right now we have regular 
meetings and the goal is to stay with the schedule of July or 
August to have the first version of CADE delivered.
    Senator Shelby. What steps are you taking at IRS to ensure 
that the business operating divisions are adequately prepared 
to accept and operate and support these modernize systems?
    Mr. Wenzel. That is a very essential part because all of 
this modernization, when you talk about modernization----
    Senator Shelby. It means nothing without that, doesn't it?
    Mr. Wenzel. It means nothing without having your people 
come along and understand what the new systems offer. So there 
is a training part, awareness part, all of that is so 
important, and it is integral to this whole effort.
    Senator Shelby. You do not want to purchase software and no 
one knows how to operate it.
    Mr. Wenzel. That is exactly right. We have seen that happen 
in some other agencies, and we are not going to let that happen 
here at the IRS.
    Senator Shelby. GAO has reported that IRS has made progress 
in implementing modernization management controls and 
capabilities, certain BSM management capabilities have not been 
fully implemented they say. GAO reiterated prior 
recommendations that the IRS correct modernization management 
weaknesses. We know you have made progress from when I used to 
benchmark it.
    What is IRS's plan and schedule for addressing the GAO's 
recommendations, including implementing effective procedures 
for validating contractor development, cost and schedule 
estimates?
    Mr. Wenzel. We have done a number of things based on the 
input from the GAO's oversight of the IRS, and also our 
inspector general's oversight of the BSM program. One of the 
things that we have done is this year, fiscal year 2003, we 
have slowed down or eliminated some of the projects that we 
thought we were going to undertake, and really focused on CADE 
and some of the other critical programs, which has helped us 
immeasurably.
    We have also met with the PRIME contractor and entered into 
an understanding that a lot of the programs in the future will 
be cost performance-based type of compensation, rather than 
just continuing to write a check. That's the expectation; the 
work will be based on a set cost price or possibly a 
performance-based price, so there is accountability going back 
to the PRIME contractor.
    The third thing that the PRIME contractor has done, based 
on their further awareness of the challenges that these efforts 
offer, is beefed up their experts, their expertise, 
particularly their senior leadership of the contract, and have 
brought in some individuals that really understand this better 
and know how to manage it better, and to work with the IRS 
leadership in terms of making sure we deliver on BSM this time.

                          OFFERS IN COMPROMISE

    Senator Shelby. The Offer in Compromise, this initiative 
has allowed the IRS to reduce the backlog of cases and all new 
cases are to be processed at one of two centralized sites, and 
only those offers that cannot be completed there are sent to 
field offices for resolution. Concerns exist because the 
program has been costly to operate in comparison to the return 
on the investment. Have the new initiatives enabled IRS to make 
the program more cost efficient? What measures are used to make 
your assessment?
    Mr. Wenzel. What we have done is, in two sites, as you 
mention, one in Brookhaven and one in Memphis, added a total of 
600 employees, roughly 300 in each of the locations. They are 
lower-graded employees. Obviously, to start this up we had to 
go through an extensive training program for the 600 employees. 
Now their skill level has really reached the point where they 
have become quite productive, and we are able to screen out and 
work in those sites some of the real easy offer in compromises 
where we do not have to make a one-on-one contact with a 
revenue officer who is much higher-graded, where there is 
travel time involved and so forth.
    So our key measurement is what you might expect in terms of 
the quality of the work performed, the efficiency of the work 
performed. We feel, at this point in time, that now that we 
have gone through this learning curve, that our decision to go 
to that kind of an operation is going to really pay the overall 
benefits that we initially expected.

                                SECURITY

    Senator Shelby. Information security. News reports that the 
IRS has not done a good job in making sure that contractors 
receive appropriate background checks. There have been problems 
with lock box employee guards and even bomb-sniffing dogs that 
really could not detect explosives. What is the IRS doing to 
address these problems? Can these problems have an impact on 
the safety of IRS employees as well as on the security of the 
taxpayer data? It is important to have a safe place to work.
    Mr. Wenzel. Mr. Chairman, if there is a number one priority 
at the Internal Revenue Service, it is to ensure the safety of 
our 100,000 employees around the country. We take seriously and 
welcome the reviews that have been conducted by the GAO and the 
inspector general for the IRS, who has also provided us ongoing 
feedback on things like you just mentioned, in terms of the 
contract employees. We have responded to those and taken the 
necessary actions to correct that problem, so that the 
background checks are done of contract employees, and do the 
follow-up reviews and make sure it does not recur again.
    Ever since September 11th of 2001, we have an ongoing site 
here in Washington, D.C. with the Inspector General, where 
cooperatively we are looking at every aspect of physical 
security in every one of our 795 offices around the country to 
try to ensure the safety of our employees.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Shelby. That is good to hear.
    We appreciate your appearance here today. We will continue 
to work with you and we believe that we have to measure the 
expenditures of the taxpayer and you are in a position to set 
the ground rules.
    Mr. Wenzel. Mr. Chairman, thank you for your oversight and 
support that you provide to the Internal Revenue Service.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
            Questions Submitted by Senator Richard C. Shelby
                                general
    Question. Why is IRS requesting additional staffing in fiscal year 
2004, when the positions granted in fiscal year 2003 have not been 
filled?
    Answer. The IRS requested additional funding in fiscal year 2003 
for 1,179 FTE to improve customer service and compliance and meet 
workload increases. However, before we published the fiscal year 2004 
budget, a number of unfunded and unanticipated costs arose that reduced 
the funding available for hiring these additional staff. Since over 70 
percent of the IRS Operating budget consists of salaries and benefits, 
any unanticipated costs we must pay requires the reduction of labor 
costs (i.e., FTE).
    For example, the fiscal year 2002 annual pay raise of 4.6 percent 
cost an additional $43 million above the 3.6 percent budgeted amount. 
The IRS had also expected savings resulting from legislative proposals 
for postage and the Financial Management Service (FMS) levy that 
Congress did not pass that required us to fund an additional $23 
million. The unfunded postage increase raised our postage costs by $22 
million. Moreover, an unfunded increase in security costs resulting 
from the 9/11 tragedy cost the agency an additional $20 million. These 
changes and others amounted to $170 million in unexpected, unfunded 
costs mandatory to meet our mission.
    In addition, the extended Continuing Resolution for fiscal year 
2003 limited our funding to the fiscal year 2002 level until the 
appropriation was passed in early 2003. That restriction forced the IRS 
to concentrate available funds on ensuring a good filing season and 
prevented the execution of hiring plans. Despite these setbacks, the 
IRS needs the additional funding in fiscal year 2004 to continue to 
build the staff necessary to address the enforcement problems that 
ensure that all taxpayers pay their fair share of taxes.
    Question. What formula did IRS use to determine which Service 
Center to close and what cost savings if any, are derived from this 
action?
    Answer. In the past, all ten IRS submissions processing centers 
processed returns from both the Individual Taxpayers (IMF) and Business 
Taxpayers (BMF). Prior to our reorganization the ten centers were 
identical to each other. Each center processed IMF and BMF returns. 
Each center also handled Taxpayer Accounts (correspondence/telephones) 
and Compliance programs for both IMF and BMF. While this was 
successful, we felt we could improve our Business results, and be more 
responsive to the Customer/Taxpayers by specializing our organization 
structure based on our customers. We based the initial IMF 
Consolidation Strategy of these centers around Wage and Investment 
(W&I), Small Business/Self Employed (SB/SE), Large and Mid-Size 
Business (LMSB) and Tax Exempt and Government Entities (TE/GE) customer 
segments. As a result of this reorganization, we reorganized the ten 
Processing Campuses into eight W&I and two SB/SE Submission (Return) 
Processing Centers.
    With the increased emphasis on Electronic Filing we have designed a 
detailed business plan to reduce the number of Processing Centers from 
eight W&I sites to, eventually, two. This is several years in the 
future, but this plan will reduce the number of centers every couple of 
years, providing the public continues to switch from filing paper to 
electronic returns.
    We used economies of scale, labor market factors and real estate 
costs, as well as the criteria listed below, to determine the order of 
consolidation of the sites:
  --A Program Optimization Model using site specific volumetric and 
        production rates,
  --Campus specific Return on Investment for real estate expenditures 
        associated with Submission Processing,
  --Detailed potential severance costs associated with a Submission 
        Processing consolidation,
  --Qualitative factors such as, operational feasibility, 
        infrastructure and work force impacts.
    As Electronic Filing increases and paper returns decrease, 
consolidation of Submission Processing campuses will result in savings. 
The IRS' intent is to reinvest these savings to maximize program 
opportunities in other areas. While there is not a final figure for the 
Brookhaven Submission Processing consolidation, the initial cost 
savings projection was approximately $50 million. The projected savings 
at the Memphis Service Center consist of both Real Estate and Salary 
costs and are currently projected to be $12.5 million dollars for the 
period 2004 through 2006. We project an annual cost avoidance of $9.5 
million dollars a year starting in 2007. It is too soon to project the 
cost savings for each center beyond Memphis at this time.

