[Senate Hearing 108-]
[From the U.S. Government Publishing Office]
DEPARTMENTS OF TRANSPORTATION, TREASURY AND GENERAL GOVERNMENT, AND
RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 2005
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WEDNESDAY, APRIL 7, 2004
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:17 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. Richard C. Shelby (chairman)
presiding.
Present: Senators Shelby and Reid.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
STATEMENTS OF:
MARK O. EVERSON, COMMISSIONER
PAMELA J. GARDINER, ACTING TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION, DEPARTMENT OF THE TREASURY
Senator Shelby. The subcommittee will come to order.
Good morning. I would like to welcome Internal Revenue
Service (IRS) Commissioner Mark Everson and Pamela Gardiner,
the Acting Treasury Inspector General for Tax Administration
(TIGTA) to this morning's hearing. I look forward to hearing
each of your views on the IRS's administration and enforcement
of our Nation's tax code.
As we all know, the April 15th tax filing season deadline
is rapidly approaching. Each year the subcommittee requests
that the IRS Commissioner appear before it in order to provide
an update on how the Service is responding to the influx of
questions and assistance that taxpayers need to correctly file
their tax returns. This year we have also asked TIGTA to
participate in order to provide a different perspective on the
IRS's performance.
I have taken note of the IRS's stated mission to provide
America's taxpayers with top quality service by helping them to
understand and meet their tax responsibilities, and by applying
the tax law with integrity and fairness to all. This mission
statement is appropriate, but some might question whether we
are making progress toward achieving that goal.
The IRS continues to face numerous challenges in tax law
enforcement, customer service, and the modernization of its
computer systems. While some strides have been made in some
areas, much work remains to be completed. Each one of these
tasks would prove difficult to undertake individually and to
tackle all three at once is daunting indeed.
I look forward to discussing each of these areas with both
of you. The strength and weakness of our Nation's Federal
income tax system is its reliance on the voluntary compliance
of American taxpayers. Most Americans make every effort to
comply with the law and pay their taxes. But as with any law,
some intentionally seek to avoid compliance or engage in
outright fraud. That is why effective enforcement of our tax
laws is so important. If enforcement is lax, ineffective, or
uneven, it encourages more people to commit fraud.
IRS ENFORCEMENT FUNDING
While it is uncertain whether tax fraud is on the rise, I
am certain that funding for the IRS tax enforcement has been
and will continue to be an important priority for the
administration and for the Congress. Over the past several
years Congress has consistently increased funding for tax law
enforcement, including a $265 million increase this past year.
In each fiscal year since 2000, Congress provided the IRS
with additional funding to increase its enforcement staff.
Inexplicably, these staffing needs were not filled and the
funds were instead used for other budgeted expenses. The use of
these additional dollars to cover other funding shortfalls
rather than increase staffing belies the priority the Service
claims to place on enforcement. This diversion of funds is in
direct contravention to your own statements, Mr. Commissioner,
and is simply unacceptable.
The first and foremost mission of the IRS must be to ensure
the full and fair compliance of all U.S. taxpayers with their
tax obligations. Yet, how can we ensure that the IRS is taking
its enforcement responsibilities seriously if we continue to
allow the Service to spend its funding for purposes other than
that for which they have been requested and for which Congress
has provided them?
If there are administrative shortfalls caused by absorbing
pay increases or diverting funds to other priorities and other
unbudgeted items, then the IRS should ask for funding for these
expenses and not hide behind claims of underfunding of
initiatives such as customer service and enforcement. With
100,000 employees and an annual budget that exceeds $10
billion, I find it hard to believe that the IRS lacks the
resources it needs to get the job done.
I look forward to hearing both your comments and any update
on how the IRS is utilizing the additional $265 million in
enforcement and compliance funding appropriated recently. In
the long term, a strong enforcement capability supported by
necessary funding will continue to be a key part of combating
tax non-compliance. But enforcement alone will never be enough.
The IRS must provide high-quality customer service to assist
taxpayers. I believe that many people who fail to comply with
the code do so unintentionally because of its difficulty and
complexity. Accurate and timely guidance from the Service is
imperative to ensuring taxpayer compliance.
The IRS is to be commended for the improvements it has made
in customer service over the past few years. Helpful guidance
is now much more accessible by way of the Internet, telephone,
and in-person assistance. The accessibility of e-file options
has eased the burden of filing tax returns for both the
Government and the taxpayer.
While the IRS has improved its responsiveness to taxpayer
questions, the troubling fact remains that nearly one in four
callers to its toll-free helpline receive inaccurate guidance.
The numbers are only slightly better for online questioners and
considerably worse for those taxpayers who seek in-person
assistance in an IRS-operated taxpayer assistance center.
I was even more alarmed, Mr. Commissioner, after learning
of TIGTA spot audit visits to 26 different assistance centers
throughout the country that uncovered, ``IRS employees
incorrectly prepared 19 of 23 tax returns that they prepared,''
during the audits. How can we expect taxpayers to understand
and comply with the complexities of the tax code when IRS's
employees themselves have so much trouble understanding and
explaining it?
Our Federal tax code is a large part of the problem. The
code and accompanying regulations are more than 54,000 pages
long, and are too complex, too confusing and costly to comply
with. Comprehensive reform of the tax code itself would go a
long way towards reducing tax fraud by making the process
simpler and the system fairer for all taxpayers. Additionally,
a less complex tax code would provide fewer opportunities for
cheaters and reduce the paperwork burden for all taxpaying
Americans.
I continue to believe that a simple and transparent tax
structure would promote taxpayer compliance and lead to
increased collections for the Treasury, while also markedly
reducing the huge cost of administration and enforcement of our
current tax system.
BUSINESS SYSTEMS MODERNIZATION
Now I would like to focus for just a few minutes on an area
of particular concern to me, the ongoing effort to modernize
the IRS computer systems, known as Business Systems
Modernization (BSM). This effort has been ongoing for a number
of years, and it has consistently run over schedule and over
budget while also failing to achieve meaningful milestones for
its development.
Mr. Commissioner, your budget request wisely seeks a
decrease of $102 million for BSM. I agree that now is an
appropriate time to focus on reengineering efforts to achieve
the goals set for the BSM initiative. This initiative was
supposed to be completed in 10 years. However, I do not believe
that anyone expects this schedule to be achievable as schedule
delays continue to be the rule, not the exception, to this
ongoing effort.
By way of example, the Customer Account Data Engine (CADE),
the centerpiece of the entire BSM effort, was originally
scheduled to roll-out in January of 2002, 2 years ago. Former
Acting Commissioner Wenzel last year testified that CADE would
be ready in August of 2003. It is now April 2004, and there is
still no sign of CADE. True to form, CADE is not only late but
significantly over budget. These schedule slippages and cost
overruns have been epidemic. In fact, the IRS is running late
and is over budget on all seven core projects related to BSM.
I am very concerned that BSM is becoming the 21st-century
version of the Tax Systems Modernization (TSM) program which
was abandoned after consuming $4 billion of Federal tax
dollars. That prior modernization effort was a complete loss.
The current BSM effort began in 1998 and has already cost $1.7
billion. This program, like TSM before it, raises more
questions than it answers. As you noted, Commissioner Everson,
in February of 2002, ``good intentions and good beginnings are
not the measure of success. What matters in the end is
completion, performance, and results.'' Applying your own
standard, Commissioner Everson, I think you will agree that the
BSM effort has woefully under-performed.
I look forward to hearing the thoughts of both witnesses as
to the best approach to take to keep this all-important
modernization program on track. Again, I welcome you to the
committee. Your written testimony will be made part of the
record in its entirety, and Mr. Commissioner, we will start
with you.
STATEMENT OF SENATOR HARRY REID
Senator Reid. Excuse me, can I make a statement?
Senator Shelby. Senator Reid. Excuse me.
Senator Reid. I also feel at somewhat of a disadvantage.
You are 6 foot 4 and I am just a small guy, and you have got a
pad under your chair and I am here in this hole. It does not
seem fair to me, Mr. Chairman.
Senator Shelby. I do not think you would be at a
disadvantage to anybody, Senator Reid.
Senator Reid. I briefly want to just say this. I have a
statement that is prepared and I do not want to take the time
of the committee, but I would ask your permission that it be
made part of the record.
Senator Shelby. It will be made part of the record in its
entirety and you may proceed as you wish.
Senator Reid. Mr. Chairman, let me just say this. I hope
that we can give the Commissioner of the Internal Revenue
Service (IRS) the money that has been requested. I hope we do
not have to cut that. I say that because we in Nevada have been
faced with someone who has been indicted, and I think that is
good, but he has promulgated falsehoods around the country
saying you do not have to pay your taxes, and thousands of
people have followed his lead. As a result of that, it is just
one indication of why we have to have an Internal Revenue
Service that has the manpower to collect the money that is due
the government, because it places an unfair burden on those of
us who pay their taxes fairly, if others are not.
PREPARED STATEMENT
Nobody likes to pay their taxes, but I would hope that we
would give the Internal Revenue Service the tools they need to
collect the taxes, and especially the tools to go after those
people who are, like the person in Nevada, openly cheating.
They do not have the manpower to do this adequately and I hope
we can help them in that regard.
[The statement follows:]
Prepared Statement of Senator Harry Reid
Mr. Chairman, I want to thank you for calling this important
meeting to talk about one of the most serious challenges facing the
Internal Revenue Service today--the mismatch between the resources
devoted to the Service's enforcement activities and the results that we
in Congress and the public at large expect of it.
Back in his 1996 State of the Union address, President Clinton
declared that the ``era of big government is over.'' Generally
speaking, with the exception of homeland security and defense, that has
continued to be the case. It's a positive step to demand a more
efficient, effective, and accountable government. Bloated and wasteful
government is dangerous.
But there is also danger in not having enough government to perform
critical services in a responsible fashion. Take the S&L Crisis as an
example. Back in the 1980s and early 1990s, the pool of Federal bank
regulators shrank dramatically in size, training, and experience. That
was a material contributing factor in the savings and loan crisis that
saw over a thousand S&Ls with over $500 billion in assets fail. The
Federal bailout of S&Ls eventually cost us $124 billion. If we had
employed a better-trained, more experienced, and larger team of
examiners, we could have prevented that crisis at a miniscule fraction
of what it eventually cost us.
I view the IRS's enforcement budget in much the same way. It's not
that we're attempting to avert a crisis here--it's just that we have to
make sure that the IRS has the tools it needs to conduct its important
work effectively.
Nobody likes to pay their taxes, but taxes are necessary for our
society to function. And the collection of those taxes should be
efficient, accurate, and fair. Without an adequate staff and budget,
the IRS can't collect taxes efficiently, it can't collect them
accurately, and it can't collect them fairly.
Since 1996, the number of IRS agents has fallen from just under
23,000 to 16,750, which is a decline of nearly a third. The number of
taxpayers audited fell from 1.9 million to 849,000. Criminal cases
against alleged tax offenders have fallen by about half, and civil
cases have fallen by more than 60 percent.
Those numbers indicate that the IRS is experiencing difficulty
carrying out its mission--collecting revenue. Last year, the IRS chose
not to pursue $16.5 billion of taxes owed on 2 million tax returns,
mainly because of short-staffing. That represents 1.8 percent of the
total individual and corporate income taxes expected for 2003.
According to officials of the Service, many of these taxpayers would
pay their bills if an agent simply called them.
The problem extends beyond the delinquent accounts. As was noted in
yesterday's USA Today, the Service estimates that it loses $250 billion
every year from taxpayers who cheat, fail to file, or abuse tax
shelters. The lost revenue constitutes 10 percent of the Federal
budget. That amounts to almost as much as we spend on Medicare!
When the IRS has a limited organizational capacity to go after this
money--which is fairly owed--it means that the tax burden just got a
little bit heavier on everyone who pays their taxes honestly. That's
not right.
Furthermore, especially at a time when the Federal budget deficit
is $500 billion, we should be ensuring that everyone pays in full.
Sometimes in our haste to create a smaller government, we settle
for a considerably less efficient and productive government. That is
unacceptable when it comes to the enforcement activities of the IRS,
and I look forward to working with Commissioner Everson and his
talented associates to ensure that they are equipped with the resources
necessary to do their vital enforcement work.
Senator Shelby. Thank you.
Senator Reid. I am sorry to be here late.
PREPARED STATEMENT OF SENATOR PATTY MURRAY
Senator Shelby. That is okay, Senator Reid.
Senator Murray has submitted a prepared statement which
will also be included in the record.
[The statement follows:]
Prepared Statement of Senator Patty Murray
Thank you, Mr. Chairman. Over the past 3 years, our country has
pursued a destructive and inequitable economic policy centered on
providing tax cuts to the wealthiest Americans while restricting
spending on programs that help all Americans. As a result, our Federal
budget has gone from one of the greatest surpluses in its history to
the highest deficit ever known in the history of our country--$478
billion--close to half a trillion dollars in the current fiscal year.
But if that sea of red ink is not bad enough, it is even more
disturbing when you consider that a growing percentage of Americans
believe that it is okay to avoid the taxes that they do owe the Federal
Government.
Our IRS Commissioner, Mark Everson, is before the subcommittee
today to report that the estimated tax gap, the difference between what
the Nation's taxpayers actually owe versus the amount of actual tax
receipts paid has grown to the level of $255 billion.
In about 1 week from today, millions of American families who work
hard every day and play by the rules will struggle to write a check to
the Internal Revenue Service to cover their Federal tax liability while
the rich and the super-rich in this country will pay an increasingly
smaller percent of their income in taxes. If that isn't galling enough,
the situation is made worse when you recognize that the Internal
Revenue Service is very ill-equipped to catch and penalize those
crooked Americans that do cheat on their taxes, especially the most
wealthy and sophisticated of tax cheats.
Indeed, the IRS's own methods of prosecuting tax cheats and
collecting old debts is so troubled that the Treasury Inspector General
for Tax Administration recently reported that the IRS has failed to
collect the taxes due even from dozens of individuals who have been
convicted in court for tax evasion. This is an appalling situation
where the government goes through the effort and expense of dragging
these individuals into court and convicting them of cheating on their
taxes. Even then, the IRS fails to collect the debts owed by these
convicted criminals. This situation is unacceptable and it has got to
change. The IRS must turn a corner and cease to be the laughing stock
of the wealthy and super-wealthy tax cheaters in this country.
I am pleased to say that, today, the IRS Commissioner Mark Everson
is here to testify on behalf of a budget that seeks to do something
about the problem. He is asking for a 9.4 percent boost in funding for
tax law enforcement, including funding for 2,942 additional enforcement
agents. However, there are several questions that surround the
Commissioner's request in this area that must be addressed in today's
hearing.
The first question is: are the resources that the Commissioner is
seeking enough to do the job? Recently, an oversight board appointed by
the President said that the answer is ``no.'' That oversight board
pointed out that, absent even more resources beyond the level requested
by the administration, the IRS will actually have to curtail some of
its most critical enforcement and collection efforts.
A second question of equal importance is ``will this subcommittee
be in a position to fund the increased resources sought by the IRS?''
Here, I believe that the Republican budget resolution adopted by the
thinnest majority in the U.S. Senate indicates that the answer is
``no.''
At a time when the IRS is seeking a budget increase for tax law
enforcement of 9.4 percent, the budget resolution adopted by the
Senate, which I voted against, allows for an overall funding increase
in discretionary spending of less than 1 percent. This is precisely one
of the reasons that I voted against the budget resolution. That budget
calls for continuing tax cuts to the wealthiest Americans while forcing
difficult and illogical choices when it comes to Federal spending.
We know that when we provide for increased spending for the
education of our young, we avoid even greater expenses down the road in
job training, welfare payments, even the construction of new prisons.
Similarly, if we can't fund enhanced enforcement in the Internal
Revenue Service, our Federal budget will not gain the tax revenue that
it is due and our deficit will be far worse. It is estimated that an
increase in IRS enforcement efforts of several hundred million of
dollars could yield billions in additional revenue that is owed to the
government.
A third question that must be asked is whether the IRS can really
do the job when it comes to hunting down and prosecuting tax cheats.
The agency is working with very antiquated computer systems, and its
efforts to modernize those computer systems have failed to produce
promised results. Moreover, the President's Budget singles out these
modernization efforts for a 26.5 percent funding cut for the coming
fiscal year.
We have to recognize that it takes upwards of half a dozen years or
longer for the IRS to finally pursue and prosecute individuals cheating
on their taxes. We regularly have underpaid and overworked government
lawyers going to court against handsomely paid private lawyers. Often
times, those private lawyers are the very same lawyers that concocted
the very complicated tax avoidance schemes that landed their client in
court.
So, I hope our hearing will, at a minimum, pursue these three
central questions that surround the Commissioner's request. I am glad
that he is here to testify before us. I should say that I believe his
commitment to reversing the growing trend in tax avoidance and tax
cheating is a sincere one and I look forward to hearing his testimony
this morning.
Thank you, Mr. Chairman.
Senator Shelby. Mr. Commissioner.
STATEMENT OF MARK W. EVERSON
Mr. Everson. Thank you, Mr. Chairman, Senator Reid. Nice to
see you again. Thank you very much for your opening remarks. I
am pleased to be here before the subcommittee today to speak
about the President's 2005 budget request for the IRS. I would
also like to welcome the future taxpayers behind me to this
hearing.
Our working equation for the IRS is service plus
enforcement equals compliance, not service or enforcement. The
IRS must do both. We must run a balanced system of tax
administration based on a foundation of taxpayer rights.
Last month we released our enforcement statistics for
fiscal year 2003. They demonstrate that we have arrested the
enforcement decline which began in the 1990s and worsened with
the implementation of RRA 1998. Audits, criminal investigations
and monies collected were all up. In particular, when compared
with the fiscal year which started October 1, 2000, audits of
taxpayers with incomes over $100,000 were up by over 50
percent. That is taxpayer's income over $100,000. You can see
how badly over a period of years this declined, as did a lot of
our audit rates. But you can see we have turned that around and
we have given great prominence to this category in particular.
IRS ENFORCEMENT ACTIVITIES
The President's 2005 budget request for the IRS will
continue to rebuild our enforcement activities. I would note
that two-thirds of the new monies requested will be devoted to
enforcing our compliance efforts in the areas of high income
individuals, corporations, and criminal activities. The extra
$300 million in new monies that we seek will carry out our four
objectives in enforcement. They are, discourage cheating and
non-compliance, particularly by corporations, high income
individuals and tax-exempt groups; help attorneys, accountants,
and other professionals adhere to professional standards and
obey the law; detect and deter domestic and offshore tax and
financial criminal activity; and discourage and deter non-
compliance within tax-exempt and government entities, and
misuse of such entities by third parties for tax avoidance and
other purposes.
ADDRESSING NON-COMPLIANCE
These incremental resources will help us address the tax
gap, the difference between what is owed and what is paid due
to non-filing, underreporting and underpayment, and secure
billions of dollars for the Treasury. Furthermore, over a 4-
year period we have seen an increase in the percentage of
Americans who think it is okay to cheat on their taxes; an
increase from 11 percent to 17 percent. I find this alarming,
as I am sure do you. I believe, however, that enhanced
enforcement efforts will improve attitudes concerning
compliance by reassuring the average American who pays his or
her taxes that when he or she pays neighbors and competitors
will do the same.
Once we have hired and trained the new enforcement
personnel as requested in the President's budget, this direct
return on investment would be 6 to 1. That is the dollars we
would get back directly. Beyond the incremental revenues
associated with the increased audits, investigations, and
collection activities there will also be a favorable spillover
effect. Other taxpayers will be discouraged from cheating when
they observe that those who play fast and loose with the tax
code are being held accountable. Behaviors at the margin will
change.
I am convinced we can augment our enforcement activities
without diminishing our commitment to service. Our filing
season results thus far in 2004 show that we can. Through last
Friday, total returns filed have increased more than 1 percent.
Our electronically filed returns are up 12 percent from last
year. Electronic filing is more reliable both for the taxpayer
and Service, and it is faster, allowing the IRS to issue
refunds in half the time. Also noteworthy is that the Free File
initiative, which helps low and middle-income taxpayers, has
grown in volume by 23 percent from last year.
Our other service indicators for the most part also show
improvement. We have handled increased call volumes with stable
resources and bettered our level of service. There is increased
usage of automated services both on the phone and the Internet.
While we made some changes to improve tax law accuracy and had
some startup problems earlier in the season, in recent weeks
our results in this area have recovered.
I want to assure you that should the Congress approve our
budget request we will spend these resources wisely. I am aware
of the problems in the past, particularly in the efforts to
modernize information technology at the IRS. We are addressing
our challenges in IT modernization and our plans in the 2005
budget take into account the necessity to improve as you
indicated.
PREPARED STATEMENT
In conclusion, let me note with gratitude the strong
bipartisan support the President's IRS budget request is
getting here in the Senate. I was pleased by the letters of
support from the leaders of the Governmental Affairs Committee
to the Appropriations Committee as well as the letter from the
Finance Committee to the Budget Committee. I think the tax
administration can and should be a matter of broad bipartisan
agreement.
Thank you.
[The statement follows:]
Prepared Statement of Mark W. Everson
INTRODUCTION
Chairman Shelby, Ranking Member Murray, and Members of the
subcommittee, thank you for the opportunity to testify today on the
fiscal year 2005 budget request for the Internal Revenue Service.
Our working equation at the IRS is service plus enforcement equals
compliance. The better we serve the taxpayer, and the better we enforce
the law, the more likely the taxpayer will pay the taxes he or she
owes.
This is not an issue of service OR enforcement, but service AND
enforcement. As you know, IRS service lagged in the 1990's. In
response, we took important and necessary steps to upgrade service--we
significantly improved the answering of taxpayer telephone inquiries
and electronic filing to name just a couple areas.
Unfortunately, improvement in service coincided with a drop in
enforcement of the tax law. After 1996, the number of IRS revenue
agents, officers, and criminal investigators dropped by over 25
percent.
We currently have a serious tax gap--the difference between what
taxpayers are supposed to pay and what is actually paid--in this
country. By our best estimates, we lose a quarter trillion dollars each
year due to non-filing, under-reporting, and underpayment. (This is a
rough estimate based largely upon data from our old Taxpayer Compliance
Measurement Program, most of which was collected in the 1980's. Our
estimates have been updated to reflect changes in the economy during
the intervening years, but a key assumption is that compliance behavior
has remained largely unchanged. If taxpayer compliance has changed in
the last 15 years, the tax gap could well be much different than our
estimate suggests.)
In addition, over the last 4 years, the number of Americans saying
it is OK to cheat on taxes rose from 11 to 17 percent. Sixty percent of
Americans believe that people are more likely to cheat on taxes and
take a chance on being audited.
We must restore the balance between service and enforcement, but
that will not come at the expense of continued improvements to taxpayer
service. In recent years, we have begun to attack these declines by
revitalizing our investigations, audits and prosecutions against those
who do not pay their taxes. The President's fiscal year 2005 budget--if
approved by Congress--will help with our efforts to boost enforcement
while maintaining our levels of service. The submission requests an
additional $300 million for enforcement activities over the fiscal year
2004 consolidated appropriations level.
president's fiscal year 2005 budget seeks increase in enforcement
The President has asked for an IRS fiscal year 2005 budget of
$10.674 billion, a 4.8 percent increase over the fiscal year 2004
consolidated appropriations level for the IRS.
This budget includes the goals of customer service, infrastructure/
modernization and enforcement. After a period of declining enforcement
resources, the IRS has stabilized and increased the amount of resources
dedicated to enforcement.
This budget has an increase of $300 million for a more vigorous
enforcement of the tax laws. This strong commitment to tax
administration will provide a significant augmentation of our
enforcement resources.
The additional $300 million will increase enforcement in several
key ways:
--Discourage and deter non-compliance, with emphasis on corrosive
activity by corporations, high-income individual taxpayers and
other contributors to the tax gap;
--Assure that attorneys, accountants and other tax practitioners
adhere to professional standards and follow the law;
--Detect and deter domestic and off-shored based tax and financial
criminal activity;
--Discourage and deter non-compliance within tax-exempt and
government entities and misuse of such entities by third
parties for tax avoidance or other unintended purposes.
Let me now provide more details on the broad categories of the
budget request for the IRS.
PROCESSING, ASSISTANCE, AND MANAGEMENT
We are seeking $4,148,403,000 for processing, assistance and
management. This includes necessary expenses for pre-filing taxpayer
assistance and education, filing and account services, shared services
support, and general management and administration. Up to $4.1 million
of the $4.1 billion total will be for the Tax Counseling for the
Elderly Program and $7.5 million of the total will be available for
low-income taxpayer clinic grants.
The Processing, Assistance, and Management (PAM) appropriation
handles all functions related to processing tax returns, including both
manual and electronic submissions, and provides assistance and
education to taxpayers to enable them to file accurate returns. The PAM
appropriation issues refunds, maintains taxpayer accounts, and provides
tax law assistance that includes tax law interpretation and rulings and
agreements related to tax law issues. This appropriation is responsible
for IRS personnel, facilities, and procurement services.
The IRS will continue to focus on pre-filing services and is
requesting funding for taxpayer communication and education to help all
taxpayers comply with tax laws and assume their fair share of the tax
burden. Funding is being requested for resources to warn taxpayers of
abusive tax schemes and improve compliance by preventing fraud and
abuse. The IRS is redirecting funding to enhance customer service by
reengineering processes to complement new technology and to develop an
outreach strategy for the Child Tax Credit.
The IRS is reinvesting resources for filing and account services by
providing funding for field assistance to reduce filing season details
of compliance staff, funding the Business Master File workload
increase, improving the level of telephone service to taxpayers, and
updating processes to complement technology.
As part of the shared services program, the IRS will reinvest
resources in new training and training delivery methods to develop and
to improve expert consultative skills. This effort will significantly
improve administrative and resource management decisions that will
enhance delivery of compliance initiatives. Additional resource
reinvestments will be used to defer rent annualization costs (based on
partial year costs extrapolated annually for approved fiscal year 2003
space expansion projects) to fulfill the IRS's operational mission
objectives. Shared services will implement HR Connect, the integrated
Human Resources Management System over the next 2 years. This system
will seamlessly link multiple Human Resource applications that should
result in significant program efficiencies.
The OMB Program Assessment Rating Tool (PART) review of Submissions
Processing recommends that IRS successfully implement the Modernized E-
File IT projects. IRS is enabling e-file growth by increasing the
numbers of returns eligible to be electronically filed. In fiscal year
2005, the IRS plans to complete the architecture and engineering
analysis required to develop and deploy functionality, allowing
taxpayers to electronically file Forms 1065, 990T, and 1041.
TAX LAW ENFORCEMENT
For enforcement, we are requesting $4,564,350,000. This
appropriation ensures IRS's ability to: provide equitable and
appropriate enforcement of the tax laws, identify possible non-filers
for examination, investigate violations of criminal statutes, support
the Statistics of Income program, conduct research to identify
compliance issues and support the national effort to combat domestic
and international terrorism.
The resources in the Tax Law Enforcement (TLE) Appropriation
provide service to taxpayers after a return is filed and support
activities such as research to identify compliance and tax
administration problems, as well as tabulation and publication of
statistics related to tax filing. In fiscal year 2001, Tax Law
Enforcement was realigned and redefined as mandated by the Internal
Revenue Restructuring and Reform Act of 1998 (RRA 98) to better serve
the needs of taxpayers. The modernized IRS structure is similar to
those widely used in the private sector: organized around customers'
needs, in this case taxpayers. The IRS has set up four operating
divisions to service the four major categories of taxpayers; Wage and
Investment Income (W&I), Small Business and Self-Employed (SBSE), Tax
Exempt and Government Entities (TEGE) and Large and Mid-Sized Business
(LMSB). Each of these business units has substantial operations within
the Tax Law Enforcement appropriation. The Criminal Investigation (CI)
business unit investigates criminal violations of the Internal Revenue
Code and also supports the national effort to combat terrorist
financing by integrating CI special agents into the Joint Terrorism
Task Forces and other anti-terrorism task forces. CI has the largest
part of its operation within the Tax Law Enforcement appropriation.