                           ELECTRONIC FILING

    Question. Reports state that the 2002 filing season has been 
successful with the implementation of e-filing. There should be some 
cost savings from this program; can you identify savings generated 
because of this initiative?
    Answer. During fiscal year 2002, IRS estimates that the savings 
generated from e-file were $9.995 million. Savings for fiscal year 2003 
are estimated to be $10.369 million. Savings are computed as the costs 
that would have been incurred for processing the decreased number of 
paper returns, reduced by the costs of processing them as e-file 
returns.
    Question. The IRS contracted with the Free File Alliance, to 
provide free online tax preparation and filing services for at least 60 
percent of all taxpayers through the IRS Website. Since the 2002 filing 
date has passed, do you think the Free File Alliance was a success? 
What changes if any, would you make to this process for the next filing 
season?
    Answer. We did not contract, but rather established and are 
executing a public-private partnership agreement with the Free File 
Alliance, LLC.
    As of May 31, 2003, the IRS has received over 2.77 million returns 
through the 17 companies participating with the Free File Alliance. 
This figure represents over 23 percent of all returns filed online with 
the IRS (11.7 million). These free tax preparation and e-filing 
services will continue to be available to taxpayers through October 15, 
2003 on the irs.gov web site. Deemed a tremendous success by Treasury, 
OMB and IRS, the Free File initiative exceeded expectations for the 
program. Based on the volume of returns received through Alliance 
members and the relatively small number of comments/concerns sent to 
the IRS, the Free File initiative was very well received by taxpayers.
    The IRS and the Free File Alliance are assessing all feedback and 
impact of the program on both industry and the IRS. Completion of this 
process will determine appropriate refinements for the 2004 filing 
season.
    Question. Electronic filing has a number of discrepancies 
pertaining to e-filing. Explain how free e-filing works? How can an 
individual qualify for free e-filing?
    Answer. In November of 2001, the Office of Management Budget's 
(OMB) Quicksilver Task Force established 24 e-government initiatives as 
part of the President's Management Agenda. The task force designed 
these initiatives to improve government to government, government to 
business, and government to citizen electronic capabilities. One 
initiative, EZ Tax Filing (now known as Free File) instructed the IRS 
to provide free online tax return preparation and electronic filing 
services to taxpayers. To accomplish this objective, the IRS began 
working in partnership with the tax software industry to develop a 
solution. The result was a precedent-setting agreement between the 
government (IRS) and private sector (Free File Alliance, LLC, a group 
of tax software companies, managed by the Council for the Electronic 
Revenue Communication Advancement (CERCA)), that requires tax software 
companies to provide free online tax preparation and electronic filing 
services to eligible taxpayers. This agreement requires Alliance 
members to provide free tax return preparation and electronic filing 
services to a significant portion of the taxpaying population (at least 
60 percent or 78 million taxpayers) through April 15, 2003. Many of 
these free services will be available for taxpayers with extensions 
through October 15, 2003. These free services were launched to the 
public on January 16, 2003 and are being promoted by the IRS and are 
accessible at www.irs.gov.
    The following describes how a taxpayer can participate with Free 
File:
    Determine eligibility.--Upon arrival to the Free File page within 
irs.gov, the taxpayer must determine his or her eligibility for using a 
particular company's free service. This eligibility can be determined 
by two methods: the taxpayer may browse the complete listing of 
Alliance members and their free services; or the taxpayer can use a 
``questionnaire'' application (i.e., Free File Wizard) designed to help 
identify those free services for which they may qualify. Each Alliance 
member's company name is identified and a simple description of the 
criteria for using their free service is provided. For interested 
taxpayers, each Alliance member's company or product name is linked to 
additional information about the company and/or services.
    Link to free services.--Upon determining eligibility, the taxpayer 
can link directly to that Alliance member's free service by clicking on 
the Alliance member's ``Start Now'' link. Upon doing so, taxpayers are 
notified they are leaving the irs.gov web site and are entering the 
Alliance member's web site.
    Prepare and File Income Tax Return.--At the Alliance member's web 
site, the taxpayer can use the member's online software to prepare and 
e-file his or her income tax return using proprietary processes and 
systems. Once complete, the member transmits the taxpayer's return 
information to the IRS through the established e-file system. Upon 
receipt, IRS computers check the return information for errors or 
missing information and send the taxpayer notification of return 
acceptance or rejection through the Alliance member. Taxpayers will 
receive notification from the Alliance member.
    [Note.--Each Alliance member has specific qualifying criteria for 
its free service. For the 2003 filing season, the members based these 
requirements on factors such as age, adjusted gross income, State 
residency, military status, or eligibility to file a Form 1040EZ or 
claim the Earned Income Tax Credit. Taxpayers who met these 
requirements can use that member's online software to prepare and e-
file their Federal tax return for free. An Alliance member's qualifying 
criteria may change for the 2004 filing season.]
    Question. When the business system modernization of IRS is 
complete, will all taxpayers be able to file their taxes by e-filing or 
file on-line from the privacy of one's own home? If not, why not?
    Answer. Currently, over 99 percent of all tax returns can be e-
filed from home computers or by using an authorized provider. The IRS 
is systematically removing the last few barriers to e-file to open 
eligibility to the remaining taxpaying population. However, IRS' 
Business Systems Modernization program does not have plans to offer 
direct on-line filing. RRA 98 directed the IRS to work cooperatively 
with the industry to promote electronic filing. Additionally, the IRS 
believes that private industry, given its established expertise and 
experience in electronic tax preparation, has a proven track record in 
providing the best technology and services available. As such, the IRS 
entered into an agreement with the private industry (Free File 
Alliance), to provide free online tax filing and preparation services 
to at least 60 percent of the taxpaying population. These free services 
were offered, during the 2003 filing season, by 17 different companies 
and were accessible through IRS' web site (irs.gov). The IRS is 
continuing to work with industry partners to provide opportunities and 
solutions that will encourage taxpayers to file their tax returns 
electronically.

                             MODERNIZATION

    Question. What contributed to the delays in the projects in the 
Business Systems Modernization spending plan submitted to Congress?
    Answer. The IRS is modernizing one of the largest and most complex 
information systems in the world. Since the creation of the IRS in its 
current form in the 1950s, our mission has evolved, and the volume and 
complexity of our operations have mushroomed. Our tax system 
modernization initiative faces several challenges:
  --Complex, ever-changing tax laws,
  --Extremely high volumes,
    --Over 130 million individual taxpayers,
    --Over 6 million business taxpayers,
    --200 million returns,
    --$2.1 trillion in receipts, $1.5 trillion in electronic payments,
    --Tax refunds totaling over $190 billion,
    --1.5 billion information documents,
    --52 million electronically filed returns,
    --19.2 million combined Federal/State returns,
  --Inputs with wide-variation in content ranging from few to many 
        fields of various lengths,
  --Seasonal processing with extreme variations in processing loads,
  --Hundreds of legacy applications,
  --Transaction rates on the order of billions per year and storage 
        measured in the tens of terabytes (trillions of bytes).
    Since the Business System Modernization (BSM) effort began, the BSM 
program office and PRIME contractor have struggled to implement defined 
and repeatable processes that are necessary for effective and efficient 
systems development. Due to the complexity of the BSM projects, these 
management processes have required time to become established. Once all 
management processes are in place, and as they mature, the program will 
run closer to cost and schedule estimates and our capacity to initiate 
additional deliverables will also increase. Also, we have addressed 
many of the recommendations made by GAO, such as prudently slowing some 
projects and deferring new ones when management capacity is inadequate, 
to proceed with an acceptable risk level.
    The IRS' systems are woefully obsolete and inefficient for an 
organization so critically dependent on technology. We are saddled with 
a collection of computer systems developed over a 35-year period. The 
most important systems that maintain all taxpayer records were 
developed in the 1960s. Additional cost and schedule delays arise from 
the challenge of programming interfaces with these historical systems, 
which cannot easily share information with the modernized systems.
    Initial project budgets and delivery timelines are based on long 
term plans and strategy and may be developed years before the project 
start date. As the projects move through the lifecycle and as 
requirements become fully understood, we have adjusted most project 
estimates and schedules to reflect the enormous complexity of the 
systems. Legislative changes in the tax code also impact costs and 
schedules.
    Both the IRS and the PRIME contractor have underestimated the 
enormous size and complexity of the BSM effort. We are engaged in a 
comprehensive process improvement initiative to enhance our 
effectiveness in validating cost and schedule estimates. This includes 
working with the PRIME contractor to develop and deploy best practice 
estimating capabilities consistent with Carnegie Mellon University's 
Software Engineering Institute (SEI), as recommended by GAO. Once all 
management processes are in place and as they mature, the program will 
run closer to cost and schedule estimates and our capacity to initiate 
additional deliverables will also increase.
    In addition, given the important juncture we've reached with the 
first important deliverable for CADE, we have decided to have an 
outside group of experts take an independent look at the program and 
report back to us by the end of this summer. We have not yet identified 
who will conduct this study but expect to do so in the next few weeks. 
No work will stop while the review is underway, but this is a good time 
to assess progress, project risk and whether any midcourse corrections 
are needed.
    Question. Customer Account Data Engine (CADE) is the most critical 
of the components in the modernization process. When CADE goes live 
this year will it be able to process all individual and business 
accounts?
    Answer. The first release of CADE will go live later this summer. 
CADE will begin to process individual returns this year. The system 
will not, however, process business returns this year. The individual 
tax returns that CADE will begin to process will only be 1040EZ 
returns, paper and electronic, for single filers who either fully paid 
or have a refund due. CADE's first release will not include EITC filers 
and filers with prior issues. The number of returns included in this 
first release will be approximately 6 million. Although this is a 
relatively modest beginning, this first release of CADE contains much 
of the highly complex infrastructure to support later releases.
    CADE will be deployed over 6 years in five releases, each related 
to a specific taxpayer segment. Each release will deliver functionality 
to support increasingly complex filing scenarios. At the conclusion of 
Release 5, CADE will have replaced the Individual Master Files. 
Subsequent releases of CADE will eventually replace the Business Master 
Files and Non-Master Files.
    Because CADE is one of the most complex projects in the world, we 
are moving forward carefully based upon positive results from the 
rigorous testing process, as well as cost and capacity considerations.

                      PRIVATE COLLECTION AGENCIES

    Question. What guidelines does the IRS have in place to protect 
taxpayer's privacy, when and if the tax collection process is 
contracted to private collection agencies?
    Answer. Under the Administration's proposal, taxpayer protections 
provided by the Internal Revenue Code (Code), IRS procedures, and other 
applicable laws, including those relating to taxpayer privacy, would be 
fully applicable to private collection agencies (PCAs). The taxpayer 
protections incorporated in the Administration's proposal have been 
reviewed thoroughly, including consultations with the National Taxpayer 
Advocate. The National Taxpayer Advocate would have a continuing role 
in ensuring that taxpayer protections are maintained under this 
program.
    Sections 6103(n) and 7431(a)(2) of the Internal Revenue Code 
currently permit a taxpayer to pursue legal action against any person 
who is permitted to receive tax returns and return information for 
purposes of assisting in tax administration, but who unlawfully 
inspects or discloses that information. Criminal penalties also may be 
imposed under I.R.C. Sec. Sec. 7213, 7213A. These provisions would 
apply to PCAs. The Administration's proposal would require annual 
reports outlining the safeguards in place at the PCAs to protect 
taxpayer confidentiality and PCA compliance with the taxpayer 
confidentiality provisions.
    PCA employees would receive extensive training on taxpayer rights 
and privacy protections. The IRS' oversight processes, which would 
include an on-site presence, live and tape monitoring of communications 
with taxpayers, periodic audits, and performance evaluations, would 
ensure that taxpayer rights and privacy are fully protected.
    PCAs would be required to maintain a dedicated secure physical 
space with approved access controls to ensure protection of taxpayer 
data. The IRS would evaluate the integrity of a PCA's computer system 
to ensure that appropriate access controls are in place to protect 
taxpayer data. To protect against browsing of taxpayer information, 
PCAs' systems would be required to maintain a log of accesses to 
taxpayer information, which would be audited periodically by the IRS. 
On-site security reviews would be performed to ensure that PCAs 
implement appropriate access controls to segregated areas where IRS 
work would be performed. Periodic security audits would be performed to 
ensure the PCAs maintain ongoing data and physical security.
    Question. A pilot project was tried previously, using private 
collection agencies and it was not a success; what new information do 
you have that would indicate that this process will work now?
    Answer. The Administration's proposal reflects the lessons learned 
from the pilot program. The primary issues affecting the success of the 
pilot program, and the manner in which those issues are addressed by 
this proposal, are set out below.
  --Implementation Period.--The IRS was required to implement, almost 
        from scratch, the pilot program within the year of the 
        appropriation legislation--i.e., within 10 months of enactment. 
        In contrast, planning for this proposal was begun well over a 
        year ago and has involved discussions between the IRS, the 
        Treasury Department, the Office of the National Taxpayer 
        Advocate, the Department of Justice, and prospective 
        contractors. Moreover, even once authorizing legislation is 
        enacted, this proposal contemplates that additional time would 
        be required before the PCA program could begin. This additional 
        time allows the IRS to ensure that the business processes, 
        security and oversight measures, and taxpayer protections are 
        brought on-line and fully tested before the program begins.
  --Funding.--The pilot program effectively was funded out of IRS 
        appropriations and involved the assignment to PCAs of a range 
        of cases. IRS employees can exercise discretion and enforcement 
        authority which cannot be delegated to a PCA. IRS employees, 
        therefore, should be more effective, compared to a PCA 
        employee, at collecting a range of outstanding tax obligations. 
        Thus, PCAs in the pilot program were destined to be judged as 
        inferior to IRS employees over such a range of cases. In 
        contrast, however, this proposal would involve the careful 
        screening of cases to ensure that only the most appropriate 
        ones are assigned to PCAs so that PCAs can act effectively and 
        efficiently with respect to these liabilities. The 
        Administration's proposal also involves PCAs supplementing, and 
        not displacing, existing IRS resources. Accordingly, the 
        program would add to the net revenue collected.
  --Processing and Communications.--At the time of the pilot program, 
        IRS computer and communication systems were not adequate for 
        the processing, delivery, and updating of liabilities being 
        handled by the PCAs. These processing and communications issues 
        already are being addressed to ensure that all functions are 
        performed timely in support of the program.
  --Selection of Accounts.--The pilot program required the IRS to place 
        accounts where the IRS had previously made attempts to collect 
        the monies owed. Consequently, the pilot program involved the 
        referral of many outstanding liabilities to PCAs that did not 
        have realistic collection potential. This resulted in wasted 
        effort by both the PCA and the IRS. Under the Administration's 
        proposal, the IRS would focus on ensuring that the outstanding 
        liabilities that are referred to PCAs are those that not only 
        are within the authority of the PCA to resolve but also 
        represent cases with a sufficient likelihood of payment if a 
        PCA, in fact, were to handle the liability.
  --Taxpayer Information.--The pilot program overly restricted the 
        amount of information that could be provided to PCAs for 
        purposes of collecting outstanding liabilities. As a result, 
        many cases had to be returned by the PCAs to the IRS due to the 
        PCAs' inability to respond to often straightforward questions 
        about a taxpayer's liability. Under the Administration's 
        proposal, PCAs would have access to specific information 
        regarding an outstanding tax liability (e.g., type of tax, tax 
        years affected, dates of assessment, whether the assessment is 
        based on a taxpayer's own balance due return or an IRS notice, 
        prior payments, and application of prior payments) in order to 
        answer basic, but important, questions that a taxpayer may have 
        regarding the liability. The taxpayer information that would be 
        provided to PCAs would be strictly limited to the information 
        required for the collection of the specific tax liability at 
        issue. PCAs would not receive, for instance, information 
        regarding a taxpayer's total or adjusted income, sources of 
        income, results of IRS examinations, delinquency history for 
        liabilities not being handled by the PCA, or employer 
        information. All existing restrictions imposed by section 6103 
        of the Code would apply to the PCAs, and taxpayers would have 
        the right to assert a claim against PCA employees who violate 
        those protections.
  --Contract Structure.--The pilot program involved a fixed-price 
        contract with incentive payments. The Administration's proposal 
        would involve a competitive, fee-for-service, performance-
        based, incentive contract structure. The performance evaluation 
        would be based on a balanced scorecard that would look to 
        quality of service, taxpayer satisfaction, and case resolution, 
        in addition to collection results. The allocation of accounts 
        among the PCAs participating in the program would be based on 
        this performance evaluation, thereby providing a further 
        incentive for PCAs to respect all taxpayer rights and 
        protections. This compensation structure is modeled on the 
        successful FMS and Department of Education contracts.
  --Oversight.--The Administration's proposal would involve extensive 
        oversight of the PCAs participating in the program, including 
        direct, on-site monitoring. This oversight would ensure that 
        procedures are followed, and that any issues are identified and 
        resolved early.
                                 ______
                                 
               Questions Submitted by Senator Ted Stevens

               PUBLIC EMPLOYEES RETIREMENT SYSTEMS RULING

    Question. In 2001, the Alaska State legislature passed a bill 
sponsored by Senator Rick Halsford (S.B. 145) which created the Village 
Public Safety Officer Program. The bill mandates Village Public Safety 
Officers are eligible to become a member of the Public Employees' 
Retirement Systems (PERS) under as 39.35. The IRS is considering the 
inclusion of Village Public Safety Officers in PERS, however they have 
not yet rendered a decision. Until the IRS makes a decision, S.B. 145 
can't be implemented. In March, I wrote a letter to the IRS requesting 
a response regarding the status of the IRS' ruling on the inclusion of 
Village Public Safety Officers in PERS. No response has been received 
to this date. When can I expect to receive a written response regarding 
the inclusion of Village Public Safety Officers in PERS, or can you 
address this question right now?
    Answer. The ruling request is under active consideration. Because 
positions taken by the Pension Benefit Guaranty Corporation and the 
Department of Labor can be affected by IRS rulings concerning the 
status of a plan as a governmental plan, we informally coordinate these 
rulings with those agencies on a taxpayer anonymous basis. We cannot 
disclose or otherwise make a draft taxpayer ruling available while we 
are deliberating on a ruling, whether redacted or not. Once the ruling 
is issued, with the taxpayer's permission we can make a redacted copy 
available to you.
    We plan to forward a redacted copy of our ruling to the 
aforementioned agencies for their comments in mid-June. We expect their 
response within 30 days, and, assuming they concur with our proposed 
ruling or have no concerns or comments that require follow-up, we will 
issue our decision within a week of receipt.

                         EXCISE TAX CALCULATION

    Question. You have stated one of the goals of the IRS is to ensure 
that top quality service is provided to each taxpayer through fair and 
uniform application of the law. It has come to my attention that an 
Alaskan company called Hawaiian Vacation has been using a handbook 
published by the Airlines Reporting Corporation to calculate its excise 
tax for flights from Alaska to Hawaii. According to the handbook, the 
route from Anchorage to Honolulu is subject to a 4.9 percent tax. The 
tax table has been used in the airline industry for over 30 years, and 
during this time, the IRS has not taken issue with the ARC handbook 
tables.
    Recently, the IRS has disputes the use of the ARC handbook and has 
proposed the tax calculation for the flight between Anchorage and 
Honolulu is 10.45 percent. Obviously, the IRS' calculation affects 
Alaskans because this is a tax paid by passengers. In the past, has the 
IRS rejected the use of the ARC handbook to determine tax rates? If so, 
name the circumstances in which the use of the ARC handbook was 
rejected. Will you provide the code section that prohibits the use of 
the ARC handbook when computing excise taxes?
    Answer. Industry tables are useful tools in the calculation of the 
taxable and excludable mileage for air transportation and are normally 
published by an entity having no Form 720 filing requirement. Neither 
the Internal Revenue Code nor Treasury Regulations prohibit or 
authorize the specific use of industry tables when calculating the 
excise tax due on taxable air transportation to or from Alaska or 
Hawaii. However, the underlying formulas and calculations to generate 
these industry tables must be in compliance with IRC section 4262(b) 
and applicable regulations.
    The Airline Reporting Corporation (ARC) has published tables used 
in the airline reservation industry for over 30 years. Based on 
historical files, it appears that the IRS had reviewed tables revised 
by the Air Transport Association of America (ATA) in 1969. The tables 
concerned tax rate ratios for 29 TRANSPAC gateway cities. Although the 
specific mileages were not authenticated, the IRS stated the formula 
appeared reasonable, with an understanding that the computations were 
made using the method set forth in Reg, Sec. 49.4262(b)-1(c).
    Recently, we determined that the airline reservation industry 
tables currently include tax rate ratios for over 700 cities to Alaska 
and Hawaii. It appears they may not conform to the method set forth in 
the regulations and revenue rulings. For example, all cities in Alaska 
have the same rate to Hawaii, as well as all cities in an area east 
from Vermont to Nova Scotia, regardless of the miles involved. In 
addition, established flight patterns over Kodiak Island in Alaska and 
Catalina Island in southern California, which are within the United 
States and taxable, are possibly not considered in the rate tables.
    Although IRC Sec. 6103 prevents the discussion of specific 
taxpayers and their returns, we are able to provide general tax 
information in response to these questions. The industry table 
calculates the taxable mileage portion of a trip from Anchorage to 
Hawaii to be 4.9 percent of the total miles. The 7.5 percent Federal 
Excise Tax rate would then be applicable to 4.9 percent of the amount 
paid for the ticket. Computing the specific mileage when normal flight 
patterns to Hawaii are over Kodiak Island, the taxable portion of the 
mileage is more closely reflected at 10.45 percent of the total 
mileage, because the flight passes over a point that is U.S. territory.
    This is a broad-based issue that impacts airlines, charter 
companies, and travel agencies who have a Form 720 filing requirement, 
as well as all taxpayers who travel to and from Alaska and Hawaii. In 
an effort to treat all taxpayers fairly and equally, we hope to resolve 
the issue with a uniform application of the law. We have agreed to meet 
with the industry and determine whether this issue can be addressed on 
a broad scale. We will be including excise, industry and Counsel 
specialists in this matter to come to a final determination as to the 
Service's position. There are several options open to pursue this, 
including Industry Issue Resolution, Tax Advisory Memorandum, or Field 
Technical Guidance. We will determine the appropriate format and a path 
of resolution after a review of the underlying information and a 
discussion with industry.
                                 ______
                                 
              Questions Submitted by Senator Patty Murray

     WILL THE IRS TRY TO INCREASE EARNED INCOME TAX CREDIT (EITC) 
                             PARTICIPATION?

    Question. Mr. Wenzel, you stated that you intend to develop your 
numerical performance goal in no more than 45 days.
    Please forward to me your goal and an accompanying detailed 
description of how you intend to achieve this goal no later than May 
26th.
    Answer. We are currently developing a methodology to identify the 
EITC participation rate to allow us to establish a targeted goal. We 
will provide this goal and accompanying detail by the end of June, as 
we discussed with your staff.
    Question. Some Federal agencies have used paid television 
advertising in English and Spanish as a method of publicizing their 
message. For example, the National Highway Traffic Safety 
Administration spent $10 million to buy primetime advertising utilizing 
volunteer celebrities to get out its enforcement message on seat belts 
with great success.
    How much does the IRS plan to spend on paid advertising on radio 
and television in order to boost participation in the EITC program?
    Answer. The IRS does not normally use paid advertising for EITC. 
EITC is promoted primarily through free Public Service Announcements 
(PSA). In 2003, IRS spent approximately $1.5 million for development 
and distribution of PSAs (TV, radio, and print media) in both Spanish 
and English and other related outreach materials. For 2004, we are 
beginning to plan an EITC awareness and understanding promotion 
strategy that will focus on encouraging workers eligible for EITC to 
claim it, while reducing erroneous payments. We have budgeted 
approximately $1.5 million for this effort.
    Question. Will you be using volunteer celebrities to get people's 
attention?
    Answer. In years past, celebrities have appeared in IRS PSAs from 
time to time. However, we do not actively seek celebrity participation. 
Celebrities can pose a public relations risk if the celebrity's 
positive image changes in the future.
    Question. You are asking for an additional $100 million for the 
EITC program. We are told that this funding will go both for your pre-
certification effort and to enhance participation.
    Precisely what percentage of the $100 million will go toward pre-
certification versus outreach efforts?
    Answer. Of the $100.2 million:
  --$16.2 million is allocated to the Qualifying Child Verification 
        initiative,
  --$13.0 million is allocated for Communications and Outreach,
  --$11.1 million is allocated to the Filing Status and Income 
        Misreporting initiatives,
  --$7.1 million is for operations management,
  --$9.9 million is allocated to phone support, and
  --$4.5 million is allocated for support from a variety of areas, 
        including Field Assistance, Taxpayer Advocate Service and 
        Appeals.
    The vast majority of the remainder ($38.4 million) is allocated to 
developing business and technological infrastructure. A description of 
the technology infrastructure that we are developing or acquiring is 
provided in Appendix I.