The TLE appropriation is the primary source of funding for the
compliance functions of the IRS, including: (1) automated, in-person
and correspondence collection of delinquent taxpayer liabilities, (2)
the matching of reporting documents with taxpayer returns, to insure
reporting compliance, (3) face-to-face examination to determine
taxpayers' correct income levels and corresponding tax liabilities, (4)
service center support of the field examination function and
correspondence with taxpayers regarding tax issues, (5) investigation
of criminal violations of the tax laws, (6) processing of currency
transaction reports over $10,000, (7) tax litigation, (8) acting as an
advocate to provide prompt resolution of taxpayer problems and (9) a
general counsel function to offer legal advice and guidance to all
components of the IRS.
I would specifically like to emphasize our continuing commitment to
the administration's efforts to combat terrorism. The funding provided
in the President's budget request will allow us to continue to make a
significant contribution to this effort.
The functions in TLE are essential to accomplishing the primary
goals of the Fiscal Year 2005 Budget Request. To accomplish this goal,
the IRS must restore the strength of the compliance function. Staffing
devoted to compliance and enforcement operations has declined in recent
years. Annual growth in return filings and additional work related to
RRA 98 have contributed to a steady decline in enforcement presence,
audit coverage and case closures in front-line compliance programs.
The Fiscal Year 2004 Appropriations Act merged the Earned Income
Tax Credit (EITC) Appropriation with the TLE Appropriation. The merge
of EITC into the TLE appropriation will provide for customer service
and public outreach programs, strengthened enforcement activities and
enhanced research efforts to reduce over claims and erroneous filings
associated with the Earned Income Tax Credit (EITC) compliance
initiative.
Customer service for the EITC initiative includes dedicated toll-
free telephone assistance, community-based tax preparation sites and a
coordinated marketing and educational effort (including paid
advertising and direct mailings) to assist low-income taxpayers in
determining their eligibility for EITC. Improved compliance activities
include increased staff and systemic improvements in submission
processing, examination, and criminal investigation programs. Increased
examination coverage, prior to issuance of refunds, reduces
overpayments and encourages compliance in subsequent filing periods; in
addition, post-refund correspondence audits by service center staff aid
in the recovery of erroneous refunds. Criminal investigation activities
target individuals and practitioners involved in fraudulent refund
schemes and generate referrals of suspicious returns for follow-up
examination. Examination staff assigned to district offices audit
return preparers and may apply penalties for non-compliance with ``due
diligence requirements.''
OMB Program Assessment Rating Tool (PART) observations concluded
that the IRS does not work enough collection cases with its current
resources, work processes and technology to ensure fair tax
enforcement. Each year IRS fails to work billions of dollars worth of
collection cases. Consequently, the Budget includes a legislative
proposal to allow IRS to hire private collection contractors to assist
the IRS in addressing a significant number of cases. In addition to the
increased resources requested, the IRS is making internal process
improvements, including: developing models to better identify high
priority work, better use of the predictive dialer, realigning the
workforce to core hours and creating a performance support tool to
provide employees with technical guidance while handling calls. The
PART review also determined that IRS financial management systems
remain weak. In response, the IRS plans to modernize its collection
technology to improve effectiveness. New technology tools will be
developed for collection employees (e.g., electronic Automated
Collection System, contact recording, and desktop integration), which
will improve program efficiency.
HEALTH INSURANCE TAX CREDIT ADMINISTRATION
We are requesting $34,841,000 for expenses necessary to implement
the health insurance tax credit included in the Trade Act of 2002. This
appropriation provides operating funding to administer the advance
payment feature of the Trade Adjustment Assistance health insurance tax
credit program to assist dislocated workers with their health insurance
premiums. The Trade Act of 2002 created the tax credit program and it
became effective in August of 2003.
INFORMATION SYSTEMS
We are requesting $1,641,768,000 for information systems. This
appropriation is for necessary expenses of the Internal Revenue Service
for information systems and telecommunications support, including
developmental information systems and operational information systems.
It provides for IRS information systems operations and maintenance,
investments to enhance or develop business applications for the IRS
Business Units and staff support for the Service's Modernization
program.
The appropriation includes staffing, telecommunications, hardware
and software (including commercial-off-the-shelf), and contractual
services. It also provides for Servicewide Information Systems (IS)
operations, IRS staff costs for support and management of the Business
Systems Modernization effort, and investments to support the
information systems requirements of the IRS business units. It includes
staffing, telecommunications, hardware and software (including
commercial-off-the-shelf software), and contractual services.
Staffing in this activity develops and maintains the millions of
lines of programming code supporting all aspects of the tax-processing
pipeline as well as operating and administering the Service's hardware
infrastructure mainframes, minicomputers, personal computers, networks,
and a variety of management information systems.
In addition, the Information Systems ``Tier B'' modernization
initiatives fund projects that modify or enhance existing IRS systems
or processes, provide changes in systemic functionality, and establish
bridges between current production systems and the new modernization
architecture being developed as part of the Servicewide Business
Systems Modernization efforts. Investment activities also include
improvements or enhancements to business applications that support
requirements unique to one of the IRS business units. These Tier B
projects yield increased efficiency and allow the Service to
progressively improve the quality of its interactions with the
taxpaying public and its many other internal and external customers.
BUSINESS SYSTEMS MODERNIZATION
We are seeking $285,000,000, for our Business Systems Modernization
(BSM) efforts. This request is based upon the resizing efforts we began
following the various internal and external reviews of BSM.
This appropriation provides for the planning and capital asset
acquisition of information technology systems, including related
contractual costs of such acquisition and contractual costs associated
with operations authorized by 5 U.S.C. 3109, to modernize IRS's
antiquated business systems.
The IRS collects $1.7 trillion in revenues annually through an
assortment of computer systems developed over a 40-year period. The IRS
developed the most important systems that maintain all taxpayer records
in the 1960's and 1970's. These outdated systems do not allow the IRS
to meet today's taxpayer and business needs. Failure to modernize IRS's
tax administration business systems will result in a significant
increase in resources required to maintain legacy systems--systems that
no longer efficiently or effectively serve America's taxpayers.
The BSM Appropriation provides for revamping business practices and
acquiring new technology. The IRS is using a formal methodology to
prioritize, approve, fund and evaluate its portfolio of BSM investments
across the IRS Business Units and Modernization and Information
Technology Services (MITS). This methodology enforces a documented,
repeatable and measurable process for managing investments throughout
their life cycle. The MITS Enterprise Governance (MEG) Committee, which
includes the Chief Information Officer and other senior MITS
executives, the Chief Financial Officer, and the heads of the Business
Operating Divisions, approves investment decisions. This executive-
level oversight ensures that products and projects delivered under the
Business Systems Modernization program are fully integrated into IRS
Business Units. The Department of the Treasury Investment Review Board
also reviews the BSM expenditure Plan once the IRS executive-level
oversight board approves the investment decisions. The plan is then
cleared through OMB and submitted through the Appropriations
Committees.
The IRS has undergone an intensive servicewide portfolio
prioritization effort, leading to a long-term modernization plan
identifying selected modernization projects, a release sequence for
each project, and estimated costs for each project. The effort is based
on vision and strategy initiatives that created an enterprise-wide
view, which unified the needs of the IRS Business Units. Fiscal year
2005 resources will fund the infrastructure, program management, and
releases of business applications to support the successful delivery of
a modernized tax administration system. More complete details are
provided in the BSM Expenditure Plan.
A partial Fiscal Year 2004 BSM Expenditure Plan was submitted by
the Department of Treasury for Congressional approval in January 2004,
and the full-year revision incorporating current project information
should be completed by this spring.
PROGRAM PERFORMANCE
The IRS expects to achieve the following levels of performance
after attaining full performance of the requested fiscal year 2005
initiatives:
--Examine an additional 30,000 investor returns in the Small Business
and Self-Employed (SB/SE) business unit and increase coverage
of high-income taxpayers, generating an additional $170 million
in fiscal year 2006. SB/SE also anticipates closing an
additional 50,000 taxpayer delinquent accounts, resulting in an
estimated $215 million in additional revenue.
--Hire and train over 2,000 new staff in the Examination, Collection
and Document Matching programs. These increases will generate
some $2.8 billion in direct enforcement revenue through fiscal
year 2007. Additional audits of investor returns and high-
income taxpayers, together with 55,000 correspondence
examinations, will yield more than $1.0 billion during that
same period. Collection closures will increase by 240,000 and
taxpayer contacts through the Automated Underreporter Program
by some 300,000 through fiscal year 2007--generating an
additional $1.8 billion.
--Increase the overall audit coverage rate in the Large and Mid-Sized
(LMSB) business unit from 5.1 percent in fiscal year 2004 to
9.6 percent in fiscal year 2007 and increase projected return
closures by 63 percent from 16,067 returns in fiscal year 2004
to 26,193 returns in fiscal year 2007. Enforcement revenue
recommended for the 3 years fiscal year 2005 through fiscal
year 2007 should increase by over $3 billion.
--Complete 229 significant Corporate Fraud investigations through
fiscal year 2007. Tax-related completed investigations will
increase by approximately 20 percent over the fiscal year 2003
level by fiscal year 2007. In addition, CI is striving to
reduce elapsed time on completed investigations by 30 percent
from fiscal year 2002 levels.
IMPROVING SERVICE
We are improving service to the taxpayer. Let me give a broader
picture of service and compliance, and how the President's budget will
lead to more effective and fair collection of taxes.
It was not long ago that IRS service was not all that it should
be--some would even say it was poor. In many areas the service level we
provided, or more accurately stated, failed to provide, frustrated
taxpayers in their effort to understand and comply with the tax law.
Regardless of the merits of some of the allegations directed
against the IRS in the mid-1990's, there was a significant gap between
the quality of service that the IRS was providing taxpayers and the
quality of service that the public had a right to expect. This
shortfall in services clearly warranted the fundamental improvements
and reorganization established under RRA 98.
The reorganization of the IRS along customer lines of business and
the other changes brought about by RRA 98 were, taken as a whole, sound
reforms. The twin themes of the legislation were improvement of service
and protection of taxpayer rights.
Through an almost single-minded focus on RRA 98 implementation, the
IRS has demonstrated unmistakable progress in improving customer
service and increasing its recognition of, and respect for, taxpayer
rights. While we still aim to reach a higher level of customer service,
our improvement and commitment with respect to these core goals is
measurable.
Last year 53 million individuals filed their returns
electronically. Thus far this year, nearly 1 week away from ``tax
day'', electronic filing is up again, by about 12 percent. Electronic
filing is more reliable, both for the taxpayer and the IRS. And it is
faster. Over three-quarters of Americans get refunds, and we issue the
refund in about half the time when a taxpayer files electronically.
Another challenge in the 1990's was getting through to the IRS at
all. We now have a world-class telephone call routing system. A call is
directed to the right person, someone who knows something about
charitable contributions or IRA's--whatever the subject may be--and the
system balances workforce planning against predictable workload
patterns to reduce waiting time. By 2003, overflows to the telephone
system, such as busy signals--the crudest indication of service
failure--decreased 99 percent from its worst performance of 400
million. We also reduced taxpayer call-waiting time by half since 2001,
reduced the number of abandoned calls by half since 2002, and doubled
the number of refund inquiries from our Spanish-speaking taxpayers.
Meanwhile, we have delivered other applications that provide
tangible benefits to taxpayers and improve the efficiency and
effectiveness of our tax administration system. They include:
--Where's My Refund?/Where's My Advance Child Tax Credit?, which
gives taxpayers instant updates on the status of their tax
refunds and advance child tax credits. Where's My Refund? has
provided almost 11 millions services and Where's My Advance
Child Tax Credit? has provided another 20 million services. By
shifting a significant volume of customer demand to the
Internet and automated telephone services, we have seen a
measurable improvement in service for taxpayers who still need
to talk with an IRS assistor.
--e-Services, which includes preparer tax identification number (TIN)
applications with instant delivery, individual TIN matching for
third party payers, on-line registration for electronic e-
Services, and on-line initiation of the electronic originator
application (currently released to a controlled segment of
external users). I am pleased to announce that we recently made
the first part of e-Services available on our public website.
The remaining parts will come out over the next several months.
--Internet EIN, which permits small businesses to apply for, and
receive, an Employer Identification Number on-line.
--HR Connect, which allows IRS users to perform many personnel
actions on-line. This technological advance will enable the
Service to redirect hundreds of positions to enforcement
activities by the time it is fully deployed, which we have
planned for October 2005.
Are we where we need to be on service? Not yet. As you know, I have
been emphasizing enforcement, but I do not want this subcommittee or
anyone to think the IRS will walk away from service. We still continue
to maintain and improve service.
Our objectives for improved taxpayer service are three-fold:
--First, to improve and increase service options for the tax-paying
public;
--Second, to facilitate participation in the tax system by all
sectors of the public; and
--Third, to simplify the tax process.
These are service objectives that recognize the dynamics of a
rapidly changing world, one in which the Internet will be the dominant
communications tool. Yet we realize there will remain a wide range of
computer and technological literacy among individual taxpayers, and we
must not fail to provide the same level of service to all taxpayers
regardless of their technological sophistication. Our objectives also
recognize an America with an increasingly diverse population, and that
diversity will create challenges for us as tax administrators.
Nevertheless, we are confident that we can and will serve all American
effectively.
Continued changes in traditional media will make it harder to cover
the waterfront as we seek to educate taxpayers. Moreover, the
complexity of our tax laws, along with the frequency of changes to
these laws, is not only a challenge to taxpayers trying to comply with
the tax laws, but a basis of cynicism about complying with the tax
laws. The administration is committed to addressing this complexity.
While it remains, we have an obligation to help taxpayers navigate
these laws and make it as easy as possible for them to comply.
In a world increasingly impatient for prompt and reliable
information and transaction processing, all of these factors pose
significant challenges to the IRS as it strives to improve the level of
service provided to the American taxpayer.
A good example of the challenges we will face is reconciling our
desire to standardize our processes through electronic filing with the
reality that some groups, such as immigrants and the elderly, will need
different, targeted services. Electronic filing is important to the IRS
and to taxpayers, but we cannot overemphasize it to the detriment of
services to taxpayer groups who will not utilize it. Addressing
competing priorities on the service side of the IRS will not be easy,
but we will work diligently to provide a balanced, effective program.
EFFECTIVE ENFORCEMENT
Our focus on the strong mandate of RRA 98 to improve IRS services
to the taxpaying public made it difficult for us to balance both the
service and enforcement elements that are so necessary to the success
of our tax system. Improved taxpayer service enhances compliance and
respect for our laws among the vast majority of Americans who do their
best to pay their fair share. Improved taxpayer service also may help
discourage those who might not otherwise do what is necessary to comply
with our tax laws. Taxpayer service, however, does not address those
who actively seek to avoid paying their fair share. I believe most
people would agree that we achieved improvement of IRS taxpayer
services in large part at the expense of needed enforcement activities.
Over a 5-year period beginning in 1997, the IRS refocused its
enforcement resources significantly. The number of revenue agents
(those who conduct audits), the number of revenue officers (those who
collect monies due), and the number of criminal investigators (those
who prepare cases for possible prosecution by the Justice Department)
each declined by over a quarter.
In essence, we did not observe the wise admonition of President
John F. Kennedy that ``Large continued avoidance of tax on the part of
some has a steadily demoralizing effect on the compliance of others.''
We are correcting our course and re-centering the agency. We are
strengthening the IRS enforcement of the tax laws in a balanced,
responsible fashion. And we will do so without compromising taxpayer
rights. As the IRS enhances enforcement, we have four priorities:
First, we are working to discourage and deter non-compliance, with
emphasis on corrosive activity by corporations and high-income
individuals. Attacking abusive tax shelters is the centerpiece of this
effort. What is at stake is greater than many billions of dollars of
lost tax revenues. Our surveys indicate that 80 percent of Americans
believe it is very important for the IRS to enforce the law as applied
to corporations and high-income individuals. Enforcing compliance in
these sectors is critical to maintaining Americans' faith that our
system is fair. The abuses of recent years have to a very real degree
strained the credibility of our tax administration system.
The IRS is moving aggressively to attack these transactions.
Working with our partners in the Treasury Department, we have
accelerated the issuance of guidance identifying abusive and
potentially abusive transactions and improved disclosure requirements
to provide greater transparency--sorely needed in today's complex
world. And we have over 100 promoter audits underway, not to mention
thousands of audits of high-income individuals and corporations who
have entered into potentially abusive transactions. Where necessary,
the Treasury Department, on behalf of the administration, has proposed
legislation that would stop abusive transactions that we may not be
able to fully or quickly address under existing law.
However, we need to do better. We need to do more, and we
particularly need to do it faster. The length of time it takes us to
complete the audit of a large, complex corporation is 5 years from the
date the return is filed, which in most cases is already 8\1/2\ months
after year end. And these figures don't include the appeals process,
which runs another 2 years before the matter is settled or goes to
court. That means that half of our current inventory of large cases is
from the mid 1990's or the early 1990's. In today's rapidly changing
world, we might as well be looking at transactions from the Civil War.
Simply stated, the IRS did not detect and deter the abusive
transactions that spread during the 1990's on an adequate or timely
basis because we did not have an informed view of current taxpayer
behavior, only an historical understanding of events long past. And the
challenge is becoming greater every day, as promoters of abusive tax
transactions operate globally, without regard to national boundaries.
The lessons we have learned make it imperative to get current in
our audits, to identify transactions and shorten the feedback loop so
that abusive transactions can be shut down promptly. I am convinced we
can do it. Technology will help. Right now it takes 2 years on average
before complicated corporate returns find their way into the hands of
the assigned examiner. We are addressing this issue. Electronic filing
by corporations will facilitate our analysis of data and help us
calibrate risk. Through speedier audits we will provide better service
to the compliant taxpayer by resolving ambiguity earlier, and hold
accountable those who seek to game the system. And we are creating a
web of disclosure, registration and maintenance of investor lists that
will provide information about abusive transactions.
Second, we are working to ensure that attorneys, accountants and
other tax practitioners adhere to professional standards and follow the
law. In recent decades, with an accelerated slide in the 1990's, the
model for accountants and attorneys changed. The focus shifted from
independent audit and tax functions, premised on keeping the client out
of trouble, to value creation and risk management. The tax shelter
industry had a corrupting influence. It got so bad that in some
instances blue-chip professionals actually treated compliance with the
law--in this case IRS registration and list maintenance requirements--
as a business decision. They weighed potential fees for promoting
shelters but not following the law against the risk of IRS detection
and the size of our penalties.
Our system of tax administration depends upon the integrity of
practitioners. The vast majority of practitioners are honest and
scrupulous, but even they suffered from the erosion of ethics by being
subjected to untoward competitive pressures. The IRS is acting. We have
augmented our Office of Professional Responsibility by doubling its
size and appointing as its director a tough, no-nonsense, former
prosecutor; we are tightening the regulatory scheme; and we are
receiving excellent support from the Justice Department in our promoter
and associated investigations. But we need the Congress to enact the
tougher penalties proposed by the administration for those promoters
who have not yet gotten the message.
Third, we must detect and deter domestic and offshore-based
criminal tax activity, our traditional area of emphasis, and financial
criminal activity. Our Criminal Investigation Division is a storied and
proud law enforcement agency. Their expertise comprises not just
criminal tax matters but other financial crimes. Our investigators are
the best in law enforcement at tracking and documenting the flow of
funds. In addition to our tax investigations, the IRS has over 100
agents assigned on an ongoing basis to support the President's
Corporate Fraud Task Force. We will continue and intensify these
important efforts.
Two factors account in significant part for America's great
economic vigor and success. They are our pervasive culture of
entrepreneurship, on the one hand, and the stability and transparency
of our markets on the other. The reputation and attractiveness of our
markets have been compromised by the scandals of recent years. The
President's Corporate Fraud Task Force and the President and Congress
with Sarbanes-Oxley have taken important steps to restore confidence.
Through these three enforcement initiatives, the IRS will do its part
so that sound tax administration contributes to public confidence in
our economic system.
We have one more enforcement priority. The stakes for America in
this area are also important. We will discourage and deter non-
compliance within tax exempt and government entities, and the misuse of
such entities by third parties for tax avoidance or other unintended
purposes. Non-compliance involving tax-exempt entities is especially
disturbing because it involves organizations that are supposed to be
carrying out some special or beneficial public purpose. Enforcement in
this area has suffered as IRS staffing in the exempt organizations area
fell from 1996 through 2003. Enactment of the President's budget would
allow us to gradually build up staffing in this important area and step
up enforcement.
If we do not act to guarantee the integrity of our charities, there
is a risk that Americans will lose faith in and reduce their support
more broadly for charitable organizations, damaging a unique and vital
part of our Nation's social fabric.
A case in point is credit-counseling agencies. These organizations
have been granted tax-exempt status because they are supposed to be
educating and assisting people who are experiencing credit or cash flow
problems. Based on the information we have reviewed, we believe that a
troubling number of these organizations, however, instead are operating
for the benefit of insiders or in league with profit-making companies,
such as loan companies, to generate income from lending to these
distressed individuals and families. We are taking a close look at
these organizations to ensure that they are operating within the bounds
of the law.
It is, of course, imperative as we reinvigorate the enforcement
program that IRS employees maintain their respect for and diligence to
all taxpayer due process rights and protections.
We are making progress in our effort to reduce the annual tax gap.
Our enforcement statistics for Fiscal 2003, released in early March,
demonstrate that we have arrested the enforcement decline that began in
the 1990's and worsened with the implementation of RRA 98. Audits,
criminal investigations and monies collected were all up. In
particular, the number of high-income taxpayer audits again increased
by 24 percent. Moreover, audits of taxpayers with income over $100,000
were up over 50 percent from 2 years ago. Overall audits of all
taxpayers increased to 849,296, an increase of 14 percent from 2002.
BUSINESS SYSTEMS MODERNIZATION AT THE IRS
While not as publicly visible as service or enforcement,
modernization of IRS information technology is also a high priority.
This effort is often referred to as Business Systems Modernization or
BSM. Most of our tax administration systems are very old and difficult
to keep current with today's fast paced environment--they must be
modernized.
We are committed to resizing our modernization efforts to allow
greater management capacity and to focus on the most critical projects
and initiatives. Last summer, we used comprehensive studies to help us
identify opportunities to improve management, re-engineer business
processes and implement some new systems and technology.
As I have noted, the IRS has made progress on applications such as
improved telephone service, electronic filing, and a suite of e-
services to tax practitioners. But we have failed thus far to deliver
several important projects with which taxpayers are not directly
involved.
The projects include replacing our master file system, implementing
the on-line security features, and building the modernized
technological infrastructure on which all of our future modernization
applications will depend.
Four studies completed last year consistently identified the
following problems in delivering the large information technology
efforts:
--Insufficient participation in the technology program by IRS
business units;
--An overly ambitious portfolio;
--Inadequate performance by the contractor.
The IRS is responding by to this challenge by:
--Increasing business unit ownership of projects;
--Resizing the project portfolio and reducing the modernization
program from $388 million this year to $285 million in the
President's fiscal year 2005 request;
--And revising our relationships with the contractor and ensuring
joint accountability.
While we have much work to do on modernization, I can assure you
that it is one of my top priorities as Commissioner. We need to put in
place the foundation upon which the tax system will build and rely for
decades to come.
Before I conclude my testimony, let me give you an update on the
2004 filing season and what we are doing to make the tax season easier
and more convenient for the American taxpayer.
2004 FILING SEASON
Mr. Chairman, I have been on the job for not quite a year so I am
still going through my first filing season. Each year at the IRS, we
process billions of tax-related documents. We process well over 100
million taxpayer returns. We send out about 100 million refunds. And we
do a lot of other things as well.
It all peaks, of course, on April 15, a little more than 1 week
away.
Here are some highlights as of March 26th (unless otherwise
indicated):
Return Receipts
The IRS has received 74 million total individual returns. Twenty-
nine million returns (39 percent) are paper and 45 million (61 percent)
are e-file.
--The number of online returns is at 10.5 million, a 22.9 percent
increase from last year.
--Through March 24th, 2.6 million Free File returns have been
accepted, an increase of 24 percent from last year (2.1
million).
Refunds
Refund measures continue to show an increase over 2003. Total
refunds are up from 2003 by 3.9 percent. Total dollars paid are 9.26
percent higher than last year, with an average refund of $2,113 paid.
Telephone Measures
As of March 28, assistor level of service, at 84.9 percent, is up
1.9 percent compared to last year. Assistors have answered
approximately 729,000 more calls than they did during the same period
in 2003.
Automated calls completed are 183,000 more than the same period in
2003. A major contributor to this increase is Advanced Child Tax Credit
(ACTC) related calls.
We created automated ACTC applications for use in providing
taxpayers the correct amount of ACTC to report on their 2003 tax
return. These applications are available through telephone automation
and interactive web applications.
Telephone Quality Rates
We measure telephone quality two ways: (1) customer account
accuracy and (2) tax law accuracy. While our customer account accuracy
estimates, as of February 29th are 89.76 percent, up 1.32 percent over
the past year, our tax law accuracy has declined to 75.79 percent thus
far in 2004 (down 6.69 percent from last year.)
Fiscal Year 2004 Quality Review results indicate that two of our
most frequent tax law defects are: incomplete research and applying tax
law incorrectly.
We are undertaking the following efforts to improve performance:
--Identifying root cause of performance deficiencies and implementing
corrective initiatives through analysis;
--Establishing Quality Review Improvement Teams to determine the
drivers of Customer Accuracy rates and to establish resolution
priorities as needed; and
--Strengthening accountability to the frontline managerial level to
facilitate improvement in services provided.
Taxpayer Assistance Centers (TAC's)
The number of taxpayers walking into a TAC for assistance has
decreased as a result of streamlined services in the TAC's and
initiatives to educate taxpayers on alternate methods of obtaining
services generally requiring a face-to-face contact. The advent of
technological advances in irs.gov services such as ``Free File'' and
``Where's My Refund'', and the accessibility of forms online have all
contributed to the decline in the number of customers walking into a
TAC.
CONCLUSION
The IRS has lagged behind, for reasons that are understandable, in
tax enforcement. But that is changing. We will continue to improve
service and respect taxpayer rights. But we will also enforce the law.
We won't relax until taxpayers who are unwilling to pay their fair
share see that that is not a worthwhile course to follow.
Mr. Chairman, the great majority of Americans honestly and
accurately pay their taxes. Average Americans deserve to feel confident
that, when they pay their taxes, their neighbors and competitors are
doing the same.
The President's budget request will help us enforce the tax law
more fairly and efficiently. I am most grateful for your support of
increased enforcement, and I look forward to working with you on this
important budget request.
Thank you very much. I'd be happy to take your questions.
Senator Shelby. Ms. Gardiner.
STATEMENT OF PAMELA J. GARDINER
Ms. Gardiner. Chairman Shelby, I appreciate the opportunity
to appear before you today to discuss the Internal Revenue
Service's budget and the related tax administration challenges.
The IRS is critical to the functioning of our government.
Each year the IRS collects over $2 trillion, processes over 200
million tax returns, and issues nearly 100 million tax refunds.