SHOULD THE IRS BE ALLOWED TO USE PRIVATE COLLECTION AGENCIES (PCAS) TO 
                   HELP COLLECT DELINQUENT TAX DEBTS?

    Question. Mr. Wenzel, your agency is seeking legislative authority 
to use private collection agencies to help collect delinquent tax 
debts. IRS documentation states that the IRS would be required to 
closely monitor private collection agencies' activities and 
performance, including the protection of taxpayer rights. This is 
particularly important because PCAs would be compensated out of the 
revenue collected through their activities.
    Please explain in detail the precise steps that would be in place 
to ensure that vigilant oversight would be conducted on PCA activities?
    Answer. The IRS would establish an oversight group with 
responsibility for managing case referrals, monitoring and evaluating 
PCA performance, monitoring interactions with taxpayers, and reviewing 
and approving PCA invoices. The oversight group would be required to 
monitor a statistically valid number of taxpayer contacts by each PCA 
to evaluate taxpayer treatment and adherence to IRS approved 
procedures. A manual review of PCA activity on taxpayer accounts would 
be performed to ensure compliance with approved IRS procedures and 
overall quality of case handling. A full on-site audit of each PCA by 
the IRS oversight group would be performed on a regular basis and would 
be in addition to ongoing quality-control and taxpayer protection 
monitoring.
    The PCA would be responsible for ensuring that each employee who 
has access to taxpayer account information has completed the 
appropriate background investigation and non-disclosure forms. The PCA 
would be required to submit verification of the required background 
investigation and copies of the non-disclosure forms to the IRS at 
least 20 days before the employee is permitted to access taxpayer 
information. In addition, the IRS would adopt tracking procedures 
developed during the 1996-97 pilot program to ensure that no PCA 
employee would be granted access to the IRS work site or taxpayer data 
until he/she successfully completed a satisfactory background 
determination. These procedures were very successful during the pilot.
    The IRS' oversight of PCAs would be similar in many respects to the 
IRS' oversight of its own employees. For example, the IRS audit system 
logs for indications of improper accesses to taxpayer information. The 
IRS also performs oversight of employee work for quality and 
appropriateness of taxpayer interactions.
    PCAs would be required to provide a large amount of information to 
the IRS, as well as access to various systems, to facilitate IRS 
oversight. This would include:
  --detailed Operational Management Information Systems (MIS) reports,
  --telephone Service Level reports,
  --audits of employee access to IRS taxpayer data,
  --access to PCA collection system for auditing purposes,
  --remote telephone monitoring access to authorized IRS personnel,
  --PCA employee tracking information,
  --PCA employee quality review monitoring evaluations,
  --PCA Operational Plans, and
  --PCA Business Continuation Plans.
    To make certain the IRS promptly hears, evaluates and addresses 
taxpayer complaints, a PCA would be required to provide to taxpayers, 
orally and in writing, information on how to report a complaint with 
the IRS. Any complaint received by the IRS from a taxpayer would 
immediately be provided to the PCA. If a PCA were to receive a 
complaint directly from the taxpayer, the PCA would be required to 
immediately forward the complaint to the IRS.
    Upon receipt of a complaint from the IRS or directly from a 
taxpayer, a PCA would be required to immediately cease collection 
activity on the account in question and provide to the IRS, by the 
close of business on the following business day, a copy of its records 
on the account and any other information relevant to the complaint. The 
PCA would not be permitted to resume collection activity on the account 
until IRS resolved the problem and provided the PCA written 
authorization to resume work. Failure by the PCA to cease collection 
activity on the account would result in IRS recalling the account from 
the PCA and, if appropriate, the termination of the PCA's contract.
    A PCA also would be required to investigate the complaint and 
provide a complete report to the IRS within 10 business days of 
receiving the complaint. The report would include a description of all 
actions taken to resolve the situation and steps put in place to ensure 
there are no future occurrences of similar situations.
    If a complaint is validated, the PCA would be required to remove 
the offending employee from the IRS account and take all necessary 
steps to ensure the employee no longer has any access to taxpayer 
information. In addition, the PCA's bonus and inventory would be 
reduced, and the PCA would be subject to a penalty. The IRS could 
choose to suspend all contract activity for the PCA either permanently 
or until the IRS has determined, at its discretion, that the PCA had 
taken appropriate corrective actions to prevent further complaints.\1\ 
The IRS' determination that a complaint was valid would not be subject 
to review.
---------------------------------------------------------------------------
    \1\ In determining whether to suspend a contract, the IRS would 
consider the severity and frequency of valid complaints for a PCA 
(whether related to one or more employees).
---------------------------------------------------------------------------
    If a potential statutory violation is identified, the IRS also 
would notify the Treasury Inspector General for Tax Administration 
(TIGTA). TIGTA may investigate the complaint, depending on the 
circumstances and seriousness of the complaint. If TIGTA initiates a 
formal investigation of the complaint, the PCA would be required to 
cooperate fully with the investigation and coordinate its own 
management efforts with the IRS and TIGTA. TIGTA would provide a report 
of its investigation to the IRS Contracting Officer after concluding 
the investigation.
    Question. What mechanisms would be in place to ensure that taxpayer 
rights are protected and private data is accurately secured in the use 
of private collection agencies?
    Answer. Under the Administration's proposal, taxpayer protections 
provided by the Internal Revenue Code (Code), IRS procedures, and other 
applicable laws, including those relating to taxpayer privacy, would be 
fully applicable to private collection agencies (PCAs). The taxpayer 
protections incorporated in the Administration's proposal have been 
reviewed thoroughly, including consultations with the National Taxpayer 
Advocate. The National Taxpayer Advocate would have a continuing role 
in ensuring that taxpayer protections are maintained under this 
program.
    Sections 6103(n) and 7431(a)(2) of the Internal Revenue Code 
currently permit a taxpayer to pursue legal action against any person 
who is permitted to receive tax returns and return information for 
purposes of assisting in tax administration, but who unlawfully 
inspects or discloses that information. Criminal penalties also may be 
imposed under I.R.C. Sec. Sec. 7213, 7213A. These provisions would 
apply to PCAs. The Administration's proposal would require annual 
reports outlining the safeguards in place at the PCAs to protect 
taxpayer confidentiality and PCA compliance with the taxpayer 
confidentiality provisions.
    PCA employees would receive extensive training on taxpayer rights 
and privacy protections. The IRS' oversight processes, which would 
include an on-site presence, live and tape monitoring of communications 
with taxpayers, periodic audits, and performance evaluations, would 
ensure that taxpayer rights and privacy are fully protected.
    PCAs would be required to maintain a dedicated secure physical 
space with approved access controls to ensure protection of taxpayer 
data. The IRS would evaluate the integrity of a PCA's computer system 
to ensure that appropriate access controls are in place to protect 
taxpayer data. To protect against browsing of taxpayer information, 
PCAs' systems would be required to maintain a log of accesses to 
taxpayer information, which would be audited periodically by the IRS. 
On-site security reviews would be performed to ensure that PCAs 
implement appropriate access controls to segregated areas where IRS 
work would be performed. Periodic security audits would be performed to 
ensure the PCAs maintain ongoing data and physical security.
    Question. To what degree will the backgrounds of contractor 
employees be investigated?
    Answer. The IRS, following Internal Revenue Manual (IRM) procedures 
and using input from the National Background Investigations Center 
(NBIC) would determine the degree of background investigation required 
in accordance with the risk associated with the job function performed 
and the taxpayer information being provided to the PCAs. We anticipate 
PCA employees would undergo a moderate level of background 
investigation, which includes a criminal activity check, a tax 
compliance check and verification of personal references.
    Question. The Administration is supporting legislation to allow 
private collection agencies to collect tax debt and be paid out of the 
proceeds of their collection efforts.
    Isn't this in conflict with the 1998 IRS reform legislation that 
specifically prohibits IRS employees or managers from being evaluated 
on the amount of taxes they collect?
    Answer. Fully consistent with Section 1204 of the IRS Reform and 
Restructuring Act, the IRS' contracts with PCAs would prohibit a PCA 
from evaluating a PCA employee based on quotas or collection results 
with respect to Federal tax debts serviced for the IRS. Moreover, these 
contracts would require that PCA employee evaluations include taxpayer 
service as a factor.
    The PCAs themselves would be evaluated based on a balanced measure 
scorecard that would reflect quality of service, taxpayer satisfaction, 
employee satisfaction and case resolution, in addition to collection 
results. A PCA therefore will be judged at its, and its employees' 
effectiveness, at resolving outstanding accounts and, where 
appropriate, effecting payment of outstanding tax liabilities.
    PCAs would have a very strong incentive to fully respect taxpayer 
rights and protections, including privacy rights. Validated taxpayer 
complaints and deficiencies identified during the IRS' monitoring and 
audit of a PCAs would result in significant monetary penalties for the 
PCA. In addition, the PCA's future allocation of cases would be 
significantly impacted. Simply put, a PCA that does not fully respect 
taxpayer rights and protections would soon find itself with a small to 
nonexistent role in the program.
    Question. Congress was concerned that evaluating employees on tax 
collection success could promote overly aggressive collection 
techniques. Even if the individual contract employees are not evaluated 
on how much they bring in, they may be concerned that they won't have a 
job unless they are bringing in money.