It provides service to millions of taxpayers by telephone,
Internet and in person. Since the enactment of the IRS
Restructuring and Reform Act of 1998, the IRS has made
significant progress in identifying opportunities to improve
its operations.
For example, this filing season the IRS indicated it had
received 43 million e-filed returns as of March 19, 2004, an
increase of over 11 percent. The IRS has also made progress in
providing information to taxpayers via its website, IRS.gov.
Taxpayers have visited this website billions of times to obtain
information. Just this tax season, the IRS stated taxpayers had
made nearly 10 million visits by the end of February to obtain
refund information from the ``Where's My Refund?'' section on
this site.
Even with this progress, the IRS faces significant
challenges to meeting its mission. I will focus my remarks on
two of these key challenges: systems modernization and customer
service.
The IRS's systems modernization program is in the sixth
year of its effort to upgrade and modernize IRS information
technology and business systems. This is an extremely complex
effort and is expected to take up to 15 years at a cost of at
least $7 billion. This program must be successful for IRS to
reach its goals in customer service and tax compliance.
Since 1999 about $1.5 billion has been appropriated and
released for modernization. The Treasury Inspector General for
Tax Administration (TIGTA) agrees with the IRS's recent moves
to scale back its systems modernization efforts to focus on
ensuring that the most critical systems are implemented. In
fact TIGTA has recommended such reductions in the modernization
projects in the past. Our concerns are based on the cost and
schedule overruns in the modernization program, including
significant delays in the most critical project, the Customer
Account Data Engine (CADE). CADE will eventually replace the
existing Master File of taxpayer accounts and will enable the
implementation of other modernized systems.
We believe the IRS and the PRIME contractor must address
the following modernization challenges to be successful:
implement planned improvements in key management processes;
manage the increasing complexity and risks of the modernization
program; maintain continuity with experienced leadership; and
ensure PRIME contractor performance and accountability.
Improving customer service has been a key focus at the IRS
for the last few years. Taxpayers have several options from
which to choose when they need assistance from the IRS. These
options include toll-free telephone assistance, walk-in service
at the taxpayer assistance centers, or TACs, and the IRS
Internet website. Each of these systems potentially effects the
taxpayer's ability and desire to voluntarily comply with the
tax laws.
The IRS's toll-free telephone system is the contact method
most taxpayers choose when seeking answers to tax law questions
or trying to resolve tax account issues. Taxpayers called the
IRS toll-free telephone system over 50 million times during the
2003 filing season. Access to the IRS's toll-free telephone
system has significantly improved. In comparison to the prior
filing season, for example, the level of service increased,
more calls were answered, and fewer taxpayers abandoned their
calls. We evaluated the toll-free system and found that 78
percent of taxpayers received accurate answers to their account
questions, and 73 percent of taxpayers received accurate
answers to their tax law questions.
The next most popular contact method is the taxpayer
assistance centers which provide face-to-face assistance to
taxpayers in meeting their filing and payment responsibilities.
Significant improvements have occurred in the percentage of
accurate answers to tax law questions that TAC employees
provided to TIGTA auditors anonymously conducting visits during
the past 2 years. IRS employees correctly answered 69 percent
of the questions asked from July through December 2003,
compared to only 57 percent during the same period in 2002.
Although the IRS website has received billions of visits
from taxpayers, most do not submit questions. Early statistics
indicated approximately 75,000 questions had been received this
year. Our past audit work indicated that over 80 percent of
Internet questions were answered correctly.
PREPARED STATEMENT
In conclusion, I believe the improvements in the levels of
service the IRS has provided to taxpayers are impressive.
However, challenges continue in the modernization effort. It
must succeed if IRS is going to operate at a level that
taxpayers expect and are entitled to receive from their
government.
I would be happy to answer any questions.
[The statement follows:]
Prepared Statement of Pamela J. Gardiner
Chairman Shelby, Ranking Member Murray, and distinguished Members
of the subcommittee, I appreciate the opportunity to appear before you
today to discuss the Internal Revenue Service's (IRS) budget, and the
challenges the IRS continues to face in using its funds to improve the
economy, efficiency, and effectiveness of tax administration.
The mission of the IRS is critical to the functioning of our
government. Each year, the IRS processes over 200 million tax returns
and collects over $2 trillion. The IRS also issues nearly 100 million
tax refunds, provides service to millions of taxpayers in person and
via telephone calls and the internet, and applies complex tax laws to
help ensure taxpayers meet their tax obligations.
E-filing provides significant benefits to both taxpayers and the
IRS including quick acknowledgement to taxpayers that the IRS received
their tax returns, more accurately processed tax returns, and faster
refunds. In addition, the IRS estimates that the processing of an e-
filed tax return compared to that of a paper tax return results in cost
savings of approximately $2.30 \1\ per tax return. Since the enactment
of the IRS Restructuring and Reform Act of 1998 (RRA 98), the IRS has
made significant progress in attracting taxpayers to e-file and
continues to identify opportunities and create incentives for taxpayers
to e-file. These efforts have resulted in individual taxpayers being
able to electronically sign their tax returns, e-file their State tax
returns with their Federal tax returns, pay their taxes using a credit
card, e-file 99 percent of all tax forms, and e-file at no cost.\2\
Furthermore, in an attempt to encourage paid preparers to submit tax
returns electronically, the IRS offers specific support services and is
in the process of providing incentives exclusive to e-file
providers.\3\ These incentives include the ability to apply to become
an e-file provider online, interact with the IRS by email, and obtain
client transcripts online. This filing season, the IRS indicated it had
received 43 million e-filed returns as of March 19--an increase of over
11 percent.
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\1\ Cost savings relate to the costs saved to process a tax return
and do not include Information Technology and Customer Service costs as
the IRS is still in the process of computing these costs.
\2\ This no cost e-filing option is the result of the IRS entering
into an agreement with tax preparation software companies and is
available for taxpayers that meet certain requirements.
\3\ E-file providers may be electronic return originators,
transmitters, software developers, tax practitioners, and States.
---------------------------------------------------------------------------
The IRS has also made progress in providing information to
taxpayers via its internet website IRS.gov. Taxpayers have visited this
website billions of times to obtain information. Just this tax season,
the IRS stated taxpayers had made nearly 10 million visits by the end
of February to obtain refund information from the ``Where's My
Refund?'' application which is featured on this site. This is almost
double the number received last year at this time.
Even with much progress, the IRS still faces significant challenges
to meeting its mission. TIGTA has identified major management
challenges in the following areas that could affect the IRS's ability
to help taxpayers address their tax responsibilities:
--Systems Modernization.
--Tax Compliance Initiatives.
--Security of Employees, Facilities, and Information Systems.
--Integrating Performance and Financial Management.
--Complexity of the Tax Law.
--Providing Quality Customer Service Operations.
--Erroneous and Improper Payments.
--Processing Returns and Implementing Tax Law Changes During the Tax
Filing Season.
--Taxpayer Protection and Rights.
--Human Capital.
Although each of these areas presents its own unique challenges, I
have chosen to focus the remainder of my remarks on two of these key
areas, Systems Modernization and Providing Quality Customer Service
Operations.
SYSTEMS MODERNIZATION
The IRS's systems modernization program is in the sixth year of its
effort to upgrade and modernize IRS information technology and business
systems. It is expected that this program will take up to 15 years and
cost at least $7 billion to complete. The modernization program is an
extremely complex effort, since many of the IRS's current business
systems are a mixture of technologies that date back to the 1960's.
While difficult, the program must nevertheless be successful if the IRS
is to meet its goals and commitments of improving its customer service
and tax compliance activities. To facilitate the success of its
modernization efforts, the IRS hired the Computer Sciences Corporation
as the PRIME contractor and integrator for the modernization program,
and created the Business Systems Modernization Office to guide and
oversee the work of the PRIME contractor. Through March 2004, the IRS
has received approximately $1.59 billion to support the systems
modernization program, and the IRS plans to request an additional $142
million for fiscal year 2004. Approximately $285 million has been
included in the fiscal year 2005 budget to further fund systems
modernization efforts.
The Treasury Inspector General for Tax Administration (TIGTA)
agrees with the IRS's recent moves to resize and scale back its systems
modernization efforts to place additional focus on ensuring the most
critical systems are implemented. In fact, TIGTA has been recommending
such a reduction in the modernization projects based on the concerns we
have raised with cost and schedule overruns in the modernization
program. The IRS Commissioner recently launched a comprehensive review
of the modernization program resulting in 21 recommendations for
improvement. Many of those recommendations were similar to those made
in TIGTA reports issued during the past 4 years.
Over the last 2 fiscal years,\4\ TIGTA cited four challenges that
the IRS and the PRIME contractor must overcome to be successful:
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\4\ Annual Assessment of the Business Systems Modernization Program
(Reference Number 2003-20-208, dated September 2003). Annual Assessment
of the Internal Revenue Service's Business Systems Modernization
Program (Reference Number 2002-20-189, dated September 2002).
---------------------------------------------------------------------------
--Implement planned improvements in key management processes and
commit necessary resources to enable success.
--Manage the increasing complexity and risks of the modernization
program.
--Maintain the continuity of strategic direction with experienced
leadership.
--Ensure PRIME contractor performance and accountability are
effectively managed.
The fourth challenge has recently become critical as oversight
groups are starting to lose confidence in the PRIME contractor's
ability to meet its commitments in modernizing the IRS's business
systems and have raised concerns about future funding. In light of this
concern, effective contract management, always difficult on a project
of this magnitude, is becoming an increasingly important challenge that
needs to be overcome.
The IRS has made progress in defining the management processes and
capabilities needed to effectively acquire and implement information
technology systems. For example, it has deployed the infrastructure
system on which future modernized applications will run. Establishing
this infrastructure is a necessary prerequisite to introducing the
business applications that are intended to provide benefits to
taxpayers and the IRS. The IRS also deployed several applications that
have immediately produced taxpayer benefits. The ``Where's My Refund''
application, as described earlier, has assisted taxpayers with millions
of online inquiries to obtain refund information. Other applications
that have been implemented allow businesses and taxpayers to obtain
employer identification numbers online, tax preparers to apply to
become an electronic filer and obtain an identification number for use
in filing clients' returns, and businesses to electronically file
certain tax returns.
In response to concerns of TIGTA and others, the revised fiscal
year 2003 modernization spending plan submitted in March 2003 focused
the program on a smaller portfolio of existing key projects. Although
the IRS expressed high confidence in the practicality of the revised
plan and assured the Congress that it could timely deliver the revised
fiscal year 2003 project portfolio, all of the projects experienced
schedule delays and most incurred significant cost increases from
fiscal year 2002 estimates. Also, management decisions were made to
delay some of the functionality that was originally planned for these
systems until sometime in the future.
These schedule delays, cost increases, and delayed functionality
occurred, in part, because modernization project teams did not always
follow defined management and project development processes. The IRS
and the PRIME contractor have particularly struggled to develop
adequate cost and schedule estimation techniques. As a result, delivery
schedules and cost estimates were very aggressive and overly
optimistic.
Additionally, the IRS and the PRIME contractor had not fully
implemented disciplined project testing processes and procedures.
Testing processes have been substantially revised and refined based on
lessons learned during the early testing efforts for modernization
projects. However, TIGTA analyzed several key projects and found the
project teams were not consistently following the established testing
processes. We believe the inadequate implementation of the testing
processes was the result of the modernization project teams attempting
to meet overly optimistic project schedules.
While progress has been made in the IRS's modernization efforts, it
did not achieve its goals for fiscal year 2003. This underachievement
is disappointing considering that the expectations for the year were
scaled back in hopes of being able to successfully deliver several key
modernization projects.
The delays in implementing projects can clearly be seen in the most
critical modernization project, the Customer Account Data Engine
(CADE). CADE will eventually replace the existing Master File \5\ of
taxpayer accounts, and will enable the implementation of other
modernized systems that will improve customer service and compliance
and allow the on-line posting and updating of taxpayer account and
return data. Therefore, CADE will be the foundation for managing
taxpayer accounts in the modernized IRS. The portion of CADE related to
individual tax accounts will be incrementally deployed in five
releases, each related to a specific taxpayer segment, over several
years, as shown in the revised CADE release schedule below.
---------------------------------------------------------------------------
\5\ The Master File is the IRS's database that stores various types
of taxpayer account information and includes individual, business, and
employee plans and exempt organizations data.
CADE RELEASE SCHEDULE
--------------------------------------------------------------------------------------------------------------------------------------------------------
Release One Release Two Release Three Release Four Release Five
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax Return Types................... 1040EZ, Refund or Even 1040EZ, 1040 Sch A, B, All 1040 Family and All 1040 Family and All remaining
balance. D, 1040A Sch 1, 3, supporting forms, supporting forms, individual tax
with Refund or Even Refund or Full Paid. Refund, Full Paid, returns.
Balance. 1040A Sch 2, Refund and Balance Due.
1040, 1040A 1040EZ, or Balance Due. 941, 940, 720 Forms--
Full Paid. 1040ES Pmts.......... Payroll,
unemployment, and
Excise returns for
1040 taxpayers.
Filing Status...................... Single................ (Single, Married-- All (including Head All.................. All.
Married once and no of Household).
dependents).
Account Characteristics............ No account issues No open account issues No open account No open account All accounts not
(Open or Closed). issues EITC. issues. included in previous
releases.
Est. Returns :\1\
Original estimate.............. 6 Million............. 29 Million............ 41 Million........... 34 Million........... 12 Million.
Revised June 2003.............. 5 Million............. 33 Million............ 57 Million........... 20 Million........... 15 Million.
Est. Delivery:
As of April 2000............... January 2002.......... August 2002........... July 2003............ July 2004............ July 2005.
As of March 2001............... January 2002.......... January 2003.......... January 2004......... January 2005......... January 2006.
As of April 2003............... August 2003........... January 2005.......... TBD.................. TBD.................. TBD.
As of Jan. 2004................ Rel 1.1 \2\.--August TBD................... TBD.................. TBD.................. TBD.
2004.
Rel 1.2/1.3.--January
2005/January 2006.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimated tax returns (electronic and paper) are based on 1999 statistics.
\2\ Release 1 has been divided up into three separate releases--1.1, 1.2, and 1.3.
CUSTOMER SERVICE
One of the Congress' principal objectives in enacting the RRA 98
was to mandate that the IRS do a better job of meeting the needs of its
customers. In the RRA 98, the Congress directed the IRS to achieve a
better balance between its post-filing enforcement efforts and pre-
filing taxpayer assistance through education and service. To comply
with this Congressional mandate, the IRS revised its mission statement
to refocus its emphasis on helping taxpayers understand and meet their
tax responsibilities. Additionally, the IRS has enhanced its focus on
increasing the levels of electronic filing.
Taxpayers have several options from which to choose when they need
assistance from the IRS. These options include toll-free telephone
assistance, walk-in service at the Taxpayer Assistance Centers (TAC),
and the IRS internet website IRS.gov. The effectiveness of each of
these services potentially affects a taxpayer's ability and desire to
voluntarily comply with the tax laws.
Toll-Free Telephone Assistance
The IRS's toll-free telephone system is the contact method most
taxpayers choose when seeking answers to tax law questions or trying to
resolve tax account-related issues. Taxpayers called the IRS toll-free
telephone system over 50 million times during the 2003 Filing Season.
The IRS's strategy for handling this significant customer demand is to
direct those taxpayers with less complicated issues to its automated
services (i.e., recorded information and interactive applications) and
allow its Customer Service Representatives (CSR) to assist taxpayers
with more difficult issues. However, during fiscal year 2003, over 26
million of the calls were from taxpayers who had questions about their
accounts and who chose to speak with a CSR.
The TIGTA and others have raised continuing concerns about the
IRS's ability to effectively meet the significant annual taxpayer
demand for access to its toll-free telephone system. Over the past
several years, the IRS has made many technological changes, as well as
organizational and process changes, to its toll-free telephone system
in an effort to provide taxpayers with better access and improve the
quality of its service.
Many aspects of the taxpayer experience in accessing the IRS toll-
free telephone system were significantly improved during the 2003
Filing Season. This improvement was reflected in the measures the IRS
uses to gauge the performance of its toll-free telephone system. In
comparison to the prior filing season, for example, the level of
service increased, more calls were answered, and fewer taxpayers
abandoned (i.e., hung up) their calls before receiving assistance.
Further, taxpayers that called with account- or refund-related
questions had shorter wait times to receive service, and taxpayers that
called with account-related questions were more likely to receive
assistance when they reached a CSR assigned to an account application.
Although taxpayer access to its toll-free telephone services
improved, the IRS has opportunities to further enhance the taxpayer
experience and reduce the costs of providing toll-free telephone
services. A major improvement opportunity involves implementing
enhancements to automated call routing solutions so that much of the
need for call screeners can be reduced or eliminated. For the 2003
Filing Season, using screeners to manually route calls cost the IRS
almost $3.6 million in salaries and benefits that would not have been
needed if the previously developed call routing solution had worked as
planned. Another improvement opportunity involves reducing the high
Assistor Availability levels \6\ that have existed for at least the
past two filing seasons. The IRS had planned for a level of 5.5 percent
in fiscal year 2003, but during the 2003 Filing Season, the rate was
11.2 percent, and had further increased to 12.15 percent through the
end of June. We estimate that this cost the IRS nearly $6.4 million in
CSR salaries and benefits. Finally, the IRS needs a financial system
that will accurately track its cost-per-call for various toll-free
telephone services to provide management and key stakeholders
sufficient information to make critical decisions.
---------------------------------------------------------------------------
\6\ Assistor Availability is the measure the IRS uses to calculate
how long its CSR's are available to take calls when none are coming in
for their specific applications. Achieving the optimum Assistor
Availability level is critical for effective and efficient call site
operations.
---------------------------------------------------------------------------
The IRS receives calls from taxpayers with account issues and
questions about various aspects of the tax law. During the 2003 Filing
Season, we reviewed both account assistance and tax law assistance
calls for professionalism, accuracy, and timeliness.
Account Assistance.--TIGTA evaluated the professionalism, accuracy,
and timeliness of account assistance obtained through the Toll-Free
program. From a judgmental sample of 191 calls monitored between April
21 and May 16, 2003, we determined that CSR's treated taxpayers
professionally for 99 percent of the calls and provided timely service
for 83 percent of the calls. In addition, 78 percent of taxpayers
received accurate answers to their account questions. Using a
statistical sample during the same period we reviewed, the IRS reported
rates of 100 and 97 percent, respectively, for professionalism and
timeliness, and 88 percent for customer accuracy.
Tax Law Assistance.--TIGTA monitored a judgmental sample of 294
toll-free tax law calls between January 27 and March 13, 2003, and
compared the results to records from an IRS statistically valid sample
of 6,011 calls monitored during the same period. The 2 samples showed
that CSR performance was professional and timely in 98 percent or more
of the total number of calls monitored. Although our sample showed a
customer accuracy rate of 73 percent as compared to the IRS' measured
rate of 81 percent, the need for CSR's to fully probe the taxpayer for
information was clearly evident as an ongoing issue requiring
improvement in both of the samples taken. The primary reason incorrect
responses were given was because CSR's were not effectively using the
appropriate guidance. Without effective use of this guidance, CSR's are
unable to fully understand the taxpayer's situation and may provide
information that is incorrect or incomplete.
Taxpayer Assistance Centers
The primary emphasis of the TAC's is to provide face-to-face
assistance to taxpayers in meeting their filing and payment
responsibilities, including educating taxpayers, providing self-help,
interpreting tax laws and regulations, securing forms, resolving
notices, and providing needs-based complimentary tax return
preparation. The IRS has over 400 TAC's that served over 8.5 million
taxpayers in fiscal year 2003.
Significant improvements have occurred in the percentage of
accurate answers to tax law questions TIGTA auditors asked when
anonymously conducting site visits to TAC's during the past 2 years.
IRS employees correctly answered 69 percent of the questions asked and
incorrectly referred only 2 percent to publications from July through
December 2003, compared to correctly answering only 57 percent of the
questions asked and incorrectly referring 12 percent to publications
from July through December 2002. TIGTA commends the IRS for the
improvements it has made in this level of accuracy.
Auditors also had positive experiences when they visited the TAC's.
IRS employees were professional and courteous in 97 percent of the 194
TIGTA site visits to 105 TAC's. Wait time for service was 1 hour or
less for 99 percent of the visits. In addition, 85 (81 percent) of the
TAC's visited by our auditors had office hours listed on the IRS
internet website IRS.gov, which matched the hours posted at the TAC's.
Although improvements have occurred in accuracy of responses to
taxpayer questions, the accuracy of tax return preparation at the TAC's
needs improvement. Complimentary tax return preparation and electronic
filing is provided to those taxpayers whose returns meet certain
requirements and limitations. For Tax Year 2002, IRS employees at the
TAC's prepared 293,242 tax returns that involved refunds and tax
liabilities totaling approximately $330 million and $6 million,
respectively.
Returns prepared at the TAC sites, however, are often inaccurate.
From February through April 2003, TIGTA auditors made 34 anonymous
visits to 26 TAC's nationwide in an attempt to have a tax return
prepared. IRS employees incorrectly prepared 19 of the 23 tax returns
prepared during our visits. If these returns had been filed, the IRS
would have inappropriately refunded $32,000 and inappropriately
withheld $2,400 in tax refunds. IRS management has taken action to
improve the accuracy of the tax returns prepared, and TIGTA has
recommended additional actions to ensure taxpayers receive proper and
accurate customer service when requesting assistance with tax return
preparation.
Service to Taxpayers via the Internet
The use of the internet has increased dramatically. The latest
statistics indicate that nearly 70 percent of the United States
population are internet users. Since 1995, the IRS has administered a
program to answer taxpayer questions submitted through its internet
website IRS.gov. This program offers individual and business taxpayers
an accessible and convenient alternative to using the telephone or
visiting an IRS office to obtain answers to tax law questions.
Taxpayers have the ability to submit tax law questions 24 hours a day,
7 days a week. The IRS provides responses to taxpayer questions via an
e-mail message.
Past TIGTA testing indicated that the accuracy rate for the answers
to the submitted questions was over 80 percent, which is higher than
that received in TAC's or via the toll-free assistance telephone
program. However, the IRS did not respond to several of the questions
TIGTA submitted anonymously to the program. Additionally, the number of
questions submitted dropped from over 200,000 questions in the 2000
Filing Season to about 120,000 in the 2002 Filing Season. TIGTA
encouraged management to provide clear instructions to taxpayers to
help them locate the area to input tax questions on the internet
website.
Statistics obtained from the IRS indicated that for the 2003 Filing
Season, 146,369 questions were received from taxpayers (a 23 percent
increase over the prior year). However, the average response time for
each question increased from 2.4 days to 4.2 days. Thus far, for the
2004 Filing Season (through March 15, 2004), statistics indicate a
reduction in the number of questions received--76,156 questions have
been received (76 percent of the number received in the prior year
during the same period) with an average response time of 3.6 days.
In closing, I would like to reiterate that the improvements in the
levels of service the IRS has provided to taxpayers are impressive. The
IRS has made great strides in enhancing the level of electronic filing,
providing information via its internet website, and improving the
accuracy and availability of toll-free telephone service. The early IRS
filing season statistics indicate a rise in electronic filing and an
increase in the use of some of the services available via the internet.
However, significant challenges remain to be addressed as the IRS
strives to modernize its systems and provide world-class customer
service to America's taxpayers.
ACCURACY OF TAX RETURN PREPARATION
Senator Shelby. I have a number of questions. The Treasury
Inspector General for Tax Administration (TIGTA) reported that
the IRS employees incorrectly prepared 19 of 23 tax returns
during a spot check of 26 taxpayer assistance centers around
the country. Ms. Gardiner, what recommendations do you have to
ensure taxpayers receive proper and accurate customer service
when requesting assistance in the preparation of a tax return?
Ms. Gardiner. The biggest problem that we see when mistakes
are made, whether it is preparing tax returns or answering
questions on the toll-free line or walk-in assistance, is that
the IRS employees do not ask appropriate probing questions. For
example, the earned income tax credit is a complicated law and
there are so many different little pieces that make a
difference in whether you qualify or not.
Senator Shelby. I certainly would not be qualified----
Ms. Gardiner. A common problem is just simply the number of
months that a child resides with the taxpayer that would
determine whether they do or do not get the credit, and that is
a common mistake.
Senator Shelby. There is a problem of verification, too, is
it not?
Ms. Gardiner. It is verification as well, but what we find
is simply that they are not asking enough questions to get to
the right answer.
IMPROVING THE ACCURACY OF RETURN PREPARATION
Senator Shelby. Mr. Commissioner, what actions have you
taken to improve the accuracy of tax returns prepared by the
IRS personnel?
Mr. Everson. I think that as Ms. Gardiner has suggested,
this is an area that needs our concern, and that is a
relatively recent set of findings. We have had recent
discussions--in fact, I think the issues here, Senator, extend
beyond returns we prepare. As you may be aware, there are up to
about 2 million returns that are prepared through volunteer
organizations that work closely with the Service, to which
people are referred and they may go visit one of these
volunteer sites.
Senator Shelby. How accurate are those returns?
Mr. Everson. I think we are seeing that there are some of
the same issues. This comes back to what you spoke about, it
comes back to the complexity of the code. That is a root cause
here. I would just expand upon Ms. Gardiner's remarks, which I
think hit it correctly. There are a couple things that are
difficult here. One is the true desire of our employers or
others to help. If they are sitting there with you and they
think they understand the situation, they may fail to ask that
next probing question. It is on a script that they are supposed
to be using, but they have made an assumption, and they
probably should not have made that assumption.
The way the scoring that TIGTA uses works and that we use
works, sometimes it holds against them the fact they just have
not asked that next question. Now, they may actually have been
right but they did not fully follow the procedure, so there is
a real risk that they have got the wrong answer. We need to
keep working on our training. We are doing that. I think that
this area----
Senator Shelby. Does a lot of it go to training?
Mr. Everson. Training is it, and getting good scripts. The
same thing applies to the tax law accuracy question where we
made some changes earlier this filing season. Overall, our
filing season results are excellent, but we did have a dip in
tax law accuracy, and that was because we were making changes
to actually get better. We were changing some of these scripts.
They proved a little more difficult to use. And we were also
having some people who worked in the account area, which Ms.
Gardiner talked about, that is the area where you call in and
you say, ``I cannot remember what my payment ought to be,'' if
you are on an installment plan, or ``I got a notice from you,''
or a question like that. We were taking some of those folks and
having them work in the tax law area. Getting them properly
trained and up to speed took a little more time than we
thought.
So this is an ongoing challenge. Whatever you can do to
simplify the code, though, would really help us.
Ms. Gardiner. Yes.
Senator Shelby. I have tried.
Mr. Everson. I know you have.
CORPORATE TAX SHELTERS
Senator Shelby. Mr. Commissioner, I think we all know there
have been a lot of abuse of tax shelters. We often hear of
large corporations or high income taxpayers creating shelters
that are obviously designed to avoid paying taxes. They do not
have a real purpose, a business purpose, other than that. On
top of that, these shelters are designed by a handful of
attorneys, accountants, and tax practitioners whose standards
and ethics are very, very questionable. You know this yourself.
We have talked about it a little.
Does the budget request reflect your plan for attacking
these corporate shelters and the few unprofessional individuals
who created them? I think you have got to go to the heart of
this.
Mr. Everson. Absolutely. If we could show the four
enforcement priorities. We have very carefully constructed,
through our planning process, four mutually reinforcing
enforcement priorities. This issue is really at the heart of
all four of these priorities.
ENFORCEMENT PRIORITIES
Senator Shelby. Go over them.
Mr. Everson. The first is to discourage and deter non-
compliance, with emphasis on the corrosive activities of
corporations and high income individuals. That is the meat of
the shelter question.
The second is to assure that----
Senator Shelby. A lot of these people just exist to think
of creative ways to beat the tax code, do they not?
Mr. Everson. That is the second point here: assure that
attorneys and accountants and other tax practitioners adhere to
professional standards and follow the law. If you could indulge
me for just a minute. I started out my career at Arthur
Andersen in the mid-1970s. The firm had one of the best
reputations, and the standard of any Big Eight accounting firm
was clear, any good law firm: you make sure that your clients
follow the law. This all changed over a period of decades to
become about value creation and risk management, and now you
have interlocking networks of investment banks, accounting
firms, law firms, commercial brokerages.
Senator Shelby. Trying to beat the tax code?
Mr. Everson. They are working to do this. So this element
of it is terribly important.
The third priority, augmenting our criminal investigations,
gets to it too. Some of this gets to a criminal level. We have
active criminal investigations, including against
professionals, that will hold people to account.
Senator Shelby. You have to do this, do you not?
Mr. Everson. We have to. We are getting excellent support
from the Department of Justice. They have litigated for the
first time, as you may have seen, against law firms who have
acted as promoters. They are not providing traditional advice
to clients. They are acting as promoters of generic tax
products that have had a corrupting influence on the practice
of law and accounting.
IRS ENFORCEMENT PRIORITIES
Senator Shelby. A lot of this advice has no real business
purpose, does it?
Mr. Everson. That is exactly right. And it gets even to the
fourth point here, which is about the abuse of tax-exempt
entities. This is a very serious one, where we have seen some
of these charities are being used. We just prohibited a
transaction last week where people would take advantage of
charitable organizations in order to actually promote a tax
avoidance scheme. If I could just show you one chart as to the
problem we have got ourselves into over a period of years, and
then I want to address one thing you said in your statement.
Senator Shelby. You go ahead.
IRS STAFFING
Mr. Everson. This green line, this is the growth over 6
years starting in 1995 in total assets of 501(c)(3) entities.
This is the number of returns filed, together with some
projections. This is what happened to the staffing at the IRS.
What happened, basically, was we maintained--as you said, we
kept working on service, and that was good. We needed to do
that. But the fallout in this was a dramatic decline across-
the-board--but this is just the people working on tax-exempt
groups. And if you adjust for this volume increase in terms of
number of charitable entities, this shows you how far we are
down.
This is bringing it back up. We brought it back up in 2004.
What I wanted to say here, the only correction I would have,
and I agree with your statement, is that in 2004 after I got
here, the first thing I did was direct my two deputies to make
sure that as we dealt with funding shortfalls we did not just
take it out of enforcement. We stopped that last year, so that
the fiscal year we are in now, we do have the enforcement
increment the President and you want us to follow.
But this just shows, we are bringing this back. This is a
terribly important area because of what you just said. It is
also terribly important because of abuses, the credit
counseling industry----
Senator Shelby. How much money are we talking about in
abuses, in your judgment?
Mr. Everson. In this area, in tax-exempt entities I would
not have a precise figure but what I would tell you, let me
give you----
Senator Shelby. Could you furnish something for the record?
[The information follows:]
We do not have data with which to provide a precise answer. Lost
revenues would generally result from tax-exempt organizations that are
not operating in accordance with their exempt status, and therefore
should be subject to tax. The market segment studies we are currently
undertaking will enable us to better estimate revenue losses in
particular segments or industries, but will not provide data that can
be extended to exempt organizations generally.
Mr. Everson. Let me tell you one statistic on this. There
is a $1 billion credit counseling industry that is operating as
not-for-profit, calling around to people, taking advantage of
the fact that they are exempted from the do-not-call list
because they are a charity, taking advantage of the fact that
they are not regulated by your State or others for consumer
protection laws. They are preying, many of these entities are
preying on good average Americans who have found themselves in
trouble with debts, and they are no longer providing counseling
and educational services, which is their mission under tax-
exempt status.
So we are going after them. We may very well lift some of
the tax exemptions, and I believe there may very well be
criminal referrals on some of these entities.
Senator Shelby. That is what you ought to do.
Mr. Everson. This is all what needs to be done. To get back
to your statement, I want to give you my personal commitment
that as we go forward--I am obviously asking for the
President's full request. I am not asking for a penny more, but
I am asking for the full request. I want to be crystal clear
with you and your colleagues that we will protect that
enforcement build and be very responsible at addressing
shortfalls, should there be across-the-board rescissions and
things like there have been in the past, or other gaps.
Senator Shelby. You have got to have the money to do your
job. What percentage, and you might want to furnish this for
the record, of 501(c)(3) tax-exempt groups are abusing their
status?
Mr. Everson. That is a very difficult question, and I would
tell you, we have fallen so far behind----
Senator Shelby. A lot of them are very clean, very
straight-up.
Mr. Everson. Yes. Most of them are. What is really at stake
here, Senator, is that Americans could lose faith in the
integrity of charities and stop supporting our charitable
institutions, which are so important to our way of life.
[The information follows:]
Currently, we do not have data that would yield a meaningful
statistic. The 501(c) exempt organization community is made up of many
different kinds of charities and other exempt organizations, with
diverse activities and needs and correspondingly diverse compliance
challenges. To address this diversity, we have divided the exempt
organization community into several dozen market segments, and in
fiscal year 2002 we began to conduct market segment studies. To date,
we have begun studies looking at labor unions, business leagues, social
clubs, community trusts, hospitals, colleges and universities, social
services organizations, religious organizations (other than churches),
private foundations, 509(a)(3) supporting organizations, fraternal
organizations, elder housing organizations, arts & humanities
organizations, as well as others. Although the results of these studies
will allow us to make generalizations about compliance levels in
particular segments or industries, we do not expect that they will
allow us to make generalizations about the percentage of organizations
that are not operating in accordance with their tax-exempt status.
Recently, we have devoted more of our limited resources to
enforcement areas with known or suspected compliance problems, such as
donor advised funds, credit counseling organizations, excessive
compensation issues, and others. Although we will continue with market
segment studies, we anticipate that fewer resources will be devoted to
new studies as we increasingly concentrate on existing areas of
noncompliance.
EARNED INCOME TAX CREDIT
Senator Shelby. Absolutely.
Let us now focus on the earned income tax credit. As we all
know, there is an estimated $8 billion to $10 billion of annual
fraud. This is a lot of money. We were talking about $1 billion
a minute ago, or $260 million, which is still a lot of money.
But there is an estimated $8 billion to $10 billion dollars of
annual fraud that occurs in the earned income tax credit
program. What is the IRS doing currently to crack down on this?
What is the status of your five-point initiative to improve the
administration of the earned income tax credit (EITC)? And how
and when does the IRS plan to determine whether the earned
income tax credit pilot initiative, including the qualifying
child certification filing status and income report, will be a
success? Because we know a lot of people who receive the
benefit do not abuse it. But we also know that there is a high
rate of erroneous payments to people who should not receive it.
It looks like it is a question of correlating information
before you pay out, if you are double paying in areas. Do you
want to respond?
Mr. Everson. Certainly, Senator.
Senator Shelby. This is important.
Mr. Everson. It is very important. We want to make sure
that everybody who qualifies for this program takes advantage
of this program. That is our first objective. But the second
one is, we want to, obviously, make sure that we are not paying
out monies to people who legitimately do not qualify. As was
indicated before, Ms. Gardiner indicated, there is some
complexity in the program, so I would not want anybody to draw
the impression that it is all fraud in there.
Senator Shelby. No, it is not all fraud, but there is a lot
of fraud.
Mr. Everson. There is a legitimate error rate that accounts
for a good chunk of what you talked about. Our studies have
indicated an error rate somewhere between 25 and 30 percent,
which is the highest in government.
Let me draw the distinction, because your statement made
reference to some things I said in my prior life over at OMB
and this is something I looked at when we were there. The
difference between this program and food stamps, or housing
subsidies, is there is no front-end application process. In a
lot of benefits programs, the government, either the Federal
Government or a State entity, or somebody is going through an
application process to determine whether you or I qualify for a
benefit. That does not exist in the EITC. It is treated like it
is embedded in the tax code. It is the largest means-tested
program we have, so it is an odd animal.
Senator Shelby. How much money, overall, is involved in the
Earned Income Tax Credit?
Mr. Everson. Last year I believe it was about $36 billion
with about 21 million filers who took advantage of the program.
Senator Shelby. A $36 billion program and, say, 25 percent
of it's more or less questionable?
Mr. Everson. Yes, 25 percent of it. So let me come back
directly to your question. We do have the five-point program
which is geared to hit those objectives, to help people
participate, simplify forms. We are working on all that. We are
bringing in a backlog of the old audits. The core of this
though is this certification pilot. Right now we have got a
certification--
EARNED INCOME TAX CREDIT CERTIFICATION PILOT
Senator Shelby. How does that work?
Mr. Everson. We are asking people to demonstrate their
eligibility this year at the time that they are filing for the
credit, rather than getting--if they were in a high-risk
category, rather than automatically getting their----
Senator Shelby. Preapproval, in a sense?
Mr. Everson. It is not quite preapproval, but in lieu of
getting their refund held. What would happen in the past is,
they might go down a corridor where if their return looked
suspect--I will give you an example where you typically might
see a problem. You see the same address for a husband and wife,
but they are filing as head of household and splitting their
kids. That is not the right thing to do, obviously, because the
presumption would be that since they are living together that
it is one family. That would be something--and there are other
indicators where you might end up holding the refund.
What we are doing here with this pilot group is we are
looking, in a real-time basis, and asking them to complete the
paperwork so that then their refund does not get held. I do not
have the results for that yet. That is underway right now. My
impression, and it is just an impression, is that so far, so
good. But we are going to have an independent evaluation of
this pilot done. We will not know until, I would tell you later
in the summer, later in the year, how it has gone.
Senator Shelby. Will you let us know how it is going?
Mr. Everson. Of course we will. We want to ramp this up,
but only if we prove that it works and that it gets us a good
answer, that it does not dampen the participation of those who
qualify, and that it does the job that it is supposed to do,
which is reduce the error rate.
ADDRESSING FRAUD AT ALL INCOME LEVELS
Senator Shelby. But you can have fraud at the highest
level, the richest people, and you can have big fraud, as you
pointed out, in the Earned Income Tax Credit. It is our job to
root it out in both places, is it not?
Mr. Everson. Absolutely correct. It is our job to run a
balanced program. That is what I am seeking to do with this
budget increase. But I do emphasize that where we start is at
the high income and the corporate in the criminal area, because
the basic sense of fairness of Americans is that the big guy
should not get away with something here.
Senator Shelby. Absolutely. And the little guy should not
get away with it either.
Mr. Everson. We want everybody to be compliant.
Senator Shelby. Both of them. Because you cannot have fraud
by anybody, can you?
Mr. Everson. You cannot.
Senator Shelby. Ms. Gardiner, what are your thoughts about
the pilot and other initiatives in this area?
Ms. Gardiner. We have been looking at the pilot concept,
the design of the original test, and it looked pretty good. We
made some suggestions that in the early stages of planning for
it, because they did not seem to have good measures on how they
would determine whether the pilot was a success or not. They
have improved that.
Senator Shelby. Does the pilot relate to a software program
that can correlate all this information?
Ms. Gardiner. No, it really is examining a sample of
returns and related documentation, that would support the
eligibility. So it is manual. The results could go into a
database, of course.
Senator Shelby. But this is a lot of money involved, as the
Commissioner has pointed out, over time. There is a lot of
money involved here in cheating. There is a lot of money
involved in these fraudulent tax shelters, too.
Mr. Everson. Yes, sir.
Senator Shelby. If you could cut down on both tremendously
it would mean a lot of savings to the IRS. It would mean a lot
more revenue, legitimate revenue coming in, would it not, sir?
TAX GAP
Mr. Everson. Senator, what you are getting to here is of
great concern. It is what we call this tax gap. Our estimates
are that this combination of non-filing, underreporting and
underpayment is north of $250 billion a year. Now that number
is not very precise and that is because it is based on a model
that was last updated in the late 1980s, and adjusted for
changes in demographics and economics. We are just now doing
the research, through a new series of more in-depth audits,
that will give us a basis for updating that number.
My fear is that it might well be greater than the $250
billion a year because of these shelters, the changes in
behavior, and this change in compliance attitudes. So this is a
serious problem, but anything that we do--and this is why I am
so anxious to get the money--we help out on the deficit, we
help out States, because when we get a dollar for the Federal
Government, on average the blended rates across the country is
that the States get 20 cents. So it is important everywhere.
Senator Shelby. What are the current spending plans and
changes the IRS has made to the Earned Income Tax Credit
initiative as a result of the merger of appropriations with Tax
Law Enforcement?
Mr. Everson. Last year we had an increase from the previous
year in the EITC, and if you look at 2004 versus 2005, the
spending actually goes down. It is not going to affect this
program that we are talking about or our ability to do more
audits, because we were making some one-time investments as we
got ready to do these pilots and some of the other educational
data requirements. So that number has gone down from about $201
million in 2004, to, I believe, it is $176 million. But it will
not hurt our ability to move forward and do just what we were
talking about.
FUEL TAX EVASION
Senator Shelby. Mr. Commissioner, part of my duties as an
appropriator of this subcommittee is transportation, as you
know. Fuel tax fraud creates a drain on the Highway Trust Fund
revenues which the Federal Highway Administration estimates
could cost at least $1 billion a year. In testimony before this
subcommittee, the Secretary of the Department of
Transportation, Secretary Mineta, stated that he was not
satisfied with the IRS's effort to combat evasion of Federal
motor fuel taxes.
Mr. Commissioner, does the IRS agree with the Federal
Highway Administration's estimate of the loss; in other words,
a loss of $1 billion or more, from the fuel tax?
Mr. Everson. I have not looked at that specific number.
Senator Shelby. Can you furnish that information?
Mr. Everson. I have no reason to challenge it. I understand
that there is a legislative fix pending that would actually
provide the Service more resources to go after this important
area. When I was recently traveling, I went to a fuel depot, a
tank farm, and saw the testing procedures we have. This is a
big issue, and it comes down to fairness again. If the fellow
who is running a gas station sees the guy across the corner
mixing his fuels, he has got a competitive advantage that is
not fair. So we need to do more. I am hopeful that the fix that
I have talked about will get the extra agents to keep on this
issue.
Senator Shelby. Will that be a collaborative effort with
the States?
Mr. Everson. I think that is more our own area. I could be
wrong about that, but I believe--these are our folks that do
the work themselves, and the fellows I met were just Service
employees.
Senator Shelby. It is still a lot of money involved.
Mr. Everson. It is a lot of money and it goes into, again,
business fraud. We need to be attentive, not just to
individuals, but to the businesses here.
WORKFORCE REALIGNMENT
Senator Shelby. Mr. Commissioner, following the IRS's
reform legislation of 1998, the IRS realigned significant
levels of resources out of tax enforcement and compliance
activities to customer service, telephone assistance, and
submission processing activities. How do your fiscal 2005
realignment proposals and new funding initiatives compare to
the pre-reform legislation levels for the tax enforcement and
compliance programs?
Mr. Everson. Maybe I could show a chart on that.
This just shows you what happens. I am not quibbling with
RRA 1998. I want to be clear about that. The reforms that were
contemplated were necessary to improve services. We were not
doing everything we needed to do on service. I want to be clear
about that. But as the IRS worked in a single-minded fashion to
improve services--these are our service and infrastructure
personnel--it kept those resources stable and invested in phone
services, restructured the agency, did a lot of things to get
things better.
But what fell out was a decline in enforcement. This red
dotted line represents FTEs as dollars turned into bodies for
revenue agents, people who do audits, revenue officers, people
who collect monies due, and criminal investigators. Over a
period of time they fell by over a quarter.
Now we have turned that back in 2004, as I indicated to
you, by absorbing some of the shortfalls in congressional
spending. Last year, you know we ended up $250 million short at
the end of the day, plus the pay raise, plus the child credit;
a series of factors. But for the first time what we did was,
for this year, forced an allocation of these cuts in a way that
protected enforcement, the enforcement initiative.
We will bring this back further. There will be another
several thousand FTEs that we will get through the 2005
increment and about 4,000 positions. So this will make a
difference in 2005. It does not bring us all the way back.
Senator Shelby. It is progress, though.
Mr. Everson. My commitment to the Secretary and to Josh
Bolten at OMB is we will look at this on an ongoing basis to
see that we run a balanced system. We are also improving our
processes so that we get more leverage. You do not always have
to have more money, but in this case we felt that we needed the
money to improve our processes.
IRS SERVICE AND STAFFING LEVELS
Senator Shelby. Mr. Commissioner, does your fiscal year
2005 request reflect a belief on your part that sufficient
service and staffing levels have been achieved for the customer
service and processing program areas?
Mr. Everson. As a general rule, I would suggest that I
would like to continue to maintain and improve services with a
relatively stable resource commitment on the service. We are
near inflation, if you look at what we have got in the 2005
request. I think that is appropriate.
We need to challenge our people to get the same kind of
productivity gains that you get in the private sector. That
sometimes results in some painful adjustments in the workforce.
You probably read of some of the actions we are taking. But I
believe that it is difficult for me to come and ask you for
money in this resource-starved environment, and time of
deficits, if I have not done everything I can to run the agency
efficiently. So we are asking our people to look at that
productivity, and I think that we can continue to run our
services and improve them at a relatively stable investment
level.
TAX LAW ENFORCEMENT FUNDING
Senator Shelby. Has the IRS invested all the resources
appropriated by the Congress in recent years for tax law
enforcement or have some of the new resources been reallocated
to other areas?
Mr. Everson. No, this is what we were just saying. The
standing rule until I got here was that when there was a
shortfall you took it out of enforcement to protect services. I
have reversed that.
Senator Shelby. That would be a mistake.
Mr. Everson. I am not in the business of challenging the
past. I am not sure there was a great deal of choice, given the
overall environment and the absolute imperative to improve
services. But, clearly, now we need to rebuild the enforcement
side and that is what I have started to do in the last year and
I am asking your support for going down the road.
Senator Shelby. Mr. Commissioner, why has the IRS been
unable, if this is true, to hire the revenue agents and revenue
officers requested and funded in prior fiscal years? Is this
about not competing in the market? Is there not enough money to
hire people? Are the salaries too low or what?
Mr. Everson. It has been, I would tell you, primarily a
funding question. It is dependent, obviously, on the overall
economy and the desirability of Federal employment. Right now
we are doing very well, as we look at this enforcement build.
We are very pleased with the caliber and the interest we are
getting. We are doing some creative things.
Senator Shelby. But you cannot do it overnight, can you?
Mr. Everson. You cannot. This is why it is so important to
get strong, continued support from you and your colleagues
because what the IRS did, it stopped and started on its hiring.
You do not develop a relationship with a good university to
draw in accountants if you are there once and then you do not
come back for 7 years. You have got to be there every year,
develop a reputation as a good employer and then you get good
people.
Senator Shelby. Continuity is important.
Mr. Everson. Continuity is important, and I think that we
will be able to address demographics. The only other thing I
would say on this is: in the group that works with our large
and mid-size businesses, corporations over $10 million in
assets, for the first time we are hiring outside the IRS from
mid-career people; folks who have been 10, 15 years at
companies or accounting firms. This is a good, helpful thing
too, because as you know, people in America, they do not tend
to stay with the same employer for their whole career any more.
Why shouldn't we in the government be able to take advantage of
that a little bit too?
Senator Shelby. I think you can and you are.
RETURN ON ENFORCEMENT INVESTMENT
What benefits does the IRS expect to derive from the
additional $300 million that you have requested for 2005 in tax
law enforcement?
Mr. Everson. As we have looked at this, we think will get
about a 6 to 1 return. That is a blended return in terms of the
dollars that we are asking for. It will increase audit rates.
Let me just give you one example.
We will increase the penetration on corporations, largely
mid-size corporations where we are not very active, from 7
percent up to 13 percent. That is one area where we do not have
adequate coverage, in my opinion, right now. This will get us
more dollars, and it will also then have a derivative effect on
behaviors.
Same thing, we are going to be adding 350 special agents,
plus support staff, to go after the crooks. Across the board
there will--the chart that I showed before, for the first time
in many years we will be adding to our agents in the tax-exempt
area so they can look at these charities that have problems.
Senator Shelby. Ms. Gardiner, is the IRS headed in the
right direction, and can the Service execute the plan to
improve the tax law enforcement without jeopardizing advances
in taxpayer service? In other words, how do you balance that?
Ms. Gardiner. I believe they are, because the areas in
customer service where we find deficiencies rarely have
anything to do with resources anymore. I would say several
years ago that that was a problem. But now the phones are being
answered, there are people available, the wait times are less
than an hour. So there are people available to provide the
customer service, so I would agree with the Commissioner's
conclusion that keeping a steady resource level there is
appropriate.
On the flip side, with enforcement, clearly, the volume and
complexity of returns is growing. Those resources have
declined. I share the Commissioner's concern that the average
American's perception has grown that you can cheat on your tax
returns. That needs to be addressed, so I think it is the
appropriate thing to increase enforcement.
RESOURCES FOR TAX ADMINISTRATION
Senator Shelby. Mr. Commissioner, in recent testimony on
Capitol Hill, you indicated that Congress has not provided you
with the resources you need to meet your tax administration
responsibilities. A review of your request by the subcommittee
and independently confirmed by the General Accounting Office
(GAO) shows that at least 98 percent, not all, but 98 percent,
of the request has been funded. The GAO has estimated that even
if this Subcommittee on Appropriations gives you every dime of
your enforcement request, the IRS would have already spent at
least one-third of any increase on unbudgeted expenses. Is this
correct, or is the GAO wrong?
Mr. Everson. The figure that we have overall is that--you
know this. We are not the kind of agency that gets topped up in
the appropriations process. If you look back over a 10-year
period, the average shortfall to the President's request, that
could be President Bush or President Clinton, is about 3
percent. Now last year's shortfall was $250 million. Now that
has got a bunch of things in it. It has got things that you do
here in the subcommittee or the full committee, and then it has
got the overall, end-of-the-day rescissions that go across-the-
board.
That gets compounded further by a gap. Seventy percent of
our costs are in the pay area. So that if the administration
proposes a civilian pay raise at one level and the Congress
funds it more generously, then of course we do have an
additional handicap.
What I would suggest to you, Senator, is I very much want
100 percent of the President's request. If we end up in a
situation where there are issues like that I think it is
reasonable for me to challenge my organization to find those
levels.
What happens is, if you work to absorb 1 percent or 2
percent and then you get further whacked by another 2 percent
or 3 percent, then it gets a lot harder to redress some of the
problems you have got.
Senator Shelby. To do your job.
Mr. Everson. To do the job, yes, sir.
COMMITMENT TO ENFORCEMENT FUNDING
Senator Shelby. Mr. Commissioner, would you commit to this
Subcommittee on Appropriations that any enforcement resources
that we allocate to you will be used for the purpose it was
appropriated for? In other words, for the enforcement
initiatives which you have been pushing?
Mr. Everson. Yes, sir, I will. The only exception I would
give you is that if this problem you just talked about was so
severe that if I had to take cuts, I will take them. I commit
to you that I will take them across-the-board. I would take
them at the service side, infrastructure, and I might have to
touch some of the enforcement base. But we will make this
build, the new programs on enforcement, we will do.
DELINQUENT TAX INVENTORY
Senator Shelby. Every year the IRS fails to collect
billions in delinquent tax obligations. What headway will the
IRS make in curbing the growing delinquent tax inventory that
exists? Do you anticipate another large write-off of delinquent
taxes as was the case last year?
Mr. Everson. Collections are an important element of this
enforcement build. The revenue officers that I mentioned, those
are the folks that actually go out and work to collect the
dollars owed. We will add many collection officers through
this.
The other thing you may be familiar with that is important
to us, is pending legislation to get private collection
agencies to do some of the work here. This is somewhat more
controversial, but frankly, over 40 States have this, in terms
of their own tax programs. We will run this with full
protection of taxpayer rights.
Senator Shelby. But collection agencies would help you
collect money that is owed to the government.
Mr. Everson. Absolutely, and what it will enable us to do,
sir, is focus on the more complicated matters, the ones--there
was a hearing up here not too long ago on monies owed by
defense contractors that we are not fully getting after. This
initiative will enable us to work on things like that, if we
have relatively more simple matters being attended to by some
of the private collection agencies.
Senator Shelby. Ms. Gardiner, has your office, the Treasury
Inspector General for Tax Administration, reviewed the efforts
of the IRS to collect outstanding tax debts? Would you comment
on the proposal to improve the collection case management?
Ms. Gardiner. We actually did an audit some time ago of the
original pilot for using outside contractors, and then we
looked at what IRS was proposing in this newer effort and
believe it is an appropriate effort. I would guess that if IRS
is not going to get the money to collect it themselves then we
do believe that using outside debt collection agencies is a
good move.
Our only concern there would be that IRS still would need a
sufficient level of staffing themselves to provide proper
oversight, because it would be a little tricky in terms of just
monitoring the accounts that are turned over to the private
collection agencies, ensuring that they do the work
appropriately, protect taxpayers' rights, and those issues.
WORKFORCE REALIGNMENT
Senator Shelby. Mr. Commissioner, you announced a
realignment of your workforce in January. You also expect
savings from a related initiative to close some facilities,
such as the Brookhaven service center. How much do you expect
to save from these cost-reduction efforts?
Mr. Everson. Through a variety of programs, Senator, we
would expect to save over $100 million on an annual basis. What
these actions do is enable us to free up a couple thousand
folks that would work on the enforcement side of the house. A
lot of this is due to the tremendous success we have in
electronic filing. As electronic filing increases--it was 53
million last year, up again 12 percent so far this year--you
obviously do not need as many people opening the mail and doing
the data entry.
At the same time what we are doing is consolidating some of
our processing operations where after we realigned the Service
around four lines of business, we did not fully realign all of
the support efforts, which a business would have done. Some of
this is consolidation of activities, administrative activities
that businesses did 10 and 20 years ago. We are doing this
because--I think, again, it goes back to our earlier dialogue--
it is responsible that we be as efficient as possible.
Senator Shelby. Ms. Gardiner, how likely are the
anticipated savings the IRS is talking about to materialize?
Ms. Gardiner. Some things are tied to you just working
smarter, not harder. The National Research Program is an
example of that. As IRS can devote its resources, the limited
resources in a smarter way, then they really should have
savings. Modernization should bring about savings too.
For these particular efforts, we would have to look into
them to see if the savings actually materialized.
TAX LAW ACCURACY
Senator Shelby. The TIGTA testimony indicates that the
telephone access rate for the IRS is steadily increasing. At
the same time, the accuracy rate on tax law questions declined
to 73 percent. Do you have a plan to bring that rate up? Does
the telephone staff receive enough training? Are there specific
questions that should not be answered by the telephone staff?
How do you work all that?
Mr. Everson. This comes back, Senator, to the conversation
we had a little while ago about how we are continually trying
to improve tax law accuracy both at the phones and also for the
walk-in centers. It comes down to training. We did some things,
as I mentioned, earlier this year that we believe in the long
term will actually increase the accuracy rate, but because of
training some people who had been working on the accounts side
of it, and rewriting the scripts, there was a short-term
degradation and the accuracy went down about 6 percent.