    Doesn't this conflict with the provisions of the 1998 IRS reform 
legislation?
    Answer. The Administration's proposal combines carefully restricted 
PCA activities, careful and continuous oversight, and significant short 
and long-term penalties and incentives to ensure PCAs and their 
employees will fully respect taxpayer rights and protections.
    PCAs would focus on taxpayers who are likely to pay their 
outstanding tax liabilities, either in full or in installments, if they 
were located and contacted. These are functions that do not require the 
exercise of discretion and which would not involve enforcement actions. 
PCAs may be provided by the IRS with a specific statement that can 
either be sent or delivered verbally to taxpayers regarding the 
benefits of paying an outstanding tax liability, and the potential 
consequences of failing to do so. PCAs would be prohibited from 
threatening or intimidating taxpayers, or otherwise suggesting that 
enforcement action will or may be taken if a taxpayer does not pay the 
liability. In no case would a PCA be permitted to take enforcement 
action against a taxpayer.
    As described in previous responses, PCAs and their employees would 
be subject to extensive oversight and audit. A violation by a PCA of a 
taxpayer protection provided by the Internal Revenue Code (Code), IRS 
procedures, or other applicable laws, including those relating to 
taxpayer privacy, would have real short-term and long-term consequences 
to the PCA and its employee, including, where appropriate, contract 
termination.
    Question. I understand that under current law, if an IRS employee 
misuses taxpayer information, the injured taxpayer can recover damages 
from the U.S. government.
    Would that be the case with private contractors?
    Answer. The existing protections against unauthorized disclosure of 
returns or return information would apply to PCAs and their employees. 
Sections 6103(n) and 7431(a)(2) of the Internal Revenue Code permit a 
taxpayer to pursue legal action against any person who is permitted to 
receive tax returns and return information for purposes of assisting 
with tax administration, but who unlawfully inspects or discloses that 
information. Criminal penalties also may be imposed under I.R.C. 7213 
and 7231A.
    Question. IRS employees are routinely charged with frivolous claims 
of misconduct by noncompliant taxpayers. These charges are investigated 
by IRS or the Treasury Inspector General for Tax Administration.
    Who would do the investigating and who would pay the cost of 
investigations of charges against contract employees?
    Answer. The process generally would be similar. The IRS would 
establish an oversight group with responsibility for managing case 
referrals, monitoring and evaluating PCA performance, monitoring 
interactions with taxpayers, and reviewing and approving PCA invoices. 
The oversight group would be required to monitor a statistically valid 
number of taxpayer contacts by each PCA to evaluate taxpayer treatment 
and adherence to IRS approved procedures. A manual review of PCA 
activity on taxpayer accounts would be performed to ensure compliance 
with approved IRS procedures and overall quality of case handling. A 
full on-site audit of each PCA by the IRS oversight group would be 
performed on a regular basis and would be in addition to ongoing 
quality-control and taxpayer protection monitoring.
    The PCA would be responsible for ensuring that each employee who 
has access to taxpayer account information has completed the 
appropriate background investigation and non-disclosure forms. The PCA 
would be required to submit verification of the required background 
investigation and copies of the non-disclosure forms to the IRS at 
least 20 days before the employee is permitted to access taxpayer 
information. In addition, the IRS would adopt tracking procedures 
developed during the 1996-97 pilot program to ensure that no PCA 
employee would be granted access to the IRS work site or taxpayer data 
until he/she successfully completed a satisfactory background 
determination. These procedures were very successful during the pilot.
    The IRS' oversight of PCAs would be similar in many respects to the 
IRS' oversight of its own employees. For example, the IRS audit system 
logs for indications of improper accesses to taxpayer information. The 
IRS also performs oversight of employee work for quality and 
appropriateness of taxpayer interactions.
    PCAs would be required to provide a large amount of information to 
the IRS, as well as access to various systems, to facilitate IRS 
oversight. This would include:
  --detailed Operational Management Information Systems (MIS) reports,
  --telephone Service Level reports,
  --audits of employee access to IRS taxpayer data,
  --access to PCA collection system for auditing purposes,
  --remote telephone monitoring access to authorized IRS personnel,
  --PCA employee tracking information,
  --PCA employee quality review monitoring evaluations,
  --PCA Operational Plans, and
  --PCA Business Continuation Plans.
    To make certain the IRS promptly hears, evaluates and addresses 
taxpayer complaints, a PCA would be required to provide to taxpayers, 
orally and in writing, information on how to report a complaint with 
the IRS. Any complaint received by the IRS from a taxpayer would 
immediately be provided to the PCA. If a PCA were to receive a 
complaint directly from the taxpayer, the PCA would be required to 
immediately forward the complaint to the IRS.
    Upon receipt of a complaint from the IRS or directly from a 
taxpayer, a PCA would be required to immediately cease collection 
activity on the account in question and provide to the IRS, by the 
close of business on the following business day, a copy of its records 
on the account and any other information relevant to the complaint. The 
PCA would not be permitted to resume collection activity on the account 
until IRS resolved the problem and provided the PCA written 
authorization to resume work. Failure by the PCA to cease collection 
activity on the account would result in IRS recalling the account from 
the PCA and, if appropriate, the termination of the PCA's contract.
    A PCA also would be required to investigate the complaint and 
provide a complete report to the IRS within 10 business days of 
receiving the complaint. The report would include a description of all 
actions taken to resolve the situation and steps put in place to ensure 
there are no future occurrences of similar situations.
    If a complaint is validated, the PCA would be required to remove 
the offending employee from the IRS account and take all necessary 
steps to ensure the employee no longer has any access to taxpayer 
information. In addition, the PCA's bonus and inventory would be 
reduced, and the PCA would be subject to a penalty. The IRS could 
choose to suspend all contract activity for the PCA either permanently 
or until the IRS has determined, at its discretion, that the PCA had 
taken appropriate corrective actions to prevent further complaints.\2\ 
The IRS' determination that a complaint was valid would not be subject 
to review.
---------------------------------------------------------------------------
    \2\ In determining whether to suspend a contract, the IRS would 
consider the severity and frequency of valid complaints for a PCA 
(whether related to one or more employees).
---------------------------------------------------------------------------
    If a potential statutory violation is identified, the IRS also 
would notify the Treasury Inspector General for Tax Administration 
(TIGTA). TIGTA may investigate the complaint, depending on the 
circumstances and seriousness of the complaint. If TIGTA initiates a 
formal investigation of the complaint, the PCA would be required to 
cooperate fully with the investigation and coordinate its own 
management efforts with the IRS and TIGTA. TIGTA would provide a report 
of its investigation to the IRS Contracting Officer after concluding 
the investigation.
    The IRS would pay for an initial number of the background 
investigations (75), and the PCA would bear the cost for any additional 
background investigations after the first 75.
    Question. How would IRS decide which cases to give to contractors?
    Answer. The IRS is currently evaluating the cases that would be 
referred to PCAs. In general, the cases the IRS would refer to PCAs are 
cases where the taxpayer has a reasonable likelihood of paying the 
outstanding tax liability if contacted by telephone. These cases would 
include situations where a taxpayer has filed a return indicating an 
amount of tax due but has not sent in full payment of that amount (so-
called ``balance-due'' taxpayers). These cases also would include 
situations where the taxpayer has made three or more voluntary payments 
of tax that the IRS has assessed (e.g., after having failed to file a 
return or report all income received). The IRS would not refer cases 
for which there is any indication that enforcement action would be 
required to collect the tax liabilities or cases in which the taxpayer 
disputes the amount of the liability or the existence of the liability.
    The IRS anticipates that it initially would refer only cases 
relating to the Form 1040 series of returns, i.e., individual 
taxpayers. These cases also would include tax liabilities of Small 
Business/Self-Employed (SB/SE) taxpayers and sole proprietors who file 
a Form 1040 with a Schedule C, E, or F. Although the IRS would use PCAs 
to help address both new cases as well as those cases that currently 
are not to be addressed due to resource and collection priorities, the 
IRS does not intend to refer cases that are over 6 years old.
    The IRS is currently evaluating the potential inventory of cases 
that may be appropriate for referral. The IRS is developing more 
detailed screening criteria to eliminate cases likely to result in a 
referral back to the IRS or that otherwise would have a low probability 
of collection by the PCA. In addition, the IRS is examining whether 
commercially available credit data could assist in identifying and 
prioritizing the potential inventory for PCA placement.
    Question. Wasn't funding to analyze which cases could be given to 
contractors cut in this year's budget?
    Answer. Collection Contract Support (CCS) was initially part of the 
Filing & Payment Compliance (F&PC) Modernization project. Although this 
project is now on hold, the IRS has identified fiscal year 2003 funding 
for critical needs, including analysis and development of predictive 
models that will place the appropriate accounts with PCAs should 
legislation be enacted. We have engaged an industry leader in the 
credit and risk management scoring process to develop these models for 
use with CCS.
    While the empirical models that are envisioned for F&PC are 
ultimately desirable for the modernized IRS, the commercially available 
models presently planned for use in CCS will provide valuable insight 
to the IRS on which accounts can be best resolved in the PCA 
environment.

               HAS THE IRS IMPROVED ITS CUSTOMER SERVICE?

    Question. For the 2002 filing season and so far in this year's 
filing season, taxpayers have received correct responses to questions 
approximately 85 percent of the time.
    What is the IRS doing to improve this rate?
    Answer. The IRS utilizes several methods to continually address 
quality issues.
  --The IRS monitors error data from the Centralized Quality Review 
        System on a daily basis and provides ongoing feedback about top 
        errors to frontline employees. The Centralized Quality Review 
        system is conducting in-depth analysis of fiscal year 2003 
        Filing Season data to make recommendations on correcting 
        problem areas.
  --Frontline managers and local review staffs continually listen to 
        the responses given to customers on the toll free telephone 
        lines to ensure responses are correct and complete and to 
        provide performance feedback to frontline employees.
  --The IRS is working continually to improve tools used by frontline 
        employees to respond to customer inquiries. These tools include 
        the Service Wide Electronic Research Program, the Electronic 
        Accounts Resolution Guide, and the Tax Law Probe and Response 
        Guide.
  --Employees responding to tax law inquiries are specialized in their 
        respective topics and tested before being permitted to take 
        live calls.
    The IRS has accumulated data from each toll-free site on challenges 
faced during the fiscal year 2003 filing season and actions taken to 
overcome these challenges. This information is being used to plan for 
fiscal year 2004 and beyond to eliminate barriers to providing world-
class customer service.
    Field Assistance initiated several actions to improve the accuracy 
of responses given to taxpayers who visit Taxpayer Assistance Centers 
(TAC). Some of the actions are:
  --Monitor Employee Performance.--TAC managers are monitoring 12 tax 
        law counter contacts for each technical employee during the 
        year. At least six of the contacts will be monitored during the 
        filing season. To place the monitoring commitment into the 
        proper context, Field Assistance had 1521 permanent and 335 
        seasonal and permanent part time employees as of March 2003. 
        Considering that tax law represents only 10 percent of the 
        total workload and the geographic dispersion of our TACs this 
        is a significant number of reviews.
  --Employee Counseling.--Counseling is provided when we identify an 
        improper referral to a publication. We follow up with education 
        and role playing to demonstrate proper use of the Publication 
        Method. The Publication Method is a technique to ``walk'' a 
        taxpayer through a publication to cover all appropriate probing 
        questions and illustrates the correct answer to his/her 
        question.
  --Training Assessment Battery (TAB).--TAB will be administered to all 
        employees and managers to identify skill levels and training 
        needs. The TAB includes four modules that align directly with 
        the four-stage training curriculum for Tax Resolution 
        Representatives (TRRs).
  --Employee Certification Process.--We have completed the first round 
        of employee certifications. The certification process requires 
        employees to correctly answer three out of three questions on 
        four tax law topics (social security benefits, education 
        credit, earned income tax credit and dependents). Employees 
        will only be allowed to answer taxpayers' questions on topics 
        for which they have been certified.
  --Anonymous Managerial Visits.--The sample plan requires 30 anonymous 
        visits monthly per Area. Results of the visits are provided to 
        the employee's manager within one business day for follow-up 
        for potential quality improvement.
  --Anonymous Headquarters Quality Assurance Visits.--Our Headquarters 
        Quality Assurance staff is required to make monthly anonymous 
        visits to the TACs. Results of the visits are also provided to 
        the employees' managers.
  --Error Trend Reports.--Issued by Headquarters Quality Assurance 
        staff when we identify errors. Areas are required to follow up 
        on the errors identified and take appropriate actions to 
        improve the accuracy of responses given to taxpayers who visit 
        the TACs.
    Question. How accurate are the answers supplied by employees using 
the IRS toll-free help phone lines?
    Answer. Using fiscal year 2003 cumulative as of May 23rd, for the 
2003 filing season the accuracy rate for tax law is 82.25 percent and 
accuracy rate for accounts is 88.11 percent.
    Question. What is the result of reviews of the quality of walk-in 
service to taxpayers at IRS Taxpayer Assistance Centers?
    Answer. The results of Field Assistance quality reviews and 
Treasury Inspector General for Tax Administration (TIGTA) reviews of 
the quality of walk-in service at TAC's during fiscal year 2003 are:
    Field Assistance Quality Review Results.--The cumulative accuracy 
rate through April 2003 is 87 percent based on 840 questions asked 
nationwide.
    TIGTA Results.--The cumulative accuracy rate through April 2003 is 
68 percent based on 445 questions asked. We disagree with including 
referrals to publications and service denied responses in computing the 
accuracy rate. When recomputed to reflect only answers that are 
technically correct or incorrect, the cumulative accuracy rate is 73 
percent. [Note.--The term ``service denied'' includes situations where 
the IRS employee did not answer the taxpayer's question, did not refer 
the taxpayer to a publication, another employee, the toll-free 
telephone number or offer to prepare a written referral for the 
question. The IRS employee may have told the taxpayer that no one was 
available to answer their question and that they should come back the 
next day.]
    Question. Is there separate data available regarding the accuracy 
of information given in response to inquiries pertaining to EITC?
    Answer. Yes. Cumulative through April 2003, IRS has achieved an 
81.4 percent accuracy on Earned Income Tax Credit (Tax Law) for 
inquiries to our telephone assistors.
    The accuracy results for EITC questions for our walk-in offices are 
as follows:
    Field Assistance Quality Review Results.--The cumulative accuracy 
rate through April 2003 for EITC questions is 96 percent based on 69 
questions asked nationwide.
    TIGTA Results.--The cumulative accuracy rate through April 2003 for 
EITC questions is 70 percent based on 96 EITC questions asked. As 
stated above, we disagree with including referrals to publications and 
service denied in computing the accuracy rate. When recomputed to 
reflect only answers to EITC questions that are technically correct or 
incorrect, the cumulative accuracy rate for EITC questions is 79 
percent.

                           IRS MODERNIZATION

    Question. It seems that for more than a decade, IRS has been 
modernizing its computer systems. Obviously, this has been a challenge.
    Why has it taken so long and why is it not completed? Despite 
improvements, the major modernization projects continue to experience 
significant delays, cost increases, management difficulties, and 
reductions in deliverables.
    Answer. The IRS is modernizing one of the largest and most complex 
information systems in the world. Since the creation of Internal 
Revenue Service (IRS) in its current form in the 1950s, our mission has 
evolved, and the volume and complexity of our operations have 
mushroomed. Comparable to no other in the world today, our tax system 
modernization initiative faces several challenges:
  --Complex, ever-changing tax codes,
  --Extremely high volumes,
    --Over 130 million individual taxpayers,
    --Over 6 million business taxpayers,
    --200 million returns,
    --$2.1 trillion receipts, $1.5 trillion in electronic payments,
    --Tax refunds totaling over $190 billion,
    --1.5 billion information documents,
    --52 million electronically filed returns,
    --19.2 million combined Federal/State returns,
  --Input with wide-variation in content ranging from few to many 
        fields of various lengths,
  --Seasonal processing with extreme variations in processing loads,
  --Hundreds of legacy applications, and
  --Transaction rates on the order of billions per year and storage 
        measured in the tens of terabytes (trillions of bytes).
    As you know, past modernization attempts have yielded small 
improvements, but have been largely unsuccessful. A critical question 
moving forward was whether or not the IRS could learn from these 
failures to become more successful at managing modernization. At the 
direction of Congress and to maximize the likelihood of success, the 
IRS awarded the PRIME contract to provide leadership in the development 
of the IRS long-term vision of tax administration including; systems 
integration and engineering, best practices in business process 
reengineering and business solution, software acquisition/development 
and program/project management capability.
    Notwithstanding the complexity of our modernization effort, we are 
experiencing the same challenges faced by private industry in 
developing and deploying technology projects. The CHAOS report, 
published by the Standish Group, evaluated the causes for success and 
failure of technology projects. The Standish Group research shows a 
staggering 31.1 percent of projects will be canceled before they ever 
get completed. Further results indicate 52.7 percent of projects will 
cost 189 percent of their original estimates. The Modernization 
projects are realizing a success rate equal to or greater than the 
success rate experienced by private industry.
    The Modernization program is delivering real benefits for 
taxpayers, tax practitioners and the IRS, and we are supporting an 
aggressive deliverable schedule. In addition to the accomplishments 
realized by project releases in fiscal year 2001 and 2002 discussed in 
the response to question 39d, planned deliverables for fiscal year 2003 
include functionality for Internet Employer Identification Number 
(EIN), Customer Account Data Engine (CADE), Human Resources (HR) 
Connect and e-Services.
    Initial project budgets and delivery timelines are based upon the 
long term visioning and strategy and sometimes developed several years 
before the project start date. As the projects move through the 
lifecycle and requirements become fully understood, most project 
estimates and schedules have been adjusted to reflect the enormous 
complexity of the systems. Additional costs and schedule delays also 
arise from legislative changes and the need for the modernized systems 
to interface with the existing legacy systems.
    We are engaged in a comprehensive process improvement initiative to 
enhance our effectiveness in validating cost and schedule estimates. 
This includes working with the PRIME contractor to develop and deploy 
best practice estimating capabilities consistent with Carnegie Mellon 
University's Software Engineering Institute (SEI), as recommended by 
GAO. Following the present rollout of cost and schedule estimating 
enhancements our focus will transition to ensuring increased accuracy 
and reliability of estimates. Once all management processes are in 
place, and as these mature, the program will run closer to cost and 
schedule estimates and our capacity to initiate additional deliverables 
will also increase.
    The modernization effort is a major challenge. As the GAO noted in 
its January assessment, modernization remains a high risk area. It 
stated, ``The scope and complexity of the program are growing--the 
challenge for the IRS is to make sure the pace of systems acquisition 
projects does not exceed the agency's ability to manage them 
effectively.'' Given the important juncture we have reached with the 
first important deliverable for CADE, and the need to ensure future 
success of the program, we have decided to have an outside group of 
experts take an independent look at the program and report back to us 
by the end of this summer. We have not yet identified who will conduct 
this study but expect to do so in the next few weeks. No work will stop 
while the review is underway, but this is a good time to assess 
progress, project risk and whether any midcourse corrections are 
needed.
    Finally, because of the importance of successfully achieving 
modernization, the new Commissioner recently appointed a new position, 
the Deputy Commissioner for Operations Support, who will supervise the 
Chief Financial Officer, Chief Information Officer, the Chief Human 
Capital Officer, Agency Wide Shared Services and the Service's IT and 
physical security operations. The Deputy Commissioner for Operations 
Support will own the modernization program and drive productivity 
across the organization in order to improve service to taxpayers.

                        IRS FINANCIAL MANAGEMENT

    Question. The Acting Inspector General has found that IRS lacks, on 
an ongoing basis, the timely, accurate, and useful information needed 
to make informed management decisions.
    How do you respond to this charge?
    Answer. The IRS is in the process of implementing the Integrated 
Financial System, a Joint Financial Management Improvement Program 
(JFMIP)-certified, commercial off-the-shelf software application that 
addresses the legislative requirements for the IRS in support of the 
financial and revenue accounting, property and procurement processes. 
Release 1 is scheduled for agency-wide deployment in October 1, 2003.
    This release will:
  --Improve the capability to meet internal/external requirements 
        related to management controls and financial reporting, 
        including cost accounting;
  --Improve the timeliness, quality, and utility of administrative 
        activity data provided to IRS managers, as well as to central 
        agencies, so they can make effective business decisions; and
  --Address several Remediation Plan action items, and address GAO 
        concerns regarding lack of integrated financial management 
        systems at IRS.
    With the implementation of IFS Release 1, the IRS expects to 
dramatically improve the timeliness, accuracy, and usability of the 
information required to make informed management decisions.
                                 ______
                                 