Our figures are just a little bit different from TIGTA's,
but they are basically consistent. They do show that decline. I
think over time they will get better. We assess this on a
weekly basis. We have real-time monitoring of conversations
where supervisors are sitting in and listening randomly to the
workers' calls. So we are continually trying to improve this.
But again, work on the simplification; it will help us too.
BUSINESS SYSTEMS MODERNIZATION
Senator Shelby. On the subject of modernization, the
Congress has appropriated approximately $1.7 billion for the
Business Systems Modernization (BSM) program. The IRS has
requested an additional $285 million in this year's fiscal year
2005 submission. This substantial investment is on top of
almost $4 billion we provided and was lost by BSM's
predecessor, TSM. The investment in TSM was a total loss. That
was before your time, I have to say that to both of you. After
serving a year as Commissioner of the IRS, what is your
assessment on the progress of BSM at this time?
Mr. Everson. This is a very important question. I
established three themes, as I testified before the Finance
Committee before my confirmation, and I continue to believe
that they are the correct themes. They are to continue to
improve service and implement the reorganization that former
Commissioner Rossotti and his team did a splendid job on before
I got here. They are to augment the enforcement efforts, as we
have been discussing. But it is also to successfully execute
the modernization of the IRS. That is fundamental to achieving
the first two. We will not be able to continue to improve
service and help taxpayers, we will not be able to enforce the
law adequately, if we do not modernize the IRS. So it is
terribly important.
After I arrived, we commissioned a series of studies last
summer to look at this basket of projects. I would say to you
that, first of all, it is not all bad news. I give the Service
a mixed grade here. There are many successes. It is true, some
of them have cost more than they should have. As a taxpayer,
you can check the status of your refund on the Internet, and
you can file electronically. Practitioners now can get employer
identification numbers. There is a whole suite of products
where I would suggest to you the IRS has improved its services
to the taxpayer--I would be hard-pressed to find another
government agency that has made the dramatic leaps that we have
made largely through technology. So that is a lot of good news.
Where we have failed, though, is on these big ticket
projects, like CADE that you discussed, that are at the core of
our master files. Or also another one that you did not
mention--
Senator Shelby. We cannot afford to fail this time.
Mr. Everson. We cannot afford to fail. The other one was
the financial system we have been struggling to put in.
These studies indicated three problems. The first was that
the IRS business units did not have adequate ownership of the
projects. They were running as independent technical solutions,
so that the businesses were not involved in setting
specifications or the testing and development schedules.
The second observation was we were trying to do too much.
GAO had said this, and as we studied this I concurred with all
those observations.
The third was that we were getting uneven performance from
the vendor. We are working on each of these. We have got the
business units much more involved. They are participating every
step of the way. We have resized the portfolio, as you
indicated. I am comfortable with this. It will provide more
focus. I believe in the long run we will actually get more done
because as we change our work processes and hold people
accountable to get things done, I think we will actually move
faster.
We are working with the contractor. I meet with the
president and chief operating officer of CSC--a big company,
Computer Sciences Corporation runs the consortium--every month
and we go over the deliverables. We will see. Later this summer
we will have that long-delayed first step of CADE, which works
on a section of the 1040EZ filers. The feedback I am getting is
pretty optimistic at this stage. It is not done till it is
done. And the same thing is true on the financial system. I
will report back to you. We will know for sure what is
happening here.
Just to close I would say, we have held the contractor
accountable in a way that I would say is fairly unusual in
government. I sent a letter after they missed their last
deadline and I said, look, for the next big piece of work we
are going to do, which is a filing and payment compliance
system, we are going to not automatically award that to this
PRIME alliance. We are going to open it up to competition. That
is a strong statement, very strong statement because it hurts
them financially, and I think it got their attention.
Senator Shelby. When do you expect BSM to be completed?
Mr. Everson. I will have to get back to you on that. That
is a big, complicated project.
Senator Shelby. It is an important question.
Mr. Everson. It is important. I think we will have a much
better idea as we adjust our programs here. If we are
successful with CADE, this first section of CADE, I will tell
you that in about a year we will have a better capability of
giving you a longer term projection.
[The information follows:]
The hallmark application of the Business Systems Modernization
Program (BSM) is the Customer Account Data Engine (CADE), which is the
application we are building to eventually replace the existing
Individual Master File (IMF) and the Business Master File (BMF). CADE
is now in service and handling its first filing season. Currently CADE
is only handling a subset of Form 1040EZ filers, with the expectation
that it will process approximately 1.9 million returns this calendar
year. Our plans for CADE are now set for the next 2 years, with the
expectation that CADE will handle 33 million returns in calendar year
2007. It is not possible, however, for us to predict when CADE will be
fully implemented, since timing is based on a variety of unknown
factors, including BSM funding levels, insertion of new technology to
improve development productivity on CADE, and policy decisions
regarding the extent to which CADE will need to handle returns from
prior years. As a point of comparison, former Commissioner Charles
Rossotti stated that he expected BSM implementation to last 10 years.
Progress anticipated in the first 4 years of the project, however, fell
far short of our goals for reasons that we have publicly stated. In
addition, we based that plan on extremely robust funding levels for
fiscal year 2005 and fiscal year 2006. Because of steps we have taken
to streamline and focus the work we are doing on BSM, we requested and
received lower funding levels than Commissioner Rossotti anticipated
when he provided his estimate.
Additionally, given the size and complexity of the IRS's IT assets,
modernization must be an ongoing endeavor. Modernization programs at
the IRS have been difficult, mainly due to the fact that we did not
have a program of continual modernization of its IT assets. This
deficiency has led to a situation of increasingly antiquated software
applications that are not well documented, are difficult to maintain
and upgrade, and are difficult with which to interface. Given that the
heart of our IT efforts is to increase the effectiveness and efficiency
of tax administration, modernization will always be an ongoing activity
at the IRS.
RESOURCES NECESSARY TO COMPLETE MODERNIZATION
Senator Shelby. Ms. Gardiner, I want to ask you a few of
these questions since you are the Inspector General. How much
more is needed to complete this effort to modernize the IRS's
outdated systems and processes? And how is the IRS's 2005
budget request consistent with that vision?
Ms. Gardiner. As far as what is needed, the estimates are
that it would be $7 billion to complete the whole----
Senator Shelby. Say it again.
Ms. Gardiner. Seven billion dollars to complete the whole
effort, and those are the estimates.
Senator Shelby. How many years?
Ms. Gardiner. A total of 15, and I believe that includes
the 6 that have already passed.
Senator Shelby. That is a continuous modernization.
Ms. Gardiner. Correct. Even with that, I am not sure that
you will ever get to a point where you will say, okay, we are
all done and we do not have to spend--you know, there will be
upgrades and changes as time goes on.
Senator Shelby. You will have to continue to do that to
keep up.
Ms. Gardiner. But I agree with the Commissioner that
getting CADE, the first release accomplished, that has to occur
before you can make any projections on anything else.
Senator Shelby. When do you think that will be?
Ms. Gardiner. I think everybody is giving it about 60 to 70
percent odds that the first part will be rolled out this year
in August.
Senator Shelby. What do you think? You said everybody.
Mr. Everson. I am interested in this answer.
Ms. Gardiner. Actually I could answer it for IFS. I am not
as sure for CADE.
Senator Shelby. Give me your best judgment.
Ms. Gardiner. It does appear that the testing and
everything is going well. Certainly, the contractor is on
notice that they need to do this. I would say it is probably a
very good bet that in August they will be----
Senator Shelby. Who is the main contractor here?
Ms. Gardiner. CSC is the one that is overseeing the whole
effort.
Senator Shelby. What about the total cost overruns so far
on this project? Does that bother you, Ms. Gardiner? You are
the Inspector General.
Ms. Gardiner. It does. We have been making recommendations
for the past 2 years that we think have all been incorporated
in these recent studies too, which is good, that it has
validated what we have said and I think that that is getting
the attention of Treasury and IRS and others. Some of the cost
overruns were changing requirements. These projects are hard
projects. They are totally new, and they are huge and complex.
It would be one thing if you were just starting today to say,
okay, let us create a master file. But the problem is they have
to interface and talk to the old system. That is the biggest
piece----
Senator Shelby. Plus, you are doing business every day as
you are doing this.
Ms. Gardiner. That is right.
Mr. Everson. Let me just expand, if I could, for a second
on that last remark. This tie back to the legacy systems is
very difficult because the IRS did a lousy job over a period of
decades of keeping documentation of all the multitude of
changes it made to the systems each year when the tax code
would change. So when people have done the work, they developed
a road map, but then all of a sudden when they get into doing
the work they find it is much, much more complicated than they
had contemplated. That, together with governance issues, too
many changes in overall requirements, they all contributed to a
very bad cocktail, I would suggest.
BSM COST OVERRUNS
Senator Shelby. How much money are we talking about in
overruns, hundreds of millions of dollars?
Ms. Gardiner. I would have to get back to you on that. We
do know that information and we keep track of it.
[The information follows:]
Through BSM spend plans, the IRS requests funding for program level
activities (e.g. MITRE Corporation assistance, PRIME Program Management
Office, etc.) and modernization projects (e.g. Infrastructure Shared
Services (ISS), Customer Account Data Engine (CADE), etc.). As of
February 2002, we determined that 20 BSM projects had experienced costs
increases of approximately $75 million.\1\
---------------------------------------------------------------------------
\1\ Analysis of Business Systems Modernization Cost, Schedule, and
Functionality Performance (Reference Number 2003-20-007, dated October
2003).
---------------------------------------------------------------------------
At the time of our analysis, the majority of the projects were in
the planning phases. IRS officials responded that the reliability of
costs estimates for the development and deployment phases would be much
greater than that for the planning phases. This belief has not proven
to be true. Most projects have now moved into the development and
deployment phases and cost increases have risen, partially due to the
fact that projects require more funds during the development and
deployments phases.
The GAO testified in February 2004 that the IRS had experienced
cost variances of approximately $290 million for 10 completed or
ongoing projects.\2\ The chart below is reprinted from the most recent
data available (GAO testimony).
---------------------------------------------------------------------------
\2\ Business Systems Modernization: Internal Revenue Service Needs
to Further Strengthen Program Management (GAO-04-438T, dated February
2004).
------------------------------------------------------------------------
Reported/
Cost Variance Revised
Project Name (In Thousands) Estimated Cost
(In Thousands)
------------------------------------------------------------------------
Completed Projects:
Security and Technology +$7,553 $41,287
Infrastructure Release 1...........
Customer Communications 2001........ +5,310 46,420
Customer Relationship Management -1,938 7,375
Exam...............................
Human Resources Connect Release 1... +200 10,200
Internet Refund/Fact Of Filing...... +12,923 26,432
Ongoing Projects (as of 09/30/2003):
Modernized e-File................... +17,057 46,303
e-Services.......................... +86,236 130,281
CADE Release 1...................... +36,760 97,905
Integrated Financial System Release +53,916 153,786
1..................................
Custodial Accounting Project Release +72,058 119,219
1..................................
-------------------------------
TOTAL............................. +290,075 ..............
------------------------------------------------------------------------
Senator Shelby. Mr. Commissioner, we hold the American
taxpayers to a high standard: file your return by April 15 or
face stiff penalties and interest payments. Why should we not
hold the IRS acquisition process and the Service's contractor
to a similar standard and enforce penalties when deadlines are
missed and costs are increased? Ms. Gardiner, what steps have
been taken or would you recommend that the IRS take to improve
acquisition and management and discipline?
Ms. Gardiner. We actually have suggested that
disincentives, or penalties so to speak, are built into
contracts and that has not been looked on that favorably by the
Service.
Senator Shelby. Who has not looked on it favorably? I know
the contractors never look on it favorably.
Ms. Gardiner. IRS as well. The folks that do the
contracting have not really accepted those types of
recommendations. They have accepted another, and that is that
we have recommended early on that IRS use firm fixed-price
contracts as often as possible. When we looked at it in the
first year they were used very infrequently, and now they are
using them more. So that puts the burden on the contractor and
we think that certainly is a step in the right direction.
Mr. Everson. If I could, the other thing I would note on
this is--after the contractor missed this deadline on the
financial system, I did take that action of saying, we will
open this up to competition for the next enforcement module.
That is a very strong action because they contemplated, they
had built their----
Senator Shelby. That is a strong message.
Mr. Everson. They built their business on a projection of
how much work they were going to get over a period of years,
and I just said, wait a minute, you have just potentially lost
this piece of work. They can compete for it, but it is very
different. I have run businesses, and when you have a 100
percent account, that is different than running an account
where there are other players in there. So that is a strong
statement.
I have also communicated that these upcoming deliverables
for CADE and IFS are critical to the maintenance of our
continued relationship. So I think the stakes are very clear at
this point.
BSM MANAGEMENT
Senator Shelby. Good. Mr. Commissioner, what is the IRS's
plan and schedule for fully implementing and institutionalizing
all management processes and controls needed to effectively
manage the BSM program? I know that is a big job.
Mr. Everson. This goes back to the point a few minutes ago
of first and foremost getting an overall business sensitivity
to this project. After I arrived at the Service I created a
second deputy. It follows a model that we put in over at
Homeland where we consolidated all of the support functions,
CFO, CIO, human resources, in our case, mission assurance,
which is security. We have cyber-security and physical
security, people security, all of that, plus facilities
management under one individual. He was our senior career
official--came out of the business units--so that we would get
proper attention to the long-term needs of the Service in our
functions including the CIO function. I appointed our CFO,
moved him over to be the CIO, to shake this up and to make sure
that we are addressing this on a long-term basis.
I would suggest to you that--you mentioned earlier the $4
billion that had been squandered in the early 1990s. One of the
reactions to that was the way this BSM project was done,
perhaps too much was actually given to the PRIME alliance. We
are taking a careful look at where we need to augment our own
skills. It comes back to what Ms. Gardiner was saying before,
it does not do us any good to just have contractors if you do
not have enough people inside who are monitoring and working
and understanding. So we are looking at that as well.
Senator Shelby. Ms. Gardiner, do you view BSM's current
problems as resource related, management related, or both?
Ms. Gardiner. One of the big, broad issues was just
matching the capability in-house with the portfolio of
projects. That would be somewhat resource related because they
tried to take on more than they really could. But I would say
probably the bigger part is management. Things like, if your
process says that you are going to clearly define requirements
and you are going to follow certain steps before you go to the
next stage of the project, that you have to stick with that,
and that has been a problem. Or for testing, in order to move
the project on to the next stage the same thing applies, that
you have to test and make sure that defects are identified and
fixed, and they really have had some problems with that. But
they do recognize those problems and are addressing them.
Senator Shelby. As far as modernization is concerned, we
both noted that $4 billion was lost, squandered or misused.
Could you assure this subcommittee that your current refocus
can put the program back on track so it will not go the way of
TSM? That is important. In other words, we do not want it to go
the way of TSM. TSM money was squandered or wasted, and it was
$4 billion.
Mr. Everson. Senator, I can tell you that this is getting a
lot of my attention. I am doing my level best to make sure it
is being done responsibly, and we will reach a very real
decision point. If this first piece of CADE and the financial
system do not roll out correctly now, I will have to very
seriously reassess it because we would run the risk of going
down that corridor. I do not expect that will be the case, but
we are not home free until we make sure we get that far. I give
you my commitment that this will not leave my attention.
CUSTOMER ACCOUNT DATA ENGINE
Senator Shelby. The Customer Account Data Engine (CADE), is
the first major component of BSM and will replace the IRS's
Master Files with a modern database management system. That is
the goal. It will serve as the foundation for the rest of the
BSM initiative. Thus far, the delivery of the first of CADE's
five phases--I believe there are five phases--has already been
delayed by at least 3 years. I think it has gotten off to a
poor start. When will CADE be delivered, if you can say within
some time frame? The first phase?
Mr. Everson. It is our expectation that this first phase
will be delivered this summer. So far the testing is proceeding
according to plan.
Senator Shelby. How much will CADE cost over the original
estimate?
Mr. Everson. I would want to respond for the record. It is
many tens of millions of dollars. There are functions of
complexity, also delay that have contributed to that problem.
Senator Shelby. Do you have a figure on that, Ms. Gardiner?
Ms. Gardiner. No.
Senator Shelby. Can you give us a figure for the record?
Mr. Everson. We will certainly do that. Let me say this
though, we have just recently negotiated a cap on what this
first module will cost, and that is responsive to what Ms.
Gardiner was saying a few minutes ago about a change in
philosophy in the last months that we have brought in, and we
have worked very well with the vendor to do that. So that
protects the Government's interest a lot more.
[The information follows:]
While we do not have current cost figures from the Automated
Financial System (AFS) for the CADE, the following chart represents the
funding that has been requested and received for the CADE project (all
releases).
------------------------------------------------------------------------
Amount Amount
BSM Spend Plan Requested Received
------------------------------------------------------------------------
Spend Plan #1........................... $3,500,322 $3,500,322
Emergency Funding Release #1............ 1,616,000 1,616,000
Spend Plan #2........................... 15,312,000 15,312,000
Emergency Funding Release #2............ 1,400,000 1,400,000
Spend Plan #3........................... .............. ..............
Spend Plan #4........................... 40,038,000 40,038,000
Spend Plan #5........................... 53,974,000 53,974,000
Spend Plan #6........................... 27,683,000 27,683,000
Spend Plan #7........................... 62,800,000 62,800,000
-------------------------------
TOTAL............................. \1\ 206,323,32 \1\ 206,323,32
2 2
------------------------------------------------------------------------
\1\ This amount includes $15,574,000 that was requested in spend plan 5,
but never spent on the CADE.
As shown in the response to Question 1, the CADE Release 1 has
experienced a $36,760,000 cost variance.
Future releases of the CADE have also experienced cost variances of
$25,723,000. Please see the table below.
----------------------------------------------------------------------------------------------------------------
Current
Amount Estimate (As
Release or Activity Originally of September Variance
Requested 2003)
----------------------------------------------------------------------------------------------------------------
Release 2....................................................... $38,400,000 $44,755,000 $6,355,000
Business Rules Management (Phase 1)............................. .............. 8,300,000 8,300,000
Business Rules Management (Phase 2)............................. 17,000,000 17,000,000 ..............
Release 3....................................................... 9,779,000 20,837,000 11,058,000
-----------------------------------------------
TOTAL..................................................... .............. .............. 25,713,000
----------------------------------------------------------------------------------------------------------------
According to the CADE Baseline Business Case from March 2001, the
overall estimated cost of CADE is $982 million over its life cycle.
CADE Cost Overrun (From the Original Estimate)
The description below explains the costs that GAO reported in their
Audit of the fiscal year 2004 Expenditure Plan:
(1) Design work from September 2000 to July 2001:
--$15.3 million.--Initial estimate in March 2000 Expenditure Plan;
--$19.3 million.--Actual cost;
--$4.0 million.--Variance due to design period being extended by 3
months to add detail in some areas and to bridge to
Development.
(2) Development work from July 2001 to March 2004:
--$40.0 million.--Initial estimate in March 2001 Expenditure Plan;
--$53.6 million.--Actual cost;
--$13.6 million.--A 2-month extension for a pilot using real tax
returns (cost of $5.3 million) and the addition of capacity at
the Martinsburg Computing Center to support Development and
Testing (cost of $4.0 million) created $9.3 million of this
variance. We incurred the cost of the delays outlined below,
creating the remaining variance of $4.3 million.
(3) Cost impact of 2-year delay in delivering CADE:
--$2.4 million.--Hiring of non-PRIME contractors to support our IRS
testing;
--$1.9 million.--Establishing a CADE Program Office (work to build an
organizational framework to support multiple CADE releases
simultaneously);
--$18.0 million.--Cost to apply tax law and other changes for 2003
and 2004 filing season.
These costs do not reflect any changes since the GAO audit of the
fiscal year 2004 Expenditure Plan.
IRS ACTIONS IN REGARD TO THE PRIME
Senator Shelby. Let me ask you a tough question. What steps
will the IRS take, Mr. Commissioner, if the PRIME contractor
fails to deliver?
Mr. Everson. I have made it very clear through the action
to date----
Senator Shelby. You are on top of them.
Mr. Everson [continuing]. That we will hold them
accountable. And I have also said that we will have to reassess
the very continuance of the relationship if we cannot do what
we have said we will do.
Senator Shelby. You would change that if the effort
continues to flounder?
Mr. Everson. We will have to consider that, absolutely.
Senator Shelby. Would you change if you thought you needed
to?
Mr. Everson. I retain that latitude, yes.
Senator Shelby. What is your view, Ms. Gardiner, for the
slowness of this program?
Ms. Gardiner. I think some of it, as I mentioned, it
certainly is complex. It is unique.
Senator Shelby. It is complex.
Ms. Gardiner. But I do think a big part of it too is just
the whole cost and scheduling process was flawed. It gave much
more optimistic deadlines than it should have in the first
place, so it caused people's expectations to be higher than
they should have been.
For example, even just in simple segments of it for
testing, they were so optimistic and they did not build in time
for recovery in terms of if certain defects occurred, or there
were failures, to fix those and then to start over again. So to
some degree it is that, and then the rest is that it is very
complex, and then also changing requirements. So I think
everybody is disappointed, and we are too, as far as how long
it is taking.
Senator Shelby. But your modernization program is
essential.
Mr. Everson. We cannot back away from this effort. We have
to do it. We have got aging technology right now and we have
got an aging workforce. I liken this, as I have said before, to
the movie ``Space Cowboys'', if you ever saw that, where they
send Clint Eastwood out into outer space because they have got
these old guys who are the only ones who understand the
technology. We have a bunch of people who want to retire, but
they are still helping us because we have got 1960s and 1970s
technology that we are running. We cannot keep doing that
forever.
PERFORMANCE OF THE CONTRACTOR
Senator Shelby. Do you believe that the contractor is up to
the challenge here? This is a very complex undertaking, but it
has to be done. You are spending a lot of money here to
modernize the IRS, which we think is important.
Mr. Everson. I feel that I have seen an improvement in the
attitude and the work that is being done in the year that I
have been involved with the Service, and I very much appreciate
the leadership of Mike Laphen, is the president of the company.
He has been in my office once a month. That is quite a devotion
of resources for someone who is running, I think it is a $13
billion business. We have got a relationship that I believe is
starting to improve. We had to let it all out, if you will.
There had to be this accountability of what most recently
happened. So I am cautiously optimistic that they can do this.
Senator Shelby. But you are also guarded because you know
what happened to $4 billion with TSM.
Mr. Everson. This is the old Ronald Reagan, ``trust but
verify'', attitude.
Senator Shelby. We hope you will, and we wish you every
success, and we will continue to help you.
Mr. Everson. Thank you, sir.
ADDITIONAL PREPARED STATEMENT
Senator Shelby. The subcommittee has received a statement
from the Internal Revenue Service Oversight Board which will be
included in the record.
[The statement follows:]
Prepared Statement of the Internal Revenue Service Oversight Board
INTRODUCTION
The IRS Oversight Board thanks the Chairman for the opportunity to
submit this statement to the Subcommittee on Transportation/Treasury
and General Government of the Committee on Appropriations. The Internal
Revenue Service (IRS) Oversight Board is required by 26 U.S.C. Section
7802(d) to review and approve the budget request prepared by the IRS,
submit a request to Treasury, and ensure that the approved budget
supports the annual and long-range strategic plans of the IRS.
This year, the IRS drafted a special report presenting its
recommended fiscal year 2005 IRS budget, comparing it to the
administration's request, and explaining why the Board believes its
recommended budget is needed to support the annual and long-term needs
of the IRS. This statement discusses that report. The complete version
is available on the Board's website at www.irsoversightboard.treas.gov
and the Board asks that this report be entered into the record as well.
THE IRS OVERSIGHT BOARD BUDGET RECOMMENDATION
The IRS budget is more than dollars and cents. It represents the
choices that we as a Nation make about the future of our tax
administration system and how we help over 100 million American
taxpayers deal with an increasingly complex tax code while ensuring
that everyone pays his or her fair share of taxes.
The IRS Oversight Board acknowledges that the IRS's budget has
increased in each year of President Bush's Administration, and that the
administration's request for fiscal year 2005 is significant against
other non-defense, non-homeland security discretionary funding. That
commitment is commendable, and the Board recognizes and thanks
Secretary Snow for his efforts, especially at a time when the Nation
must balance many important and competing priorities.
However, the Board believes that now is a critical time for our tax
system to be strengthened, not merely maintained at current levels.
Enforcement activities are still at unacceptable levels. Our Nation's
tax gap is estimated at $311 billion,\1\ leaving billions of dollars on
the table simply because the IRS does not have the resources to do its
job.\2\
---------------------------------------------------------------------------
\1\ Nina Olson, National Taxpayer Advocate's 2003 Annual Report to
Congress, (Washington, DC: December 31, 2003) p. 20-21. This is based
on a July 2001 IRS Office of Research report.
\2\ Charles O. Rossotti, Report to the IRS Oversight Board:
Assessment of the IRS and the Tax System (Washington, DC: September
2002), p. 16.
---------------------------------------------------------------------------
The Board's own research shows that each year, more Americans
believe it is acceptable to cheat on their taxes. At the same time, our
already complex tax code continues to be a changing, tangled mystery to
most honest taxpayers--and an asset to those intent on skirting the
law. Every effort must be made to provide quality service to honest
taxpayers who want to comply with the law.
In crafting its fiscal year 2005 budget for the IRS, the Board
addressed these concerns head on by reinvesting in the IRS to produce
tangible benefits and results for America's taxpayers and our Nation.
It is a sensible and pragmatic budget that reflects the real world in
which the IRS must operate and be funded.
The Board recommends a 10 percent increase in funding from fiscal
year 2004 to $11.204 billion, with a significant increase of 3,315
full-time equivalents (FTEs) to boost enforcement efforts. If enacted,
the Board's budget would increase our Nation's revenue by approximately
$5 billion each year once the IRS has hired and trained additional
enforcement personnel.\3\
---------------------------------------------------------------------------
\3\ These estimates are based upon the projected revenue
anticipated by hiring and training full-time employees who would audit
or collect owed taxes in known cases of taxpayers who did not file or
pay, or who substantially underreported their taxes, as described in
former IRS Commissioner Charles O. Rossotti's Report to the IRS
Oversight Board: Assessment of the IRS and the Tax System, p. 16.
---------------------------------------------------------------------------
Under the Board's budget, the IRS would have the additional
resources to:
--Close over an additional 1,000 cases involving high risk/high-
income taxpayers and promoters who avoid paying income taxes by
using offshore credit cards and abusive trusts and shelters.
--Boost audit rates by 42 percent from fiscal year 2004 to examine
companies that use aggressive tax avoidance tactics, such as
offshore transactions and flow-through entities.
--Contact an additional 200,000 taxpayers who fail to file or pay
taxes due; a 40 percent boost from fiscal year 2004 and a 27
percent increase from the administration's request. This alone
will allow the IRS to collect $84 million more in revenue owed
than the administration's request would allow.
--Sustain the one-on-one assistance that millions of Americans rely
on at tax time. The Board's budget will ensure that the IRS
will be able to maintain its improved service to taxpayers by
answering eight out of ten phone calls.
IRS MUST STAY THE COURSE ON CUSTOMER SERVICE
Mr. Chairman, the vast majority of Americans want to file their
returns and pay their fair share, yet our Nation's tax code continues
to become more complex. Resources must be available so the IRS can
answer taxpayers' questions and promptly and accurately, whether it is
over the phone, through the IRS website, by mail, or at walk-in center.
Under the board's proposed budget, customer service funding will
remain at about the same level as fiscal year 2004; however, service
should improve due to the deployment of self-service technology.
For taxpayers, that means eight out of ten phone calls will be
answered. For tax practitioners calling the IRS toll-free hotline to
resolve problems regarding clients' accounts, hold-time will remain at
current levels.
The IRS call-routing systems as well as website applications that
allow taxpayers to check the status of their tax refunds have already
shown dramatic benefits in speeding service to taxpayers. New systems,
such as e-Services, will soon be available, providing additional
automated services to tax practitioners.
Clearly, service to taxpayers has improved in the past 5 years.
Such improvements make it all the more imperative that we sustain them
and not allow this positive trend to languish, or worse, decline. The
agency must stay the course.
DAYS OF ``OUTMANNED AND OUTGUNNED'' IRS MUST END
The IRS is doing a better job of identifying egregious
noncompliance--now it needs the resources to fight back. In the past 2
years, the IRS sharpened its compliance focus to identify and pursue
promoters and participants of abusive tax shelters and tax evasion
schemes. For example, the agency is now targeting its resources on
promoters of illegal tax schemes that are often marketed to high-income
individuals, but are also finding their way to middle-market
businesses.
Despite this focus, enforcement activities are still at an
unacceptable level simply because the IRS does not have the resources
needed to accomplish its mission. It continues to be outmanned and
outgunned. In fiscal year 2003, the agency was able to pursue only 18
percent of known cases of abusive devices designed to hide income,
leaving an estimated $447 million uncollected.\4\
---------------------------------------------------------------------------
\4\ Rossotti, p. 16.
---------------------------------------------------------------------------
TAX CHEATING: ALARMING TRENDS
Public attitudes towards tax cheating show some alarming trends,
particularly among young Americans. The Board's 2003 Survey on Taxpayer
Attitudes found that support for total tax compliance diminished by
four points over the previous year to 81 percent. In other words,
nearly one out of five Americans now believe that it is acceptable to
cheat at least a little on their taxes. Almost one-third (30 percent)
of young adults age 18-24 age are among those most likely to feel that
any amount of cheating is acceptable, an increase of six points since
last year. Yet ironically, ``fear of being audited'' has the greatest
impact on these non-compliers at a time when actually being audited is
near historic lows.\5\
---------------------------------------------------------------------------
\5\ Roper ASW, 2003 IRS Oversight Board Annual Survey on Taxpayer
Attitudes, September 2003, p.17.
The IRS must prove to the public that it can and will identify and
pursue those who show contempt for the tax code. The Board's proposed
budget allows the IRS to begin to reverse this disturbing trend.
The Board's recommendation would increase our Nation's revenue by
almost $5 billion each year once the IRS has hired and trained
additional enforcement personnel. The Board believes the additional
revenue achieved makes a strong business case for the recommended
additional enforcement resources. While this is a modest boost in
closing our compliance gap, it will also send a message to those
contemplating tax avoidance: the IRS's hands are no longer tied.
MODERNIZATION CRITICAL TO TAX ADMINISTRATION
In December 2003, the Oversight Board released an independent
analysis of the IRS Business Systems Modernization (BSM) program. The
Board called for nine specific recommendations for turning around the
critical but troubled program that has experienced significant and
unacceptable delays and cost overruns.
However, the Board still believes that the overall Modernization
plan is sound and well-designed. Moreover, it is critical to the future
of tax administration. As a Nation, we must remain committed to the
IRS's computer modernization program. The Board testified before the
House Ways & Means Subcommittee on Oversight on Feb 12, 2004:
``The IRS Oversight Board firmly believes that the IRS
Modernization program cannot be allowed to fail. The IRS cannot
continue to operate with the outmoded and inefficient systems and
processes it uses today. Over time, the existing systems will become
impossible to maintain and at that point, the ability to administer our
country's tax system will be in grave danger. Such a risk to our nation
is unacceptable. We remain convinced that the overall Modernization
plan is sound and well-designed. The challenge is executing that plan.
The IRS and the Prime must get it right this time.''\6\
---------------------------------------------------------------------------
\6\ Larry R. Levitan, IRS Oversight Board Testimony before House
Ways and Means Oversight Subcommittee Hearing on IRS BSM Program,
February 10, 2004.
The Board's proposed budget provides the stable resources needed to
focus and stabilize the steady stream of funding for the IRS's computer
modernization initiative. Special controls are in place to ensure that
no funding in this account is spent until the IRS has the capability to
spend it effectively. If the IRS does not correct the weaknesses in the
BSM program by fiscal year 2005, the Board advocates that the funds
earmarked for modernization should not be spent. However, the Board
does not believe the IRS should plan for failure. The agency must be
poised to move forward with BSM once it has demonstrated that it has
corrected the program's weaknesses. The funding level recommended by
the Board sets the foundation for genuine progress for the program in
fiscal year 2005.
The Board expects that the Customer Account Data Engine (CADE)
Release 1 will occur in 2004. Over the next year, the IRS will test and
build upon that system. The IRS should continue to strengthen its
ability to manage the program and the Prime to deliver projects on
budget and on time. By the end of fiscal year 2005 and early fiscal
year 2006, the IRS should be able to proceed with the remaining
releases of CADE as quickly as possible. This will minimize future risk
and the long-term cost of modernization while providing a basis to
deliver tangible results for taxpayers.
If the IRS's fiscal year 2005 BSM funding is reduced to $285
million, as it is in the administration's budget, future funding likely
will be adversely affected. If that happens, the projects will drag on,
risk will increase, and ultimately, the program will cost taxpayers
much more.
For that reason, the Board believes fiscal year 2005 BSM funding
should be set at $400 million, with only $285 million put into the
fiscal year 2005 spend plan. This will allow the IRS's Business Systems
Modernization fund to operate like a multi-year fund, as originally
envisioned by Congress and as the Board has recommended each year since
its inception.
Further, as its archaic, tape-based computers begin to give way to
modern business systems, the IRS must plan for a smooth transition. The
Board's budget recognizes that need. As new systems are incorporated,
the IRS must plan to operate both the old and new systems in parallel
for some time. The IRS must also retain employees with critical skills
while training existing and new employees to use new systems. This will
allow the IRS to reduce the risk of a catastrophic disruption to the
system.
In addition, the Board believes that the transition to
modernization is a real cost that must be incurred. There are no short
cuts to successful modernization--the IRS's budget must reflect the
real cost of maintaining legacy systems while simultaneously supporting
modernized systems. Accordingly, the Board recommends an additional $25
million to cover these costs. The administration's budget fails to
acknowledge them.
THE ADMINISTRATION'S FISCAL YEAR 2005 BUDGET REQUEST
By comparison, the Board believes the administration's fiscal year
2005 budget cannot achieve its stated goal to add almost 2,000
personnel to bolster the IRS's enforcement efforts, and will threaten
hard-earned improvements in customer service. This year's request will
lead to a $230 million shortfall in the IRS budget because it fails to
budget adequately for the anticipated $130 million of congressionally-
mandated civilian pay raises, rent increases, and at least $100 million
of unfunded expenses.
In its fiscal year 2005 budget recommendation, the Board
anticipates a 3.5 percent pay raise for civilian employees, which
achieves parity with the administration's call for a 3.5 percent
military pay raise. The administration, but contrast, calls for a 1.5
percent civilian pay raise. While discussions are now underway in
Congress regarding parity, the Board believes that the 1.5 percent
civilian pay increase fails to recognize recent history.
In fact, fiscal year 2005 is the fourth year in a row in which the
administration has called for IRS staff increases, while not covering
pay raises or required expenses.
As a result, the administration's proposed increase in the IRS's
fiscal year 2005 budget will erode before new employees can be hired,
more taxpayer phone calls can be answered, or new audits of possible
tax cheats can be conducted.
IMPACT OF $230 MILLION BUDGET SHORTFALL ON THREE MAJOR IRS FUNCTIONS
----------------------------------------------------------------------------------------------------------------
Fiscal Year
2005 Revised Goal
Function Performance Measure Performance After $230
Goal Million Cut
----------------------------------------------------------------------------------------------------------------
Field Collection.............................. Number of tax deliquent account 981,000 463,000
cases resolved.
Toll-free Telephone Level of Service......... Calls answered.................. 32,000,000 17,000,000
Field Exam.................................... Exams of individual taxpayers 118,840 73,000
<$100,000 AGI.
----------------------------------------------------------------------------------------------------------------
BOARD CITES COMPLEXITY AS FUNDAMENTAL FLAW
The IRS Oversight Board is precluded by law from addressing tax
policy issues, but it would be remiss not to address the cost of our
Nation's complex tax system; a cost ultimately borne by taxpayers and
the IRS. The administration's legislative proposals contained in its
budget request only begin to address the problems caused by complexity.
The approach so far to tax simplification fails to address a
fundamental flaw in our tax system: its costly, confusing, and
debilitating complexity. The administration has, however, requested
that Congress provide some relief in fiscal year 2005 on the
Alternative Minimum Tax, but has not yet identified a long-term
solution.\7\ In her annual report, IRS National Taxpayer Advocate Nina
Olson recommended repeal of the AMT, saying:
---------------------------------------------------------------------------
\7\ Recent public remarks by Treasury Secretary Bodman noted that
the President's budget extends through 2005 the temporary increase in
the AMT exemption and the provision that allows certain personal
credits to offset the AMT. These temporary provisions will keep the
number of taxpayers affected by the AMT from rising significantly in
the near-term. More importantly, they will allow the Treasury
Department the time necessary to develop a comprehensive set of
proposals to deal with the AMT in the long-term. Treasury Press Release
JS-1250 contains the full statement of his remarks.
``The AMT is extremely and unnecessarily complex and results in
inconsistent and unintended impact on taxpayers . . . [T]he AMT is bad
policy, and its repeal would simplify the Internal Revenue Code,
provide more uniform treatment for all taxpayers, and eliminate the
oddity of dual tax systems. AMT repeal would also allow the IRS to
realign compliance resources to facilitate more efficient overall
administration of the tax code.'' \8\
---------------------------------------------------------------------------
\8\ Olson, p. 16.
The Board fully concurs with her assessment, and urges the
administration and Congress to consider accepting this recommendation
in future legislation.
CONCLUSION
The Board was established to bring to bear its collective expertise
and familiarity with private sector best practices on the IRS's
problems. To the private-life Board members, investments in enforcement
pay for themselves many times over, not only in revenue dollars but by
the deterrence value of reinforcing the belief that all taxpayers are
paying their fair share. A strong business case can be made for
providing the IRS with several hundred million dollars so it can
collect billions in revenue. At a time when Federal revenue as a
percentage of the economy has shrunk to 1950s levels and we face a $500
billion deficit, the Board believes it imperative that we strengthen
our tax collection system.
For that reason, the Board recommends that both Congress and the
administration reevaluate their methodology by including the revenue
value to the country when estimating budget requests for the IRS.
Indeed, considering the positive impact of additional resources
provides a better framework for making informed decisions and will lead
to a more effective IRS.
In conclusion, the Board calls for Congress to stay the course it
set more than 5 years ago with the passage of the IRS Restructuring and
Reform Act. The IRS has made progress in carrying out the spirit and
letter of the Act; we must now give it the resources to finish the job.
______
Attachment 1.--IRS Oversight Board Fiscal Year 2005 IRS Budget
Recommendation and Administration Request: Program Summary Comparison
ADMINISTRATION FISCAL YEAR 2005 BUDGET REQUEST PROGRAM SUMMARY
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Increase
Fiscal Year Fiscal Year -------------------------------
Appropriation Title 2004 Enacted 2005 OB Enacted vs.
Request Request Percent
----------------------------------------------------------------------------------------------------------------
Processing, Administration and Management....... $4,009 $4,148 $139 3.5
Tax Law Enforcement............................. 4,171 4,564 393 9.4
Information Systems............................. 1,582 1,642 60 3.8
Business Systems Modernization.................. 388 285 -103 -26.5
Health Insurance Tax Credit Administration...... 35 35 .............. ..............
---------------------------------------------------------------
Appropriation............................. 10,185 10,674 490 4.8
----------------------------------------------------------------------------------------------------------------
IRS OVERSIGHT BOARD FISCAL YEAR 2005 BUDGET REQUEST PROGRAM SUMMARY
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Increase
Fiscal Year Fiscal Year -------------------------------
Appropriation Title 2004 Enacted 2005 OB Enacted vs.
Request Request Percent
----------------------------------------------------------------------------------------------------------------
Processing, Administration and Management....... $4,009 $4,291 $282 7.0
Tax Law Enforcement............................. 4,171 4,770 598 14.3
Information Systems............................. 1,582 1,708 126 8.0
Business Systems Modernization.................. 388 400 12 3.1
Health Insurance Tax Credit Administration...... 35 35 .............. 0.3
---------------------------------------------------------------
Appropriation............................. 10,185 11,204 1,019 10.0
----------------------------------------------------------------------------------------------------------------
Attachment 2.--Unfunded IRS Costs, Fiscal Year 2002-2003
UNFUNDED IRS COSTS, FISCAL YEAR 2002-2004
[Dollars in millions, rounded]
------------------------------------------------------------------------
Fiscal Fiscal Fiscal
Detail Year 2002 Year 2003 Year 2004
------------------------------------------------------------------------
Labor Inflation:
Unfunded Pay Raise Increase $42.3 $128
(President's Request to
Congressional Action)...........
==================================
42.3 128
Non-Labor Inflation:
Rent Shortfall................... 32 54
Postage.......................... 16 53
Corporate & Electronic Contracts. .......... 23
Health Service Contract.......... 3 2
Interpreter's Contract........... 0.5 0.3
Child Care Subsidy............... 1 ..........
Increased Department of Labor 2 ..........
EFAST Contract Processing Costs.
----------------------------------
TOTAL.......................... 55 132
==================================
Added Requirements:
Background Investigations........ .......... 4
Increase Cash Awards from 1.24 8 16
percent to 1.42 percent.........
Competitive Sourcing............. .......... 8
Campus Security Response......... 15 ..........
Congressional Mandates........... 5 ..........
Guard Services................... 20 16
Public Transportation Subsidy.... 9 ..........
----------------------------------
TOTAL.......................... 56 44
==================================
Total.......................... 153 304
----------------------------------
Total Less Pay Raise and Rent.. 79 122
------------------------------------------------------------------------
Attachment 3
WHERE THE ADDITIONAL ENFORCEMENT RESOURCES ARE APPLIED
[Dollars in thousands, rounded]
----------------------------------------------------------------------------------------------------------------
Oversight Board Administration Difference
Recommendation Recommendation ---------------------
Enforcement Initiatives --------------------------------------------
Budget FTE Budget FTE Budget FTE
----------------------------------------------------------------------------------------------------------------
SBSE-2 Curb Egregious Non-Compliance.......... $159,264 1,408 $90,161 874 $69,103 534
SBSE-3 Select High-Risk Cases for Examination. 5,500 ......... ......... ......... 5,500 .........
SBSE-7 Savings through Consolidation--Case 16,085 200 14,469 144 1,616 56
Processing...................................
SBSE-8 Savings through Consolidation-- 7,656 69 5,531 65 2,125 4
Insolvency Processing........................
WAGE-2 Increase Individual Taxpayer Compliance 46,406 521 15,469 175 30,937 346
WAGE-9 Improve ITIN Application Process....... 15,484 50 ......... ......... 15,484 50
WAGE-10 Eliminate Erroneous EITC Payments.... 18,000 ......... ......... ......... 18,000 .........
LMSB-1 Combat Corporate Abusive Tax Schemes... 60,017 394 36,100 207 23,917 187
TEGE-1 Combat Diversion of Charitable Assets. 3,914 44 3,914 44 ......... .........
TEGE-5 Stop Abusive Transactions in the TEGE 11,140 100 11,140 100 ......... .........
Community....................................
CI-1 Combat Financial Fraud in the Corporate 25,600 98 25,600 98 ......... .........
Sector.......................................
CI-2 Dismantle International and Domestic 12,208 80 ......... ......... 12,208 80
Terrorist Financing..........................
CI-3 Reinforce Core Mission Tax Enforcement 34,086 130 34,086 130 ......... .........
Resources....................................
CI-7 Forensic Electronic Evidence Acquisition 3,104 4 3,104 4 ......... .........
and Analysis.................................
CI-10 Leverage/Enhance Special Agent 2,500 28 2,500 28 ......... .........
Productivity.................................
APPEALS-1 Resolve Appeals..................... 13,945 112 7,000 56 6,945 56
COUNSEL-1 Combat Abusive Tax Avoidance........ 10,852 75 5,426 38 5,426 37
NHQ-2 Deliver Strategic Compliance Data....... 2,712 2 ......... ......... 2,712 2
-----------------------------------------------------------------
Fiscal Year 2005 Enforcement Increases. 448,472 3,315 254,500 1,963 193,972 1,352
----------------------------------------------------------------------------------------------------------------
ADDITIONAL COMMITTEE QUESTIONS
Senator Shelby. There are some additional questions that
will be submitted in writing for your response.
[The following questions were not asked at the hearing, but
were submitted to the Department for response subsequent to the
hearing:]
Questions Submitted to the Internal Revenue Service
Questions Submitted by Senator Richard C. Shelby
Question. Following the IRS Reform legislation of 1997, the IRS
realigned significant levels of resources from Tax Enforcement and
Compliance activities to customer service, telephone assistance, and
submission processing activities.
How do the fiscal year 2005 realignment proposals and the new
funding initiatives proposed for 2005 compare to the pre-reform
legislation levels for those programs?
Answer. The proposed fiscal year 2005 realignment proposals and new
funding initiatives strive to better balance service and enforcement.
The IRS's service lagged in the 1990's. In response to the IRS
Restructuring and Reform Act of 1998 (RRA 98), the IRS took important
and necessary steps to upgrade service--significantly improving the
answering of taxpayer telephone inquiries and electronic filing.
Unfortunately, improvement in service coincided with a drop in
enforcement activity. Since 1996, the number of IRS revenue agents,
officers, and criminal investigators has dropped.
The President's fiscal year 2005 budget--if approved by Congress--
will help with IRS efforts to continue strengthening enforcement
activities while maintaining and enhancing levels of service. The
submission requests an enforcement increase of $300 million over the
fiscal year 2004 consolidated appropriations level. This increase will
allow a partial recovery in the numbers of enforcement personnel, but
will not fully restore the workforce.
----------------------------------------------------------------------------------------------------------------
FTE FTE FTE Fiscal FTE FTE
Enforcement Workforce Fiscal Fiscal Year 2005 Fiscal Percent
Year 1997 Year 2004 Initiatives Year 2005 Change
----------------------------------------------------------------------------------------------------------------
Revenue Agents......................................... 14,592 12,172 841 13,387 -9
Revenue Officers....................................... 7,333 5,238 332 5,734 -28
Criminal Investigators................................. 3,244 2,553 160 2,739 -22
----------------------------------------------------------------------------------------------------------------
Question. Will IRS essentially restore those realignments from
1997, or does the request make real advances in tax compliance efforts?
Answer. As in the past 2 years, the IRS has identified efficiency
improvements that could generate resources to be applied to high
priority areas. These resources will be applied to enforcement in
fiscal year 2005. However, they are not sufficient to completely
reverse the decline in enforcement performance. The IRS needs the
increase in enforcement resources requested in the fiscal year 2005
budget to carry out an appropriate level of activity in the enforcement
arena.
The primary goal in the fiscal year 2005 budget request is to
continue restoring the strength of the enforcement function. Staffing
devoted to compliance and enforcement operations declined in the 1990's
as the IRS focused on customer service; it is just beginning to
recover. The number of revenue agents, revenue officers, and criminal
investigators each declined by over a quarter from fiscal year 1997 to
fiscal year 2003. Annual growth in return filings and additional work
related to RRA 98 have contributed to a steady decline in enforcement
presence, audit coverage, and case closures in front-line compliance
programs.
This budget has an increase of $300 million for a more vigorous
enforcement of the tax laws. This strong commitment to tax
administration will provide a significant augmentation of enforcement
resources, but will not completely restore enforcement personnel to
1997 levels. Improvements will also come from productivity increases
(e.g. reeningeering, better audit targeting).
Question. Are the realignment proposals recognition that sufficient
service and staffing levels have been achieved for IRS customer service
and processing program areas?
Answer. While the ultimate desired level of taxpayer service
remains to be reached, the IRS has improved and increased recognition
of, and respect for, taxpayer rights. The IRS has made steady gains in
better serving American taxpayers. Each filing season and year is
appreciably better than the previous one and the IRS continues to build
on those successes.
FISCAL YEAR 2004 FILING SEASON SUCCESSES--DATA AS OF APRIL 23 COMPARED
TO SAME PERIOD IN FISCAL YEAR 2003
------------------------------------------------------------------------
Fiscal Year Fiscal Year Percent
Service\1\ 2003 2004 Change
------------------------------------------------------------------------
Free Filed Returns................. 2.7 3.4 26
Where's My Refund.................. 9.5 12.4 31
Telephone Level of Service 83 85 2
(Percent).........................
E-Filing From Home................. 11.7 14.2 21
------------------------------------------------------------------------
\1\ Service usage in millions, except percentages.
The IRS is doing a better job; however, much more remains to be
done. The objectives for improved taxpayer service are three-fold:
--improve and increase service options for the taxpaying public;
--facilitate participation in the tax system by all sectors of the
public;
--simplify the tax administration process.
Although the IRS is not requesting increases in fiscal year 2005
for taxpayer service initiatives, the IRS will be able to build upon
its experience over the past 6 years and will continue to improve
taxpayer service. In recognition of the need to rebalance service and
enforcement activities, consistent with the formula of service plus
enforcement equals compliance, the only increases the IRS requested in
fiscal year 2005 are for enforcement.
Question. What headway will IRS's request make in the growing
delinquent tax inventory that exists, or do you still anticipate large
write-offs of delinquent taxes similar to this past year, even with the
resource requests in the fiscal year 2005 budget?
Answer. Delinquent tax write-offs declined by 35 percent from
818,000 in fiscal year 2001 to 533,000 in fiscal year 2003. The dollar
value of this inventory declined from $10.5 billion in March 2001 to
$7.4 billion in March 2004. The fiscal year 2005 budget staffing
increase will enable the IRS to continue this progress in reducing the
delinquent tax inventory. Passage of the administration's proposed
Private Collection Agent legislation would further reduce delinquent
inventory.
Question. A continuing priority of the IRS has been to maintain and
improve the Tax Fraud and Criminal Investigations program area. This
committee has supported IRS requests in this area.
Has IRS invested all the resources granted by the Congress in
recent years for the Criminal Investigations area or have some of the
new resources been reallocated to other areas in the IRS?
Answer. The IRS has directed all the resources provided by the
Congress for the Criminal Investigation area to the Criminal
Investigation division (CI). None of the resources have been
reallocated to other areas in the IRS; however, the IRS has applied any
across-the-board rescissions or unfunded pay raises to CI
proportionally. The IRS has protected all new CI initiatives.
Question. The IRS, in recent testimony, indicated that Congress has
not provided the resources it needs to meet tax administration
responsibilities. A review of IRS requests by GAO has shown that more
than 98 percent of IRS's requests have been funded since fiscal year
2002, with most reductions relating to across-the-board reductions and
absorptions beyond the control of this committee.
What is the basis of IRS's assessment on Congress' review of your
requests?
Answer. The IRS has based its budget strategy on increasing
productivity in current operations from reengineering, modernization,
and increases in electronic filing to free up resources for
reinvestment in taxpayer service and enforcement. The administration
also has sought modest FTE increases in the last few years. If
successful, this strategy would have enhanced taxpayer service and met
the demands of increased return workload. However, this strategy has
not been as effective as anticipated due to unexpected cost increases.
For example, the IRS absorbed $97 million to fund a portion of the
fiscal year 2004 pay raise, in addition to an appropriation reduction
of $252 million from the President's Budget.
The IRS absorbed these costs across the agency, protecting only the
new fiscal year 2004 enforcement initiatives from reduction.
Nevertheless, although the IRS protected these enforcement initiatives,
the enforcement base absorbed a prorated share of these unexpected cost
increases discussed above, and this resulted in FTE reductions in
enforcement activities.
Question. Does IRS's assessment imply that the administration did
not request sufficient resources for the IRS in past years' budgets?
Answer. The IRS has received the administration's full support, and
funding requests have been sufficient. However, unfunded expenses
absorbed throughout the agency have negatively affected budget goals.
These unfunded expenses have been driven primarily by pay raises higher
than those proposed by the administration.
Question. What is IRS's assessment of the request for fiscal year
2005? Is it adequate to support IRS tax administration
responsibilities?
Answer. The proposed fiscal year 2005 budget takes a balanced,
measured approach to the challenges facing the American tax system,
with a needed emphasis on strengthening enforcement. The goal is to
ensure that the tax system is fair for all while protecting taxpayer
rights.
The request, if funded, is adequate to support IRS tax
administration responsibilities. However, the fiscal year 2005 budget
request includes a 1.5 percent increase for the pay raise, as proposed
by the administration. If Congress approves the 3.5 percent increase
proposed by some members, it would result in a shortfall of $109
million.
Question. What is IRS's assessment of long term requirements?
Answer. The vision of the IRS is to re-center the agency with the
proper balance of service and enforcement poised to quickly meet
technological and demographic changes, new challenges of taxpayer
compliance, and customer expectations.
The IRS's goals remain the same--to improve taxpayer service,
enhance enforcement through uniform application of the law, and improve
the IRS infrastructure and modernize technology. The IRS's working
equation is that service plus enforcement equals compliance. The IRS is
maintaining high levels of taxpayer service, while focusing on
corrosive areas of non-compliance. Ensuring fairness will help maintain
the taxpaying public's faith in the Nation's tax system.
Question. How is the IRS's fiscal year 2005 request consistent with
that vision?
Answer. The IRS will enforce the law and it will continue to
improve service and respect taxpayer rights. The administration's
fiscal year 2005 budget request will help the IRS restore the balance
between service and enforcement envisioned in the IRS's Strategic Plan.
The fiscal year 2005 request allocates $300 million toward
enforcement initiatives designed to curb abusive tax practices, end the
proliferation of abusive tax shelters, improve methods of identifying
tax fraud, identify and stop promoters of illegal tax schemes and
scams, and increase the number and effectiveness of audits to ensure
compliance with the tax laws. This budget will allow the IRS to apply
resources to areas where non-compliance is greatest: promotion of tax
schemes, misuse of offshore accounts and trusts to hide income, abusive
tax shelters, underreporting and non-reporting of income, and failure
to file and pay large amounts of employment taxes. The administration
also has proposed a number of legislative changes to significantly
enhance current enforcement programs and prevent the promotion of
abusive tax avoidance transactions. The goal of these initiatives is to
ensure that the tax system is fair for all, while protecting taxpayer
rights.
Question. Besides the across the board reductions, what other
expenses did the IRS pay that were not budgeted?
Answer. Examples of the expenses incurred that were not budgeted
include $97 million for a portion of the unfunded pay raise, and
unanticipated rent increases causing a shortage of $40 million. The IRS
is working to manage our space inventory to minimize future rent
increases to the extent possible.
Question. The GAO states that IRS has requested more enforcement
staff to be funded partly by budget increases and partly through
internal savings.
Please provide, for fiscal year 2002 and fiscal year 2003, a
detailed breakout of the anticipated internal savings and the actual
amount saved.