           Questions Submitted by Senator Barbara A. Mikulski

                   IRS ON PRIVATIZING TAX COLLECTION

    Question. The Administration is supporting legislation to allow 
private collection agencies to collect tax debt and be paid out of the 
proceeds of their collection efforts. This seems to me to be in 
conflict with the 1998 IRS reform legislation that specifically 
prohibits IRS employees or managers from being evaluated on the amount 
of taxes they collect. Congress felt that evaluating employees on tax 
collection success promoted overly aggressive collection techniques. 
Even if the individual contract employees are not evaluated on how much 
they bring in, they will know that they won't have a job unless they 
are bringing in money. Isn't that in conflict with the provisions of 
the 1998 IRS reform legislation?
    Answer. The Administration's proposal combines carefully restricted 
PCA activities, careful and continuous oversight, and significant short 
and long-term penalties to ensure PCAs and their employees will fully 
respect taxpayer rights and protections. Fully consistent with Section 
1204 of the IRS Reform and Restructuring Act, the IRS' contracts with 
PCAs would prohibit a PCA from evaluating a PCA employee based on 
quotas or collection results with respect to Federal tax debts serviced 
for the IRS. Moreover, these contracts would require that PCA employee 
evaluations include taxpayer service as a factor.
    PCAs would focus on taxpayers who are likely to pay their 
outstanding tax liabilities, either in full or in installments, if they 
were located and contacted. These are functions that do not require the 
exercise of discretion and which would not involve enforcement actions. 
PCAs may be provided by the IRS with a specific statement that can 
either be sent or delivered verbally to taxpayers regarding the 
benefits of paying an outstanding tax liability, and the potential 
consequences of failing to do so. PCAs would be prohibited from 
threatening or intimidating taxpayers, or otherwise suggesting that 
enforcement action will or may be taken if a taxpayer does not pay the 
liability. In no case would a PCA be permitted to take enforcement 
action against a taxpayer.
    A violation by a PCA of a taxpayer protection provided by the 
Internal Revenue Code (Code), IRS procedures, or other applicable laws, 
including those relating to taxpayer privacy, would have real short-
term and long-term consequences to the PCA and its employee, including, 
where appropriate, contract termination.
    Question. It's my understanding that under current law if an IRS 
employee misuses taxpayer information the injured taxpayer can recover 
damages from the U.S. government? Would that be the case with private 
contractors?
    Answer. The existing protections against unauthorized disclosure of 
returns or return information in would apply to PCAs and their 
employees. Sections 6103(n) and 7431(a)(2) of the Internal Revenue Code 
permit a taxpayer to pursue legal action against any person who is 
permitted to receive tax returns and return information for purposes of 
assisting with tax administration, but who unlawfully inspects or 
discloses that information. Criminal penalties also may be imposed 
under I.R.C. 7213 and 7231A.
    Question. IRS employees are routinely charged with frivolous claims 
of misconduct by noncompliant taxpayers. These charges are investigated 
by IRS or the Treasury Inspector General for Tax Administration. Who 
would do the investigating and who would pay the cost of investigations 
of charges against contract employees?
    Answer. The process generally would be similar. The IRS would 
establish an oversight group with responsibility for managing case 
referrals, monitoring and evaluating PCA performance, monitoring 
interactions with taxpayers, and reviewing and approving PCA invoices. 
The oversight group would be required to monitor a statistically valid 
number of taxpayer contacts by each PCA to evaluate taxpayer treatment 
and adherence to IRS approved procedures. A manual review of PCA 
activity on taxpayer accounts would be performed to ensure compliance 
with approved IRS procedures and overall quality of case handling. A 
full on-site audit of each PCA by the IRS oversight group would be 
performed on a regular basis and would be in addition to ongoing 
quality-control and taxpayer protection monitoring.
    The PCA would be responsible for ensuring that each employee who 
has access to taxpayer account information has completed the 
appropriate background investigation and non-disclosure forms. The PCA 
would be required to submit verification of the required background 
investigation and copies of the non-disclosure forms to the IRS at 
least 20 days before the employee is permitted to access taxpayer 
information. In addition, the IRS would adopt tracking procedures 
developed during the 1996-97 pilot program to ensure that no PCA 
employee would be granted access to the IRS work site or taxpayer data, 
and even then only limited access, until he/she successfully completed 
a satisfactory background determination. These procedures were very 
successful during the pilot.
    The IRS' oversight of PCAs would be similar in many respects to the 
IRS' oversight of its own employees. For example, the IRS audit system 
logs for indications of improper accesses to taxpayer information. The 
IRS also performs oversight of employee work for quality and 
appropriateness of taxpayer interactions.
    PCAs would be required to provide a large amount of information to 
the IRS, as well as access to various systems, to facilitate IRS 
oversight. This would include:
  --detailed Operational Management Information Systems (MIS) reports,
  --telephone Service Level reports,
  --audits of employee access to IRS taxpayer data,
  --access to PCA collection system for auditing purposes,
  --remote telephone monitoring access to authorized IRS personnel,
  --PCA employee tracking information,
  --PCA employee quality review monitoring evaluations,
  --PCA Operational Plans, and
  --PCA Business Continuation Plans.
    To make certain the IRS promptly hears, evaluates and addresses 
taxpayer complaints, a PCA would be required to provide to taxpayers, 
orally and in writing, information on how to report a complaint with 
the IRS. Any complaint received by the IRS from a taxpayer would 
immediately be provided to the PCA. If a PCA were to receive a 
complaint directly from the taxpayer, the PCA would be required to 
immediately forward the complaint to the IRS.
    Upon receipt of a complaint from the IRS or directly from a 
taxpayer, a PCA would be required to immediately cease collection 
activity on the account in question and provide to the IRS, by the 
close of business on the following business day, a copy of its records 
on the account and any other information relevant to the complaint. The 
PCA would not be permitted to resume collection activity on the account 
until IRS resolved the problem and provided the PCA written 
authorization to resume work. Failure by the PCA to cease collection 
activity on the account would result in IRS recalling the account from 
the PCA and, if appropriate, the termination of the PCAs contract.
    A PCA also would be required to investigate the complaint and 
provide a complete report to the IRS within 10 business days of 
receiving the complaint. The report would include a description of all 
actions taken to resolve the situation and steps put in place to ensure 
there are no future occurrences of similar situations.
    If a complaint is validated, the PCA would be required to remove 
the offending employee from the IRS account and take all necessary 
steps to ensure the employee no longer has any access to taxpayer 
information. In addition, the PCA's bonus and inventory would be 
reduced, and the PCA would be subject to a penalty. The IRS could 
choose to suspend all contract activity for the PCA either permanently 
or until the IRS has determined, at its discretion, that the PCA had 
taken appropriate corrective actions to prevent further complaints.\3\ 
The IRS' determination that a complaint was valid would not be subject 
to review.
---------------------------------------------------------------------------
    \3\ In determining whether to suspend a contract, the IRS would 
consider the severity and frequency of valid complaints for a PCA 
(whether related to one or more employees).
---------------------------------------------------------------------------
    If a potential statutory violation is identified, the IRS also 
would notify the Treasury Inspector General for Tax Administration 
(TIGTA). TIGTA may investigate the complaint, depending on the 
circumstances and seriousness of the complaint. If TIGTA initiates a 
formal investigation of the complaint, the PCA would be required to 
cooperate fully with the investigation and coordinate its own 
management efforts with the IRS and TIGTA. TIGTA would provide a report 
of its investigation to the IRS Contracting Officer after concluding 
the investigation.
    The IRS would pay for an initial number of the background 
investigations (75), and the PCA would bear the cost for any additional 
background investigations after the first 75.
    Question. How would the IRS decide which cases to give to 
contractors? Wasn't funding to analyze which cases could be given to 
contractors cut in this year's budget?
    Answer. The IRS is currently evaluating the cases that would be 
referred to PCAs. In general, the cases the IRS would refer to PCAs are 
cases where the taxpayer has a reasonable likelihood of paying the 
outstanding tax liability if contacted by telephone. These cases would 
include situations where a taxpayer has filed a return indicating an 
amount of tax due but has not sent in full payment of that amount (so-
called ``balance-due'' taxpayers). These cases also would include 
situations where the taxpayer has made three or more voluntary payments 
of tax that the IRS has assessed (e.g., after having failed to file a 
return or report all income received). The IRS would not refer cases 
for which there is any indication that enforcement action would be 
required to collect the tax liabilities or cases in which the taxpayer 
disputes the amount of the liability or the existence of the liability.
    The IRS anticipates that it initially would refer only cases 
relating to the Form 1040 series of returns, i.e., individual 
taxpayers. These cases also would include tax liabilities of Small 
Business/Self-Employed (SB/SE) taxpayers and sole proprietors who file 
a Form 1040 with a Schedule C, E, or F. Although the IRS would use PCAs 
to help address both new cases as well as those cases that currently 
are not to be addressed due to resource and collection priorities, the 
IRS does not intend to refer cases that are over 6 years old.
    Collection Contract Support (CCS) was initially part of the Filing 
& Payment Compliance (F&PC) Modernization project. Although this 
project is now on hold, the IRS has identified fiscal year 2003 funding 
for critical needs, including analysis and development of predictive 
models that will place the appropriate accounts with PCAs should 
legislation be enacted. We have engaged an industry leader in the 
credit and risk management scoring process to develop these models for 
use with CCS.
    While the empirical models that are envisioned for F&PC are 
ultimately desirable for the modernized IRS, the commercially available 
models presently planned for use in CCS will provide valuable insight 
to the IRS on which accounts can be best resolved in the PCA 
environment.