Answer. In fiscal year 2002, the IRS intended to offset projected
non-labor inflation of $57 million by reducing travel and contractual
services and improving purchasing power through interdepartmental
consolidation of procurements. Actual results of those actions in
fiscal year 2002 were:
------------------------------------------------------------------------
Obligations
Variance From
Object Class Fiscal Year
2001-2002
------------------------------------------------------------------------
Temporary Space Leases.................................. ($19,765,165)
Management and Professional Support Services............ (10,462,898)
Contractual Labor--Private Sector....................... (10,052,952)
Training/Travel......................................... (4,114,005)
Misc Expenses, Foreign Posts--Government................ (3,151,254)
Printing, Reproduction, & Related Services--Commercial.. (1,900,000)
Support Services--Private Sector........................ (1,711,693)
Local Telephone Service................................. (1,280,417)
Services and Maintenance to Buildings and Space......... (1,088,284)
Administrative Mail Costs............................... (1,042,750)
Telecommunications Equipment, Capitalized............... (912,880)
Communication, Telephone Service--EE.................... (811,571)
Travel of Experts & Witnesses........................... (577,566)
---------------
Total............................................. (56,871,435)
------------------------------------------------------------------------
The IRS highlighted specific initiatives for savings in fiscal year
2003. Actual results of those reductions were:
[Dollars in millions]
----------------------------------------------------------------------------------------------------------------
Budgeted Realized, EOY Difference
Savings--Fiscal Year 2003 -------------------------------------------------------------------
Dollars FTE Dollars FTE Dollars FTE
----------------------------------------------------------------------------------------------------------------
CI--Narcotics Program....................... $14.6 85 $4.0 33 ($10.6) (52)
CI--Realigned Attrition..................... $11.6 80 $9.7 80 ($1.9) ..........
COUNSEL--Reduced Tax Court Cases............ $0.6 5 $0.6 5 .......... ..........
WAGE--E-File................................ $18.5 490 $12.0 475 ($6.5) (15)
WAGE--Reengineering/Quality Improvements... $67.4 1,044 ......... ......... ($67.4) (1,044)
WAGE, SBSE--e-services release.............. $4.0 69 $0.3 6 ($3.7) (63)
LMSB--Customer Relationship Management (CRM) $11.9 119 $1.2 12 ($10.7) (107)
Exam.......................................
MITS--Selected Tier B Projects.............. $3.3 57 ......... ......... ($3.3) (57)
SBSE--Reduced Field Innocent Spouse......... $13.8 184 $7.7 103 ($6.1) (81)
SBSE--Reduced Filing Season Support......... $12.1 154 $17.9 230 $5.8 76
-------------------------------------------------------------------
GRAND TOTAL........................... $157.8 2,287 $53.4 944 ($104.4) (1,343)
----------------------------------------------------------------------------------------------------------------
Question. The GAO states that the IRS realized only 32 percent of
its claimed internal savings in fiscal year 2003. Is this correct? If
so, does this point to a weakness in budget formulation at the IRS?
Answer. The actual figure is 34 percent. The fiscal year 2003
budget submission is the first such submission to identify specific
reduction initiatives that could be used to fund high priority
initiatives. Since then, the IRS has been improving. For example, in
fiscal year 2004, the IRS expects to achieve 68 percent of the
projected savings. The savings result either from modernization
projects or reengineered systems that generate productivity increases.
Because the IRS starts development of budget estimates over 15 months
prior to execution year, the assumptions made can change, and any
changes in assumption will affect the actual savings realized. In many
cases these savings have been delayed, but will eventually be realized.
Question. Does it point to a lack of conviction to realize the
savings promised to promote change at the IRS? If the IRS does not
realize the savings assumed in its budget requests, how does it make up
for the shortfall?
Answer. The IRS's prior experience in realizing specific reduction
initiatives, particularly with respect to fiscal year 2003, in no way
reflects a lack of commitment by the IRS to achieve cost savings and
efficiencies.
In most cases, the savings generated are used to fund other high
priority areas in the same business unit. Therefore, there is an
incentive to ensure that the reengineering actions are taken so that
the new work can be done. However, if for some reason the savings are
not generated at the time expected, then the business unit must either
scale back its hiring plans, and, therefore, projected performance, or
reduce non-labor costs in other areas to maintain its performance
level. Part of the problem experienced in fiscal year 2003 and 2004 was
that the IRS did not use generated savings to fund higher priority
work, as planned in the budget, but used the savings mainly to fund
unfunded mandates and unexpected costs.
Question. Congress has appropriated approximately $1.7 billion for
the Business Systems Modernization program. IRS has requested an
additional $285 million in this year's fiscal year 2005 budget. The
current program is showing mounting delays in project milestones, with
few results to show for the taxpayer.
What is the current status of this program?
Answer. The BSM program is--without a doubt--one of the largest,
most visible, and most sensitive modernization programs ever undertaken
in the world.
The results have been mixed; but first, the good news. The IRS
built a strong technical infrastructure and designed and implemented
stringent security and control mechanisms into the infrastructure. The
IRS also developed a rigorous enterprise life cycle methodology. Over
the past 2 years, the IRS has been working toward instituting and
integrating established streamlined governance and management
processes. The IRS has made progress, but a major thrust now focuses on
sustaining a solid balance of business commitment, accountability, and
scope management. Finally, the IRS has achieved a great deal of success
with the projects delivered to date.
The IRS has fully deployed all e-Services Release 1.0 products and
made them available over the Internet, including: registration and
online address change access for third parties and IRS employees
through secure user portals; Preparer Tax Identification Number (PTIN)
online application; interactive Taxpayer Identification Number (TIN)
matching; secure Electronic Return Originator (ERO) application
processing; and access to e-Services registration and application
processes by Modernized e-File (MeF) participants.
E-Services Release 2.0 products are also now in production and
available for use by IRS staff and taxpayers, including: Application
for e-Filing (external); Electronic Account Resolution (EAR);
Electronic TIN Bulk Matching (Bulk Requests); Disclosure Authorization
(DA); and infrastructure support for outbound facsimile service.
In March 2004, James D. Leimbach appeared before the Ways & Means
Oversight Subcommittee on behalf of the National Association of
Enrolled Agents (NAEA) and said, ``This new capability is truly going
to revolutionize the way we conduct future business with the IRS. The
ultimate beneficiary is the American taxpayer. We are truly amazed and
thrilled beyond description at this way of doing business with the IRS,
and we would like for you to understand why we feel as we do.''
The IRS delivered several additional applications that are
providing tangible benefits to taxpayers and improving the efficiency
and effectiveness of the tax administration systems such as Where's My
Refund?, Where's My Advance Child Tax Credit?, Internet EIN, Modernized
e-File, HR Connect, etc. The following chart highlights the
applications the IRS has delivered, as well as the measurable business
benefits being realized.
BSM DELIVERS REAL BUSINESS VALUE (RESULTS AS OF 6/15/04)
----------------------------------------------------------------------------------------------------------------
Project Description Recent Statistics
----------------------------------------------------------------------------------------------------------------
Internet Refund Fact of Filing Improves customer self-service by --17.9 million inquiries in 2003; 22
(2002). providing instant refund status million inquiries to date in 2004
information and instructions for (1/1/04-6/6/04).
resolving refund problems to --32 percent of all real time IRS
taxpayers with internet access. assistance calls come from IRFoF.
--Modest reduction of
telecommunications costs (about
$250,000).
--Every 1,000 IRFoF contacts
eliminate 1,500-2,000 refund
assistance calls.
Advanced Child Tax Credit (2003)... Modifies the Internet Refund --15.5 million inquiries in 2003;
application to provide taxpayers 11.9 million inquiries to date in
with Advance Child Tax Credit refund 2004 (10/1/03-6/13/04).
status on the internet. --Peak date 1.1 million interaction.
Customer Communications (2001)..... Improves communications --68,000 calls in one 3-minute
infrastructure, including telephone period during initial week
call management, call routing and (coincided with start of Advanced
customer self-service applications. Tax Refund of 2001).
--50 percent reduction in waiting
time for assistor to answer call.
--50 percent reduction in abandoned
calls.
--Number of Spanish calls doubled.
--More accurate pre-routing of
calls.
Internet Employee Identification Allows businesses and taxpayers to --1.37 million internet EIN
Number (2003). apply for and receive employer applications received to date (as
identification numbers over the of 6/5/04).
internet.
HR Connect (2002).................. Delivers an enterprise solution to --75,000 internal users.
allow IRS employees to access and --Cited by Commissioner Everson as
manage their human resources an enabling factor in the
information online. redirection of approximately 750
staff years to enforcement.
--Treasury was selected as 2004
ComputerWorld Honors Laureate for
HR Connect development and
implementation.
e-Services R1 (2003-2004).......... Creates a web portal and value adding --Over 69,624 PTIN applications
e-Services services to promote the (W7P) entered to date, data entry
goal of conducting most of the IRS's productivity doubled (from 8/15/03-
transactions with tax practitioners 6/10/04).
electronically. --Over 58,201 e-File applications to
the Third-Party-Data-Store (TPDS)
entered to date (from 8/15/03-6/10/
04).
--Approximately 24,939 Registered
(and confirmed) User Portal (RUP)
to date (from 10/1/03-6/10/04).
Customer Relationship Management Provides standard tax computation --Deployed to almost 4,000 Revenue
Exam (2001). software to Large & Mid-Sized Agents.
Business Revenue Agents.
Modernized e-File (2004)........... Provides e-filing to large businesses --Went live on 2/23/04.
(1120 family) and tax exempt --Over 35,090 returns (1120 family)
organizations (990 family). accepted as of 6/13/04.
--Over 3,287 participating
Electronic Return Originators as of
6/13/04.
--Winner of Government Solutions
``Best-of-the Best'' Pioneer
Solutions.
----------------------------------------------------------------------------------------------------------------
The bad news, however, is major. Significant cost overruns and
repeated schedule delays have plagued critical projects, such as the
Customer Account Data Engine (CADE), the Integrated Financial System
(IFS), and the Custodial Accounting Project (CAP). CADE replaces the
current master files that are the IRS's repository of taxpayer
information. IFS will be the IRS's new core accounting system. CAP
provides an integrated link between tax administration (revenue) and
internal management (administrative) financial information.
The IRS has delayed the CADE program four times. It originally
planned to deliver the first release of CADE in December 2001. The IRS
then rescheduled it for August 2003, and later rescheduled it for April
2004. The IRS recently finalized the re-planning effort for CADE and
set the latest delivery date for September 2004. While CADE is farther
along than the IRS has ever been in replacing a component of the master
file, there are still major hurdles to overcome. The CADE delays
stemmed from infrastructure upgrades, initial poor software quality
during the startup of systems integration testing combined with the
failure to understand the complexity of balance and control, and the
resolution of operational and performance issues that occurred during
Phase 3 of the Release 1.0 pilot.
Like CADE, IFS has been plagued with schedule delays. The IRS
originally planned to deliver the first release of IFS in October 2003.
The IRS then rescheduled it for January 2004. The IRS later rescheduled
it for April 2004. The IRS has subsequently scheduled Release 1.0 for
October 2004. The IRS delayed the first release of IFS because of the
need to make technical changes to comply with the enterprise
architecture, the inability to resolve key design and integration
issues in a timely manner, the identification of the health coverage
tax credit interface requirement late in the development process, and
delays experienced in integration testing due to poor application
quality and interface testing issues.
IFS Release 1.0 will cover core accounting functions such as budget
preparation, general ledger, accounts payable, accounts receivable,
financial reporting, and purchasing. Problems continue to seriously
jeopardize the scheduled delivery of this first release of IFS. The IRS
is 2 weeks behind schedule on testing, which puts the data conversion
schedule at risk. The IRS is negotiating a fixed price contract for the
October delivery.
The IRS is also encountering delays on the first release of the
Custodial Accounting Project (CAP), which provides an integrated link
between tax administration (revenue) and internal management
(administrative) financial information. The first release of CAP will
address revenue from individual taxpayers on initial tax payments.
Later releases of CAP will address businesses and collections. CAP
delays resulted from unstable CADE and IFS interface definitions,
needing additional testing time due to a much larger than anticipated
volume of data anomalies discovered during the conversion of data from
the current Individual Master File (IMF), and the time required
resolving system performance issues.
In addition, though not directly responsible for CAP delays to
date, the IRS has made some adjustments to the functionality that it
needs to have in CAP Release 1 to support the GAO financial audit as
well as internal accounting and management. These adjustments will
increase the cost of later sub-releases of CAP Release 1. The IRS has
now completed all testing for CAP Release 1, and is adding changes to
reflect IMF changes from the start of the 2004 filing season (Release
1.1). The IRS plans to start production, which includes the initial
load of IMF data, in mid-August. The IRS negotiated a fixed price
contract for Release 1 and Release 1.1 in May 2004.
Question. Are the current problems resource-related or management-
related?
Answer. The current problems experienced by the IRS are a
combination of both. The IRS needs a more versatile team of seasoned
executives to provide long-term stability to the program. The IRS is
complementing the skills of experienced IRS tax executives with outside
seasoned technology executives who have experience managing large-
scale, complex IT projects. As such, the IRS is hiring two Associate
Chief Information Officers to join the MITS organization, and an
executive search firm is conducting searches for five senior executives
with a wide range of diverse experience in developing and implementing
large modernization systems. As a result of missing CADE and IFS key
deliverables last summer, the Commissioner and Computer Sciences
Corporation (CSC) commissioned external assessment studies from outside
experts. The studies produced no major surprises; but, the IRS now
understands more about the issues. All of the assessments confirmed
that the IRS modernization effort is a massive, highly complex, high-
risk program that is confronting a number of critical management and
technological challenges. These studies also made it clear that the IRS
should not turn back, but rather make a series of changes to strengthen
the BSM program.
While all of these studies assessed different components of the
modernization program, three major recommendations emerged, including:
--Scaling back the modernization portfolio to better align with IRS
and CSC's capacities;
--Engaging IRS business units to drive the projects with a business
focus; and,
--Improving contractor performance on cost, scheduling, and
functionality.
The assessments also raised a number of other key improvement
opportunities, including:
--Adding outside expertise to help manage the program and to
complement IRS skills;
--Strengthening human resources capacity management;
--Adhering to methodologies in areas such as configuration
management, cost and schedule estimating, and contract
management;
--Reducing the burden from oversight organizations;
--Simplifying the budget process; and,
--Initiating the testing of the business rules engine on CADE.
Question. How much more is needed to complete this effort and
modernize IRS's outdated systems and processes and is the fiscal year
2005 budget request consistent with that projection?
Answer. It is virtually impossible to estimate how much more is
needed to complete the modernization effort and modernize IRS's
outdated systems and processes. There are just too many unknown
variables at this time. The IRS has a BSM Expenditure Plan in the
approval process that includes a proposal on how it plans to allocate
the $285 million in the administration's fiscal year 2005 budget
request for the BSM program. This is the first time that the Business
Systems Modernization Office (BSMO) has forecast so far ahead in an
Expenditure Plan. The purpose of providing a 2-year plan is twofold.
First, the goal is to provide key stakeholders with a comprehensive
understanding of the sequencing of activities and to show the impact of
changes to the plan across multiple years. Second, the objective is to
provide enough information in advance so that funding for future fiscal
years can be made available earlier in the fiscal year. The IRS will
provide an updated BSM fiscal year 2005 Expenditure Plan in the summer
of 2004, reflecting any adjustments made during the upcoming months.
A key component to delivering on the challenge of modernizing
America's tax system is for the IRS to establish credibility with key
stakeholders that it is identifying and addressing barriers to
achieving business modernization success, and to show its constituents
that it can and will get modernization done ``right.'' The IRS must
gain the trust of its stakeholders by consistently delivering systems
on time and within budget, and significantly improving its
productivity, quality, and effectiveness in building modernized
systems.
Getting modernization ``right'' means building systems that meet
the business needs of tax administration, while delivering tangible
benefits to taxpayers. The right balance of IRS business leaders are
now engaging with the modernization technology team to help determine
how to best apply technology in order to improve service to taxpayers,
support enforcement activities, and improve compliance.
Sharing leadership roles requires clarifying responsibilities,
empowering managers with decision making authority, and holding
individuals (both contractors and employees) accountable for delivering
measurable results on time and within budget. The IRS has implemented
processes and procedures to enable and enforce accountability, such as
establishing a governance structure, clearly defining roles and
responsibilities, and defining project milestone requirements.
Scope growth and unresolved issues can easily derail the best laid
plans for developing and implementing large, complex, high-risk
systems. The IRS resized the business systems modernization project
portfolio, adopted policies to support the prompt escalation of issues,
and reached an agreement to significantly control discretionary change
requests. Maturing management processes, strategically driven business
requirements, and improved project life cycle methodologies will define
and drive the modernization initiative going forward.
The IRS has placed an emphasis on increasing the timeliness and
accuracy of BSM communications to ensure that key stakeholders are well
informed of program goals and the status of projects against schedule
and cost targets.
There is much more work to do, but the Commissioner is committed to
modernizing the IRS's archaic computer systems. While progress to-date
has been decidedly mixed, the IRS owes it to taxpayers to stay the
course and put a solid foundation in place upon which the IRS can build
for decades to come.
Question. Please provide an update of all core systems being
developed. In the update, please provide the original estimated cost of
each program, the current cost estimate, the original estimated date of
completion and the new completion date.
Answer. Response is combined with the response to the subsequent
question.
Question. Please provide a list of any core system of the BSM
program that the IRS has delivered on time and within the original
budget estimate?
Answer. The IRS and PRIME have not delivered any BSM projects on
time and within the original budget estimate. The following describes
the major projects and includes a table detailing cost and schedule
variances to date.
Modernized e-File (MeF)
Modernized e-File Release 1.0, which provides electronic filing for
the first time ever to large corporations and tax exempt organizations,
went live in February 2004. MeF provides 53 forms and schedules for
1120/1120S (corporations) and 990 (tax exempt organization) e-filing.
It also provides the functionality to support those forms including:
--applicable interfaces;
--validation;
--retrieval and display options;
--the capability for large taxpayers to file using the internet; and,
--the capability to use Adobe files.
Release 1.0 has exceeded project volume for the year after only 2
months of operation. The project won the Government Solutions Pioneer
Award from Federal Computer Week Magazine (1 of 15).
Modernized e-file release 2.0 will include 36 additional forms and
schedules that are filed with Forms 1120/1120S (corporations) and 990
(tax exempt organizations). The IRS exited Release 2.0 Milestone 3
System design in March 2004. The IRS plans deployment for the summer of
2004. The IRS provides a chart listing the cost and schedule variances
at the end of this response.
E-Services
The e-Services project focuses on providing electronic account
resolution and fostering easy-to-use electronic products and services
targeted at specific practitioner segments that will inform, educate,
and provide service to the taxpaying public. In addition, e-Services
will provide electronic customer account management or Indirect Channel
Management capabilities to all businesses, individuals, and other
customers in a safe and secure manner. This project will help the IRS
move toward the Congressional goal of receiving 80 percent of tax
returns and information filings by electronic transaction, while
achieving a 90 percent customer and employee satisfaction rate by 2007.
Taxpayers who e-file will have the benefit of quicker refunds, more
accurate transaction processing, and access to an array of new
electronic services. The IRS has made noticeable improvements in the
2003 and 2004 filing seasons, with considerable improvement resulting
from a series of strategic enhancements resulting from a series of
planned releases late in 2003.
The IRS has delivered electronic services to tax practitioners, and
other third parties such as banks and brokerage firms that report
1099's. The IRS deployed all Release 1.0 and Release 2.0 initial
operations functionality by the end of April 2004, except for
Transcript Delivery System (TDS), which will be available in June 2004.
The IRS conducted additional pilot and performance testing of both
releases prior to deployment to the broad practitioner community.
The IRS fully deployed, and made available over the Internet, all
e-Services Release 1.0 products, including: registration and online
address change access for third parties and IRS employees through
secure user portals; Preparer Tax Identification Number (PTIN) online
application; interactive Taxpayer Identification Number (TIN) matching;
secure Electronic Return Originator (ERO) application process; and,
access to e-Services registration and application processes by
Modernized e-file (MeF) participants.
E-Services Release 2.0 products are now in production and available
for use by IRS staff and taxpayers, including: Application for e-Filing
(external); Electronic Account Resolution (EAR), Electronic TIN Bulk
Matching (Bulk Requests); Disclosure Authorization (DA); and
infrastructure support for outbound facsimile service. A chart listing
cost and schedule variances for the e-Services program is provided at
the end of this response.
Customer Account Data Engine (CADE)
The IRS has delayed the CADE program four times. The IRS originally
scheduled the first release of CADE for delivery in December 2001. The
IRS then rescheduled it for August 2003 and again for April 2004. The
IRS recently finalized the re-planning effort for CADE--under a fixed
price contract--and set the latest delivery date for September 2004.
While CADE is farther along than the IRS has ever been in replacing
a component of the master file, there are still major hurdles to
overcome. The CADE delays stemmed from:
--Infrastructure upgrades;
--Failure to understand the complexity and control function combined
with poor software quality during the startup of systems
integration testing; and,
--Resolution of operational and performance issues that occurred
during an initial release of the pilot.
The delivery of the CADE project is particularly important because,
for the first time, it moves taxpayer data from the outdated tape-to-
tape reels into an updated tax administration data and processing
system that can be accessed and updated in real time. Like the new
online technical infrastructure that the IRS deployed, CADE is a core
fundamental component of the modernized systems. As such, CADE is the
IRS's highest priority technology project. As of May 14, 2 weeks
remained on 2004 filing season release pilot (Reprocesses cycles 4-8
from earlier this year). The pilot has gone well. The IRS recently
signed a fixed-price contract through initial operating capability
(IOC) and has started work on the 2005 filing season release.
Integrated Financial System (IFS) Release 1
Like CADE, IFS has been plagued with schedule delays. The IRS
originally planned to deliver the majority of the first release of IFS
in October 2003, and the balance in January 2004. The IRS later
rescheduled it for April 2004. The IRS has subsequently scheduled
Release 1.0 for October 2004. Delay of the first release of IFS
occurred because of:
--The need to make technical changes to comply with the enterprise
architecture;
--The inability to resolve key design and integration issues in a
timely manner;
--Identification of the health coverage tax credit interface
requirement late in the development process; and
--Delays experienced in integration testing due to poor application
quality and interface testing issues.
IFS Release 1.0 will cover core accounting functions such as budget
preparation, general ledger, accounts payable, accounts receivable,
financial reporting, and purchasing. Problems continue to seriously
jeopardize the scheduled delivery of the first release of IFS.
The IRS is currently negotiating a fixed-price contract for October
delivery. Testing is behind schedule by 2 weeks and data conversion is
at risk within the scheduled 6-week window. The IRS lists IFS cost and
schedule variances in the chart at the end of this response.
Custodial Accounting Project (CAP) Release 1
The IRS has encountered delays on the first release of the
Custodial Accounting Project (CAP). This project provides an integrated
link between the tax administration (revenue) and internal management
(administrative) financial information. The first release of CAP will
address revenue from individual taxpayers on initial tax payments.
Later releases of CAP will address businesses and collections. CAP
delays resulted from unstable CADE and IFS interface definitions.
Additional testing time is necessary due to a much larger than
anticipated volume of data anomalies discovered during the conversion
of the data from the current individual Master File (IMF), and the time
required resolving system performance issues.
In addition, though not directly responsible for CAP delays to
date, the IRS has made some adjustments to the functionality that it
needs to have in CAP Release 1 to support the GAO financial audit, as
well as its internal accounting and management. These adjustments will
increase the cost of later sub-releases of CAP Release 1. The IRS has
now completed all testing for CAP Release 1, and is adding changes to
reflect IMF changes from the start of the 2004 filing season (Release
1.1). The IRS plans to start production, which includes the initial
load of IMF data, in mid-August.
The IRS has scheduled the completion of negotiations of a fixed
price contract for Release 1.0/1/1 for no later than the end of June.
Once those negotiations are complete, the IRS will begin negotiating a
fixed price contract for Release 1.2 (mid-year 2004 changes). The IRS
lists cost and schedule variance information in the chart at the end of
this response.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Est. Actual/Revised Initial Est. Completion Actual/Revised Est. Schedule
Project Cost Est. Cost Cost Variance Date Completion Date Variance
--------------------------------------------------------------------------------------------------------------------------------------------------------
Customer Communications (CC) $41,110,000 $46,420,000 +$5,310,000 5/31/01.................... 2/26/02 (Full Deployment).. +9 mo.
2001.
Improves communications
infrastructure, including
telephone call
management, call routing,
and customer self-service
applications.
Recent Statistics:
--68,000 calls in one
3-minute period
during initial week
--50 percent reduction
in waiting time for
assistor to answer
call
--50 percent reduction
in abandoned calls
--Number of Spanish
calls doubled
--More accurate pre-
routing of calls
Customer Relationship $9,313,000 $7,375,000 $(1,938,000) 6/30/02.................... 9/30/02 (Full Deployment).. +3 mo.
Management Exam (CRM Exam).
Provides standard tax
computation software to
Large & Mid-Sized
Business Revenue Agents.
Recent Statistics:
--Deployed to almost
4,000 Revenue Agents
--Software meets 91
percent of LMSB
requirements
--Average case time
reduced due to new
automated tax
computation
--Improved accuracy in
computing corporate
taxes
Security and Technology $33,734,000 $41,287,000 +$7,553,000 8/31/01.................... 1/31/02 (Initial Operation) +5 mo.
Infrastructure Release (STIR)
Release 1.
Internet Refund/Fact of Filing $13,509,000 $26,432,000 +$12,923,000 7/31/02.................... 9/26/03 (Full Deployment).. +14 mo.
(IR/FoF).
Improves customer self-
service by providing
instant refund status
information and
instructions for
resolving refund problems
to taxpayers with
Internet Access.
Recent Statistics:
--17.9 million
inquiries in 2003,
19.2 million to date
in 1994 (1/1/04-4/25/
04)
--32 percent of all
real time IRS
assistance calls come
from IR/FoF
--Modest reduction of
telecommunications
costs (about
$250,000)
--Every 1,000 IR/FoF
contacts eliminate
1,500-2,000 refund
assistance calls
Human Resources (HR) Connect $10,000,000 $10,200,000 +$200,000 12/31/02................... 12/31/02 (Initial N/A.
Release 1. Operation).
Delivers an enterprise
solution to allow IRS
employees to access and
manage their human
resources information
online.
Recent Statistics:
--75,000 internal
users
--Cited by
Commissioner Everson
as an enabling factor
in the redirection of
approximately 750
staff years to
enforcement
--Treasury was
selected as 2004
Computerworld Honors
Laureate for HR
Connect development
and implementation
E-Services.................... $44,045,000 $130,281,000 +$86,236,000 10/31/03................... 4/30/05 (Full Deployment).. +18 mo.
Creates a web portal and
value adding e-Services
services to promote the
goal of conducting most
of the IRS's transactions
with tax practitioners.
Recent Statistics:
--Over 57,000 PTIN
applications (W7P)
entered to date; data
entry productivity
doubled (from 8/15/03-
4/21/04)
--Over 56,000 e-file
applications to the
Third-Party-Data-
Store (TPDS) entered
to date (from 8/15/03-
4/15/04)
--Approximately 23,000
Registered (and
confirmed) User
Portal (RUP) to date
from (10/14/03-4/21/
03)
--4.7 million Bulk TIN
requests
Modernized e-File (MeF) $29,246,000 $46,303,000 +$17,057,000 ........................... ........................... +4.5 mo.
Release 1.
Provides e-filing to large .............. .............. ............... 11/3/03: Assurance Testing. 11/04/03: Assurance Testing +1 day.
businesses (1120 family) 12/22/03: Web-Filing....... 2/9/04: Web-Filing......... +7 weeks.
and tax exempt 1/9/04: Production......... 2/23/04: Production........ +6 weeks.
organizations (990
family).