                     BUSINESS SYSTEMS MODERNIZATION

    Question. I am concerned about the requested funding levels for the 
IRS business systems modernization program. The budget request for this 
year is just $429 million, about $21 million or 5 percent below the 
initial fiscal year 2003 request and $79 million or 14 percent below 
the level recommended by the IRS Oversight Board.
    a. Are you committed to a robust Federal investment to continue the 
business systems modernization program at IRS?
    Answer. Yes. We firmly believe we are making progress on our 
commitments, are leveraging our precious resources, and are managing 
the considerable risk inherent in a program of the enormous size, 
complexity, and sensitivity. The current BSM program funding level for 
fiscal year 2003 is $407 million (including available appropriations 
from previous years). The President's Budget proposes an increase to 
$429 million in fiscal year 2004.
    The $429 million enables us to provide a balanced program that 
builds out essential infrastructure, delivers taxpayer value, improves 
internal operations and is within our ability to manage and implement.
    The BSM program has been steadily implementing management processes 
based on best practices in cost and scheduling planning, configuration 
management, risk management, management progress reporting, acquisition 
management and others. We feel the management processes coupled with 
our governance process will strike the proper balance between 
delivering business value, building critical infrastructure, and 
ensuring control and effectiveness. As the management processes mature, 
the program will run closer to cost and schedule estimates.
    In addition, the modernization effort is a major challenge. As the 
GAO noted in its January assessment, modernization remains a high risk 
area. It stated, ``The scope and complexity of the program are 
growing--the challenge for the IRS is to make sure the pace of systems 
acquisition projects does not exceed the agency's ability to manage 
them effectively.''
    Given this assessment and the important juncture we have reached 
with the first important deliverable for CADE, we have decided to have 
an outside group of experts take an independent look at the program and 
report back to us by the end of this summer. We have not yet identified 
who will conduct this study but expect to do so in the next few weeks. 
No work will stop while the review is underway. But this is a good time 
to assess progress, project risk and whether any midcourse corrections 
are needed.
    Question. b. What is the Administration's five-year run out for the 
business systems modernization--both in the annual appropriations 
request and the annual BSM program (expenditure plan) level?
    Answer. In fiscal year 2001 we developed a Tax Administration 
Vision and Strategy (TAVS) and an Internal Management Vision and 
Strategy (IMVS) to guide the BSM program. TAVS and IMVS reflected our 
priorities (the sequencing plan). Some critical projects like CADE were 
already started, but future projects are generally chartered from the 
sequencing plan that we developed as part of TAVS and IMVS. We also 
developed an Enterprise Architecture (EA) that added significant 
functional and technical detail to TAVS and IMVS. The EA includes an 
Enterprise Transition Plan that further details the TAVS and IMVS 
sequencing plan.
    The request for $429 million was determined after extensive 
analysis of: (1) the requirements for in-progress projects begun prior 
to fiscal year 2004; (2) the TAVS and IMVS sequencing plan; (3) funding 
the Custodial Accounting Project and Integrated Financial System to 
correct material weaknesses in financial management; (4) improving IRS 
e-gov functionality with e-Services and Modernized e-file; (5) 
maintaining adequate management reserve; (6) the Business Systems 
Management Office (BSMO) capacity to manage the program and projects; 
and finally, (7) the ability of the business units to absorb new 
software vis-a-vis training and implementation impacts. In requesting 
the $429 million, we believe we have set a realistic funding level that 
will allow us to continue the investments begun prior to fiscal year 
2004 and initiate critically needed systems software and hardware for 
business operations.
    As the IRS moves forward in its modernization efforts, funding 
requests will be developed after careful consideration of our long-term 
strategy, the sequencing plan and the priorities in the President's 
Management Agenda, as well as our ability to manage and absorb new 
functionality and business processes.
    Question. c. The program's development growth has generally been 
sustained through a combination of annual appropriations and carryover 
from prior year appropriations so that this year's (2003) program level 
is $450 million (the $370 million appropriation + carryover from prior 
years). I am concerned that prior year carryover funding will pretty 
much be exhausted after 2003. So how can the BSM program--as it enters 
into a critical period next year for a series of major projects--
maintain its momentum if the program level in 2004 actually drops below 
the anticipated level for 2003?
    Answer. The current BSM program funding level for fiscal year 2003 
is $407 million, including carryover from prior years. The President's 
Budget proposes an increase to $429 million in fiscal year 2004. The 
requested funding level of $429 million will allow us to continue the 
investments begun prior to fiscal year 2004 and initiate critically 
needed systems software and hardware for business operations.
    Question. d. OMB seems to be pushing expenditure of funds for this 
program into more internal IRS information technology applications 
rather than robustly funding the development of major activities that 
benefit the four major IRS business units. Can you explain what you are 
doing to guarantee that the products developed by the BSM are going to 
be used by the IRS' business units?
    Answer. Guiding the BSM Program is our Tax Administration Vision 
and Strategy and Internal Management Vision and Strategy, both of which 
are reflected in the BSM Enterprise Architecture. The business units 
developed these during late 2002 and early 2001 and keep them current.
    As we develop products based on the business priorities reflected 
in our sequencing plan, we have management processes that deeply invest 
the business units in leadership and ownership positions across the 
life cycle. One example is our Executive Steering Committees (ESC), 
which are chaired by the business unit. The Deputy Commissioner for 
Large and Mid-Size Business LMSB heads the Filing and Processing 
Management Sub-ESC and the Deputy CFO heads the Internal Management 
Sub-ESC, for example.
    Our integrated project teams have representation from all the 
relevant affected business areas, including information technology, and 
all key designated roles, such as the Requirements Director, are always 
from the business units. There are many other examples of how bonded 
the systems people and the business people are in this process, but 
hopefully the examples above convey the flavor of what we are doing to 
ensure deep business engagement and ownership from the outset.
    Our programs to date have addressed improved tax administration, 
internal management, and building technical infrastructure. 
Establishing a new secure online infrastructure to support tax 
administration applications like the very popular ``Where's My 
Refund?'' is one achievement we cite with pride. We have delivered 
several other tax administration applications (a new customer 
communications system, a new system for tax computations for use by 
LMSB revenue agents, and a new Internet Employer Identification Number 
system) and one major internal management system (human resources).
    This summer we will implement a new Internet-based system to enable 
streamlined communications with tax practitioners, and the first 
release of CADE, which will be the first step in replacing the old 
master files with a modernized taxpayer account data system. This fall 
we will implement two new internal management applications, a new core 
financial system, replacing our current financial system, and a new 
custodial accounting system. Next January, we will launch electronic 
filing for large businesses and tax-exempt organizations.
    As you can see, this represents an ambitious, but balanced (across 
tax administration and internal management) portfolio.
    Question. I am very supportive--as have the House and Senate 
Appropriations Committees--of the efforts made to advance Business 
Systems Modernization (BSM) by its systems integrator--the PRIME 
Alliance. In fact, it was this Subcommittee in the fiscal year 1997 
Treasury Appropriations bill that set the whole BSM/PRIME concept in 
motion. I am concerned, however, about a couple of items and would like 
your review of several matters.
    a. Currently, about $50 million are spent each year on Tier B 
projects that are designed to be the next generation of applications 
for certain IRS business units, yet these funds are not controlled by 
either BSM or the PRIME. I am concerned about the failure to make sure 
that the right hand and the left hand are not only coordinated, but 
marching in lock step with each other--something only settled by 
putting these funds under the control of BSM and the PRIME. Can you 
apprise the Subcommittee of your position on this concept and provide 
for us a detailed idea of how we guarantee the kind of program 
integration on IRS IT activities that are necessary for BSM to succeed?
    Answer. The BSM Business Integration Office is responsible for 
ensuring that strategically linked Tier B projects are under the BSM 
governance structure. In this case the Sub-Executive Steering 
Committees have oversight responsibility for Strategic Tier B projects 
along with Tier A projects, thus insuring project integration. In 
addition each modernization project contains a Transition to Support 
Plan, which details Operations & Maintenance activities after the 
modernized system is deployed.
    These investments are not as large, dramatic or far reaching as the 
BSM program. They are small-scale investments that provide bridge 
systems until modernization arrives or, in some cases, are the 
modernized end-state solutions. All investments or projects within this 
portfolio are selected through the IRS' integrated prioritization 
process. A major component of this prioritization and selection process 
is a thorough engineering analysis to ensure that the proposed systems 
are compliant with the modernized enterprise architecture and do not 
duplicate what is being developed by the BSM program. This engineering 
analysis also ensures that these projects will run on the modernized or 
BSM infrastructure. And, finally, the engineering analysis checks for 
duplication with legacy system enhancements.
    In order to support continuation of modernization efforts the newly 
appointed Deputy Commissioner for Operations Support will supervise the 
CFO, CIO, the Chief Human Capital Officer, Agency Wide Shared Services 
and the Service's IT and physical security operations. The Deputy 
Commissioner for Operations Support will own the modernization program 
and drive productivity across the organization in order to improve 
service to taxpayers.
    Question. b. I am also concerned that an increasing amount of the 
funds appropriated for BSM are not flowing through the PRIME Alliance. 
When Congress directed the IRS to initiate BSM in fiscal year 1997, we 
were emphatic that a private sector integrator needed to be brought in 
to do the job. Yet by bypassing the PRIME, and splintering BSM funds in 
multiple directions, it appears the IRS--in the wake of Commissioner 
Rossotti's departure--is trying to return to a position of itself being 
the systems integrator. That is at odds with the original Congressional 
intent for the program and President Bush's Management Agenda. What can 
you do to make sure that we let the private sector serve as the systems 
integrator for this program as was intended?
    Answer. The table below was recently prepared for House 
Congressional testimony. It shows the total amount of obligated funds 
since we awarded the PRIME contract. Over the life of the contract the 
PRIME has received approximately 75 percent of all obligated BSM funds. 
During the last two full fiscal years, 2001 and 2002, the PRIME has 
received approximately 76 percent of the obligations each year. Because 
of the long Continuing Resolution and the recent approval of the 
revised fiscal year 2003 Business Systems Modernization Expenditure 
Plan, we do not yet have comparable fiscal year 2003 numbers available.
    We do not believe that the numbers indicate that the share of funds 
going to PRIME has decreased significantly. It is not the intention of 
the IRS to move away from the Congressional intent of having the 
private sector serve as systems integrator for the BSM program.

           PRIME CONTRACTOR AND OTHER IRS SUPPORT CONTRACTORS
------------------------------------------------------------------------
                                                      BSM
                                     -----------------------------------
                                          Obligated         Expended
------------------------------------------------------------------------
PRIME...............................      $771,031,696      $634,725,415
MITRE...............................        52,801,406        49,440,693
Other...............................       202,236,866       171,071,729
                                     -----------------------------------
      Total.........................     1,026,069,968       855,237,837
------------------------------------------------------------------------


APPENDIX I.--TECHNOLOGY REQUIREMENTS FOR EITC CAN BE CATEGORIZED BY PRE-
             FILING, FILING, AND POST-FILING ACTIVITIES \1\
------------------------------------------------------------------------
       System Component                       Description
------------------------------------------------------------------------
    PRE-FILING TECHNOLOGY
          COMPONENTS

CERTIFICATION DATABASE.......  Database containing certification status
                                (entered during Filing); Database may
                                contained imaged documents.
AUTOMATED INFORMATION SYSTEM.  System for taxpayers to check
                                certification status through multiple
                                channels, including Internet, Phone (ACD/
                                IVR), E-File terminal, etc.
FILING STATUS SYSTEM.........  System to build taxpayer profiles from
                                historical data to identify Filing
                                Status errors in post-filing in batch.
CHOICEPOINT SYSTEM...........  System to import and store third-party
                                data (Choicepoint).
EITC UNDER REPORTER SYSTEM...  System to analyze and access historical
                                AUR information and identify taxpayer
                                fitting certain criteria (i.e. repeater
                                offenders).
EITC CONTACT CENTER/ACCTS      Complete call center solution that allows
 MANAGEMENT.                    CSRs to access all EITC information;
                                DSTs; Ability to transfer calls to
                                external contractor; Includes
                                application to access imaged documents.
 FILING TECHNOLOGY COMPONENTS

EITC E-FILING SYSTEM.........  System that enables taxpayers to
                                electronically submit certification
                                documentation.
CERTIFICATION SYSTEM.........  System to capture certification
                                information during processing; Includes
                                OTA-like Decision Support Tools to aid
                                in decisions; Provides certification
                                status to end-users; allows for
                                scanning, sending, and viewing of
                                documents (16 M) to central location.
FILING STATUS SYSTEM.........  System to capture new Filing Status
                                information at time of processing.
MATCHING SYSTEM..............  System to match taxpayer reported
                                information against information stored
                                in databases to determine if filing
                                requirements have been met.
TECHNOLOGY MODIFICATIONS.....  Master File and other systems
                                modifications to separate and freeze
                                only EITC portion of return (instead of
                                freezing the entire return).
    POST-FILING TECHNOLOGY
          COMPONENTS

RISK-BASED COMPLIANCE SYSTEM.  System to analyze and identify trends in
                                non-compliance; This system will aid in
                                compliance strategies and case selection
                                (can leverage F&PC RBSS).
COMPLIANCE DATA SYSTEM.......  System that allows Tax Examiners to
                                access multiple databases containing
                                EITC information.
FILING STATUS COMPLIANCE       System to access and analyze filing
 SYSTEM.                        status information (internal and third-
                                party) and identify errors in batch at
                                the time of filing; Includes automated
                                case building and issue-based notice
                                generation; Provides all relevant Filing
                                Status information to Tax Examiner;
                                Includes OTA-like Decision Support
                                Tools.
AUR MODIFICATIONS............  Systems changes to AUR that would allow
                                EITC cases to be identified, analyzed,
                                and worked separately from other AUR
                                cases; Includes changes to AUR to
                                include the expected change in EITC in
                                the AUR dollar discrepancy.
       SUPPORT SYSTEMS

MIS..........................  System that provides all management
                                information requirements, including pre-
                                filing, filing, and post-filing
                                activities; Includes OTA-like Decision
                                Support Tools.
WORKFORCE/INVENTORY            System to predict and manage workload and
 MANAGEMENT SYSTEM.             inventory in pre-filing, filing, and
                                post-filing activities; Includes OTA-
                                like Decision Support Tools.
------------------------------------------------------------------------
\1\ System includes applications, database, infrastructure, maintenance,
  etc.; DST--Decision Support Tools.

                          SUBCOMMITTEE RECESS

    Senator Shelby. Thank you. Thanks for your appearance.
    The subcommittee is in recess.
    [Whereupon, at 2:50 p.m., Wednesday, April 9, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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