Recent Statistics:
--Went live 2/23/04
--Over 30,600 returns
(1120) family accepted
as of 4/25/04
--Over 3,109
participating
Electronic Return
Originators as of 4/25/
04
Customer Account Data Engine $61,145,000 $97,905,000 +$36,760,000 12/31/02................... September 2004............. +21 mo. \1\
(CADE)--Individual Master
File (IMF) Release 1.
Creates authoritative
computations and stores
data for individual
taxpayer accounts and tax
return information; it
provides timely complete,
accurate taxpayer
information to IRS
employees.
Custodial Accounting Project $47,161,000 $119,219,000 +$72,058,000 1/31/03.................... August 2004................ 20 mo.
(CAP) Release 1.
Provides integrated,
reliable tax operations
and internal management
information to support
evolving decision
analytics, performance
measurement, and
management information
needs.
Integrated Financial System $99,870,000 $153,786,000 +$53,916,000 3/31/04.................... October/November 2004...... 7-8 mo.
(IFS) Release 1.
Modernizes IRS financial
management systems by
providing a single
general edger for
custodial and financial
data and a platform to
integrate core financial
data with budget,
performance, and cost
accounting data.
Customer Account Management $57,578,000 TBD \2\ TBD \2\ 10/31/04................... TBD \2\ (Initial Operation) TBD. \2\
(CAM) Release 1.
Delivers an enterprise
solution to support
access to tax account
data, contact management,
case management, outbound
correspondence
management, and workflow
management.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ CADE, CAP and IFS project schedules are currently under review.
\2\ CAM project work suspended following completion of preliminary design activities ($15,452,000 expended). No further work planned until at least
fiscal year 2005.
Source: GAO analysis of IRS data contained in Business Systems Modernization (BSM) Expenditure Plans.
Question. The budget contains an initiative related to Private
Collection Agencies. Please provide some detail justifying this
initiative.
How will taxpayer privacy rights be protected?
Answer. Private Collection Agencies (PCAs) will be required to
comply with all taxpayer protections with which IRS employees are
required to comply, including the provisions of RRA98, and 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.
--PCAs will be required to comply with the Fair Debt Collection
Practices Act.
--Under the proposal, taxpayers would be permitted to seek damages
from PCAs and their employees who violate the protections
provided.
--The IRS will approve PCA operational plans that will detail the
actions a PCA will take to resolve IRS accounts.
--The IRS will establish an oversight group with responsibility for
managing case referrals, monitoring and evaluating PCA
performance against the approved operations plan, and reviewing
and approving PCA actions.
--The IRS oversight function will use live phone monitoring, recorded
phone monitoring, review of PCA systems for adherence to
operation plans, and on-site reviews to ensure taxpayer rights
are fully respected.
Question. The IRS implemented a similar pilot program in 1996. What
lessons were learned from that pilot?
Answer. Implementation Period.--The IRS was required to implement,
almost from scratch, the pilot program within the year of the
appropriation legislation.
--Funding.--The pilot program was funded from the IRS's Tax Law
Enforcement appropriation.
--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.
--Selection of Accounts.--The pilot program required the IRS to place
accounts where the IRS had previously made attempts to collect.
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.
--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 debts had to be returned by the PCAs to the IRS due to the
PCAs' inability to respond to often-straightforward questions
about a taxpayer liability.
--Contract Structure.--The pilot program involved a fixed-price
contract with incentive payments.
Question. Have those lessons been implemented in the new
initiative?
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 this proposal addresses those
issues, are set out below.
--Implementation Period.--In contrast, this proposal has been
developed over the past 2 years and has involved discussions
between the IRS, Treasury Department, Office of the National
Taxpayer Advocate, Department of Justice, and prospective
contractors. Moreover, even if authorizing legislation were
enacted in the next 6 months, this proposal contemplates that
an additional ramp-up period of over a year would be required
before the PCA program could begin. This additional time would
be required 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 conducted in 1996/1997 was funded from
IRS's Tax Law Enforcement appropriation. Funding in this manner
resulted in a net reduction to the IRS compliance resources. In
contrast, the administration's proposal to fund PCA activities
from proceeds would allow PCAs to supplement, not displace,
existing IRS resources.
--Processing and Communications.--The IRS will invest in modernized
Collection Decision and Inventory Management Systems to ensure
the successful integration of PCA activities into the IRS
collection process.
--Selection of Accounts.--The IRS, under the administration's
proposal, would focus on ensuring that the outstanding
liabilities referred to PCAs are those that not only are within
the authority of the PCA to resolve but also represent cases
with the greatest likelihood of payment if a PCA were to handle
the liability.
--Taxpayer Information.--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, 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 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
IRS oversight of the PCAs participating in the program. This
IRS oversight would ensure that procedures are followed, and
that any issues are identified and resolved early.
Question. How much outstanding tax debt owed to the Federal
Government is likely to be collected if this initiative moves forward?
Answer. The Treasury Department has estimated net revenue will
total $1.5 billion over 10 years. The gross revenue collected in the
Treasury calculations is $1.9 billion over 10 years.
Question. The Customer Account Data Engine (CADE) is the
centerpiece of the modernization effort. It holds the promise of moving
the IRS from the tape driven system of the 1960's to a modern reliable
database.
What needs to occur to make this plan a reality for the IRS?
Answer. As you have so appropriately noted, the delivery of the
CADE project is particularly important because--like the new online
technical infrastructure that the IRS deployed--CADE is a core
fundamental component of the modernized systems. As such, CADE is the
IRS's highest priority technology project.
The first release of CADE is scheduled for delivery in September
2004. The IRS has 2 weeks remaining on the fiscal year 2004 filing
season release pilot. The pilot has gone well. The IRS is scheduled to
go into initial production operation sometime in July or August under a
fixed price contract through initial operating capacity.
Question. What has caused the 30-plus month delay in the delivery
of Phase 1 of this system?
Answer. The CADE delays stemmed from infrastructure upgrades,
initial poor software quality during the startup of systems integration
testing combined with the failure to understand the complexity of
balance and control, and the resolution of operational and performance
issues that occurred during Phase 3 of the Release 1.0 pilot.
Question. Why has the estimated cost gone from $61,145,000 to
$97,905,000? When can the committee expect a delivery of Phase 1? What
is the IRS doing to control the massive cost increases to this system?
Answer. CADE Cost Overrun (from the original estimate of
$61,145,000 to $97,905,000).--The description below explains the costs
that GAO reported in their Audit of the fiscal year 2004 Expenditure
Plan:
Design Work from September 2000 to July 2001
$15.3 million--initial estimate in March 2000 Expenditure Plan.
$19.3 million--actual cost.
$4.0 million--variance due to design period being extended by 3
months to add detail in some areas and to bridge to Development.
Development Work from July 2001 to March 2004
$40.0 million--initial estimate in March 2001 Expenditure Plan.
$53.6 million--actual cost.
$13.6 million--$9.3 million of the variance was due to a 2-month
extension for a Pilot using real tax returns (cost of $5.3 million) and
the addition of capacity at the Martinsburg Computing Center to support
Development and Testing (cost of $4.0 million). The remaining variance
of $4.3 million was due to incurring the cost impact of delays (see
first two items outlined below).
Cost Impact of 2-Year Delay in Delivering CADE
$2.4 million--hiring of non-PRIME contractors to support IRS
testing.
$1.9 million--establishing a CADE Program Office (work to build an
organizational framework to support multiple CADE releases
simultaneously).
$18.0 million--cost to apply tax law and other changes for 2003 and
2004 filing season.
These costs do not reflect any changes since the GAO audit of the
fiscal year 2004 Expenditure Plan.
Question. Please provide the committee with an update of the
review.
Answer. The IRS used the results from independent studies
commissioned during the summer of 2003 to create a BSM Challenges Plan
comprised of 40 some action items. Given the strategic importance of
the plan, the Commissioner appointed an IRS business unit deputy
commissioner to oversee the implementation of the plan.
As a first step, the BSM project team developed a crosswalk to
ensure that the BSM Challenges Plan's definition of the issues
addressed and/or satisfied all of the recommendations from the four
commissioned studies as well as the recommendations submitted by the
IRS Oversight Board, and the Software Engineering Institute (SEI) study
of CADE.
While the deputy commissioner made significant progress in
implementing the plan, the full closure of all actions items was
unrealistic within the elapsed timeframe of the 6-month appointment.
Concurrently, the CIO created a new direct report position for
modernization management and assigned responsibility for implementing
the plan to the individual recently hired into this newly created
position.
Under the leadership of the deputy commissioner, the IRS and CSC
team brought closure to several key actions items, including:
clarifying the roles of committees as advisory, identifying
``blockers'' on contracting issues, appointing business leaders to each
project, establishing a risk-adjusted schedule and new baseline for
CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews
with the business owner to twice monthly. The majority of the action
items are still works-in-progress, some of which will take time to
fully complete. Others will span the life of the BSM program.
For example, strengthening systems engineering capabilities by
hiring external candidates will take time since it involves conducting
the searches, interviewing the candidates, and negotiating the new
hires to come on board. The IRS and CSC developed ground rules for
escalating issues, but they will need to be continually enforced
throughout the life of the program. The IRS rewrote the charters of the
governing committees to reflect their advisory role and clearly
articulated their responsibilities, however, it will probably take a
year to truly evaluate and measure their effectiveness.
As stated, the IRS has made progress toward closing all the action
items, but it has much more work to do in critical areas. For example,
the IRS needs to religiously follow the proper methodologies and hold
people accountable if they do not. The IRS must start ``doing things
right'' as opposed to ``doing things fast'' such as exiting milestones
prematurely. An ongoing challenge will be balancing the scope and pace
of projects consistent with capacity, ensuring that the right people
are in place before launching a project, and setting realistic delivery
schedules and cost estimates. The IRS is committed to staying-the-
course and delivering on its promise to modernize America's tax
systems, but it is important for everyone to acknowledge this is a
monumental effort.
The magnitude and evolution of the BSM program dictates that the
IRS will always be going through an evolution of assessment and
improvements. In that regard, the BSM Challenges Plan is still evolving
and the IRS is using certain action items to continuously improve the
program.
Question. What changes need to be implemented to get this mission
critical system back on track?
Answer. As a result of missing CADE and IFS key deliverables last
summer, the Commissioner and CSC commissioned external assessments
studies from outside experts. The studies produced no major surprises;
but the IRS now understands more about the issues. All of the
assessments confirmed that the IRS modernization effort is a massive,
highly complex, high-risk program that is confronting a number of
critical management and technological challenges. These studies also
made it clear that the IRS should not turn back, but rather make a
series of changes to strengthen the BSM program.
While all of these studies assessed different components of the
modernization program, three major recommendations emerged including:
--Scaling back the modernization portfolio to better align with IRS
and CSC's capacities;
--Engaging IRS business units to drive the projects with a business
focus; and
--Improving contractor performance on cost, scheduling, and
functionality.
The assessments also raised a number of other key improvement
opportunities, including:
--Adding outside expertise to help manage the program and to
complement IRS skills;
--Strengthening our human resources capacity management;
--Adhering to methodologies in areas such as configuration
management, cost and schedule estimating, and contract
management;
--Reducing the burden from oversight organizations;
--Simplifying the budget process; and
--Initiating the testing of the business rules engine on CADE.
The Software Engineering Institute (SEI) will periodically review
the CADE program, and a third party (MITRE) will regularly assess the
overall health of the modernization program reporting directly to the
CIO.
The IRS committed to scaling back the modernization efforts to
better match its management capacity as well as the PRIME's, and to
focus on the most critical projects and initiatives. The IRS reduced
the size and scope of the modernization program considerably, and has
initially developed a human resource capacity planning model to help
ensure the right people, with the right skills, are dedicated for the
right amount of time to each IT project it undertakes.
The Commissioner is holding IRS senior business unit managers
accountable for the success of modernization efforts as it relates to
defining, developing, and controlling business requirements. For
example, the involvement and leadership of the Deputy Commissioner for
Wage and Investment played a key role in the successful delivery of
Modernized e-File.
It was evident that CSC, as the PRIME contractor, needed to
significantly improve their performance. While CSC has improved their
performance somewhat, delays and cost increases persist, as evidenced
by the continual delays in delivering CADE, IFS, and CAP. As a result,
the IRS will expand the competition for the new enforcement projects
that it plans to start later this year and next year. The IRS is also
moving to capped or fixed price contracts for development work to
balance the financial risk between the Government and the contractor in
modernization projects.
The IRS needs a more versatile team of seasoned executives to
provide long-term stability to the program. It is complementing the
skills of experienced IRS tax executives with outside seasoned
technology executives who have experience managing large-scale, complex
IT projects. As such, the IRS is hiring two Associate Chief Information
Officers to join the MITS organization, and an executive search firm is
conducting searches for five senior executives with a wide range of
diverse experience in developing and implementing large modernization
systems.
The IRS has placed an emphasis on increasing the timeliness and
accuracy of BSM communications to ensure that key stakeholders are well
informed of program goals and the status of projects against schedule
and cost targets.
There is much more work to do, but the IRS is committed to
modernizing its archaic computer systems. While progress to-date has
been decidedly mixed--the IRS owes it to the taxpayers to stay-the-
course and put a solid foundation in place upon which the IRS can build
for decades to come.
Question. The committee understands that the E-Services program is
expected to be fully operational by fiscal year 2005. Is this program
still on schedule? What has occurred to make this project cost go from
$44,045,000 to $130,281,000? Why is it 18 months behind schedule?
Answer. The IRS has achieved a great deal of success with the e-
Services project. The IRS has delivered electronic services to tax
practitioners, and other third parties such as banks and brokerage
firms that report 1099s. The IRS deployed all Release 1.0 and Release
2.0 initial operations functionality by the end of April 2004. The IRS
conducted additional pilot and performance testing of both releases
prior to deployment to the broad practitioner community. The response
has been extremely positive.
In March 2004, James D. Leimbach appeared before the Ways & Means
Oversight Subcommittee on behalf of the National Association of
Enrolled Agents (NAEA) and said, ``This new capability is truly going
to revolutionize the way we conduct future business with the IRS. The
ultimate beneficiary is the American taxpayer. We are truly amazed and
thrilled beyond description at this way of doing business with the IRS,
and we would like for you to understand why we feel as we do.''
All e-Services Release 1.0 products are fully deployed and
available over the Internet, including:
--Registration and online address change access for third parties and
IRS employees through secure user portals;
--Preparer Tax Identification Number (PTIN) online application;
--Interactive Taxpayer Identification Number (TIN) matching for
payers and/or authorized agents who submit any of six
information returns subject to backup withholding (Forms 1099-
B, INT, DIV, OID, PATR, and MISC);
--Secure Electronic Return Originator (ERO) application process; and
--Access to e-Services registration and application processes by
Modernized e-file (MeF) participants.
E-Services Release 2.0 products are now in production and available
for use by IRS staff and taxpayers, including:
--Electronic Account Resolution (EAR);
--Electronic TIN Bulk Matching (Bulk Requests);
--Disclosure Authorization (DA); and
--Infrastructure support for outbound facsimile service.
Statistics gathered as of May 13, demonstrate that the e-services
program is providing important benefits for taxpayers and tax
practitioners:
--No. of Individuals registered=24,000;
--No. of Individuals changing address during registration=3,000;
--No. of Interactive TIN Match requests=221,000;
--Bulk TIN Requests=4.7 million.
There were five main causes for the schedule delays and cost
increases from $44,045,000 to $130,281,000.
Budget Omission for Infrastructure Functionality/Acquisition ($8-9
million).--The original project budget failed to consider the
integration of the e-services application with the modernized
infrastructure or budget for the acquisition of specific hardware or
software to support e-Services development and production environments.
Extended Testing and Infrastructure Integration ($15-17 million).--
The quality of the software that CSC and Unisys delivered to the IRS
for e-Services was lower than anticipated and the time it took to
resolve each of the errors took longer than anticipated. In addition,
there was a series of actual integration issues between the application
and the infrastructure that were greater in number and took longer than
anticipated to resolve.
Modernized e-file 1040 e-file support ($4-6 million).--In reviewing
the proposed design for the Modernized e-file project, it was
discovered that the project plan called for a system that would not be
multifunctional. The IRS developed an alternative plan to expand e-
Services functionality to provide these services for Modernized e-file
in a manner that was consistent with the Enterprise Architecture, which
describes the business and information systems and technical
infrastructure that are both in place (Current) and planned (Target).
In addition, the Enterprise Architecture defines the architectural
strategies to be followed and prescribes standards and technologies to
be used.
IRS Initiated changes including filing season changes ($8-10
million).--Due to the fact that it took longer than anticipated to
build the e-Services system, the IRS made a number of significant
changes to ensure that the e-Services system was consistent with filing
season requirements and current production changes.
Extension of MS5 and a misestimate of MS5 costs ($45-48 million--
increased estimates for costs through 9/30/05).--Because the e-Services
project ran over cost and schedule estimates, the IRS deployed the
project using version 8.1 Peoplesoft, CRM. Peoplesoft will stop
maintenance of this version of the software in 2005. The IRS must
upgrade the production system to conform to latest Peoplesoft CRM 8.8
release. Due to the complexity of the upgrade, the BSM program had to
make the changes before turning it over to ITS for operations and
maintenance. The BSM program was originally scheduled to turn the e-
Services project over in May 2004. The program will now be maintaining
and upgrading the system a year longer, until May 2005.
Question. Of the ten computer modernization projects ongoing as of
September 2003, nine are currently over their original cost estimate by
a total of $292,013,000.
What needs to occur for the IRS to better monitor the escalating
costs of these systems?
What types of oversight does the IRS provide over the contracts for
development and acquisition of these projects?
Answer. The IRS is currently putting in place several control
mechanisms for Contractual, Enterprise Life Cycle, Earned Value
Management, Performance and Cost and Schedule Estimating that directly
address the estimate overruns. In particular, the IRS is enacting
methodologies that will eliminate future ``escalating costs.''
The IRS has been working jointly with MITRE and CSC (the PRIME
Contractor) to improve cost and schedule estimating capability. The IRS
is using the well-recognized Carnegie Mellon Software Engineering
Institute's (SEIs) Requisites for Reliable Estimating Processes as a
guide. The requisites provide for development and execution of the
following key cost and schedule estimating objectives:
--Maintaining historical data;
--Structured estimating processes;
--Mechanisms for extrapolating estimates from successful past
projects;
--Audit trails; and
--Ensuring integrity in dealing with dictated costs and schedules.
Both CSC and the IRS have made significant progress towards
achieving these key objectives. The IRS has implemented procedures for
validating contractors' estimating systems and for reviewing cost and
schedule estimates. The procedures provide guidance for evaluating
reliability of documentation supporting individual estimates and for
tracking compliance with sound estimating practices. Furthermore, the
procedures also address professional development of personnel with the
right skill set for developing and evaluating cost and schedule
estimates. CSC has established a historical database, calibrated
estimating models and developed detailed requirements for documenting
and supporting bases of estimates along with related guidance and
directives. Work is also in progress for continuing refinement and
improvement in each of these elements.
In addition, joint training is being conducted for IRS, CSC and
MITRE personnel as an integral part of the overall plan to ensure
competent deployment of improved processes and procedures. The IRS,
with MITRE's assistance, recently completed a review of CSC's
estimating system. The IRS is finalizing the results and will issue
them in a report in the latter part of June. In general, there have
been improvements. The report will include a time phased corrective
action plan for addressing deficiencies. To ensure the tools, guidance,
processes and procedures are part of a mature repeatable process, a
concerted effort is underway to fully validate all aspects of the
processes and procedures prior to official roll-out within the IRS.
This pilot program is intended to verify the soundness of the processes
and procedures and provide lessons learned, before full implementation
is effected.
Every effort is being made to hire qualified staff and fully
implement improved tools, guidance, processes and procedures as soon as
possible. However, this is taking more time than the IRS would like.
This is a pervasive problem on programs of the size and complexity of
the modernization initiative. Nonetheless, the IRS believes that there
will be evidence of increased accuracy by the end of fiscal year 2004
and continued improvements over time.
Finally, all of these efforts are part of a highly visible set of
plans geared to identifying, tracking, reporting, and reviewing the
critical cost and schedule estimating commitments with IRS Executive
Management and GAO/TIGTA.
The following initiatives have been implemented (or are pending) to
improve performance in the other areas:
--Application of Performance-Based Contracting (PBC) Techniques.--
Applying performance-based contracting techniques and
leveraging lessons learned enhances the IRS's ability to
proactively establish expectations for and manage the PRIME
contractor's performance.
--Determination of Task Order for Acquiring Modernization Systems.--
To further improve modernization controls and capabilities, the
IRS has established and is implementing a process for
determining the type of task order to be awarded when acquiring
modernization systems. The IRS issued a policy stating that
contracts and task orders for the BSM projects in Milestones 4
and 5 (development and deployment) will be fixed price, as
appropriate. This type of task order will shift most or all
risks from the IRS to the PRIME.
--Implementation of Fixed Price Contracting Policy.--The IRS's
Contracting organization and the Enterprise Life Cycle program
are developing a joint approach to implement the fixed price
contracting policy.
--Identification of Issues and Tracking Progress.--The IRS is making
use of Earned Value Management, Program Performance
Measurements, and a sophisticated electronic analysis and
reporting mechanism (the Dashboard) to track progress, identify
variances early, and facilitate escalation of issues early in
the life cycle.
--Development of Metrics.--Finally, the Program Performance
Management Office (PPMO) is developing efficiency and outcome
metrics to:
--decrease contracted program variances,
--decrease requirements volatility, and,
--increase contracted requirements delivery.
These metrics support program management effectiveness, and provide
the ability to assess achievement of program performance goals relative
to cost, schedule, requirements scope, and requirements delivery.
FUEL TAX EVASION
Question. The Federal Highway Administration (FHWA) Motor Fuel Tax
Evasion Project supports Federal and State efforts to enhance motor
fuel tax enforcement. The program was established by the Intermodal
Surface Transportation Efficiency Act of 1991 (Public Law 102-240) and
continued under the Transportation Equity Act for the 21st Century
(TEA-21) (Public Law 105-178).
Since 1998, the Department of Transportation has provided the
Internal Revenue Service (IRS) $31 million from Highway Trust Fund
revenues to enhance motor fuel tax enforcement, primarily by developing
and operating an automated excise fuel tax reporting system, the Excise
Fuel Information Reporting System (ExFIRS). The administration's
proposed Safe, Accountable, Flexible and Efficient Transportation
Equity Act (SAFETEA) of 2003 includes $163 million for the IRS through
fiscal year 2009, and the Surface Transportation Authorization bill as
passed by the Senate proposes about $300 million.
The IRS has been struggling to modernize its automated systems. For
example, the committee has been told that Commissioner Everson excluded
one contractor from a project to update the IRS's tax enforcement
systems after learning the contractor would miss an April deadline for
putting in a new general ledger accounting system.
How is ExFIRS currently being used to enhance motor fuel tax
enforcement and what are its capabilities? Is the system fully
operational and functioning as envisioned? If not, what is needed to
complete the systems development effort?
Answer. ExFIRS is an umbrella system made up of several subsystems/
modules that support the collection of motor fuel industry information,
support automated analysis of this information, and help identify areas
with the highest risk for non-payment of excise tax liabilities
(therefore offering higher potential for return on investigative and
enforcement activities). The most important of the subsystems is the
Excise Summary Terminal Activity Reporting System (ExSTARS), which
tracks all petroleum movements, in and out, through approved terminals,
and captures information that the IRS shares with State taxing
agencies.
ExSTARS is the information reporting system that was designed
similar to the IRS 1099 matching system that matches information
received from employers, financial institutions and other businesses
with information reported by taxpayers. It enables the IRS to track all
reported fuel transactions that occur within the fuel industry's bulk
shipping and storage system. It provides tracking capabilities of fuel
from the pipeline/barge delivery system to the point of taxation for
the Federal Excise Tax at the terminal. This information is then
matched by the IRS to fuel sales transactions reported by taxpayers and
to verify their tax liabilities reported on the quarterly Forms 720.
ExSTARS was operational on April 1, 2001. However, the large volume
of paper returns filed each month has hampered the maximum use and
benefit of the system. ExSTARS requires information reporting from over
1,400 terminals registered to transact fuel sales in this country, as
well as the pipelines and barge carriers that transport the fuel from
the refineries to the terminals. The IRS receives information reports
on 10 to 14 million fuel transactions monthly. Approximately 70 percent
of these are filed electronically. Working with the remaining 30
percent filed on paper documents is both impractical and cost
prohibitive. Senate Bill S. 1072, the Safe, Accountable, Flexible, and
Efficient Transportation Equity Act of 2004 (SAFETEA), would require
electronic filing of any return containing more then 25 transactions,
as proposed in the administration's SAFETEA bill. This legislation, if
passed, will greatly enhance the tracking capabilities of ExSTARS.
ExFIRS includes a Data Warehouse module that interfaces with
ExSTARS. This module uses the information reported in ExSTARS, on the
distribution of fuel, to match against the reported amounts on
taxpayer's 720 Excise Tax Returns. ExFIRS also includes legacy systems
that the IRS used to track and monitor compliance in the motor fuel
area. The Excise Tax Registration Authentication System (ExTRAS)
contains the monitoring system for the registration program of
taxpayers allowed to carry on tax free transactions within the fuel
distribution system. The Excise Fuel On-line Network (ExFON) is the
management information system used to monitor the Dyed Fuel Program.
The IRS included these systems in the ExFIRS Program because they are
an integral part of the motor fuel tax program and must be included in
the IRS's tracking of activities that impact compliance in this area.
The funding for the update and enhancement of these systems came from
IRS operating funds. These systems have been operational for several
years and the updated versions are in place and operating within the
ExFIRS Program. The Excise Tax Agent Work Center (ExTAC) is an
automated work center that will enable IRS Excise Tax Agents to receive
tax returns in electronic format and to conduct examinations in an
automated environment. ExTAC is a part of ExFIRS and will receive
information from the system to assist in the examination of returns.
ExTAC was funded by the IRS and is currently a working prototype
version. The system will be in full production and used by agents by
the end of the first quarter of fiscal year 2005.
Question. Given the problems IRS has experienced fixing its other
automated systems, what reasonable assurance can you provide this
committee that taxpayers are getting a good return on their investment
in ExFIRS and that the project is being properly managed?
Answer. In 1998, Congress passed the Transportation Equity Act for
the 21st Century, requiring the IRS to develop a fuel tracking system.
This act required the IRS to use an outside contractor for the
development and maintenance of the system. The IRS has met this
requirement, and is using Software Engineering Institute (SEI) CMMI
Level 2 development processes to manage the development efforts of the
contractor and subcontractor personnel in order to ensure a continuous,
uninterrupted, integrated approach to the development, installation and
implementation of the ExFIRS subsystems.
As stated above, the ExSTARS module of ExFIRS was operational April
1, 2001. The design and development of this system was a joint effort
between the IRS, industry and the States. The IRS is using the system,
but the ability to date to maximize the effectiveness has been limited
by two factors.
Due to the high volume of paper returns that contain thousands of
individual transactions, the IRS only captures summary information from
paper returns. This limits the IRS's ability to meet the goal of
matching ExSTARS information to filed Excise Tax returns.
The filing requirements for ExSTARS required a significant
investment for the fuel industry and at the time of ExSTARS becoming
operational, some companies were not fully prepared to meet all of the
filing requirements. Since April 1, 2001, the IRS has worked closely
with industry filers to ensure accurate and timely filing of the
information returns required for the operation of ExSTARS. The IRS
formed a Data Perfection Team composed of IRS personnel along with
outside contractors to work with and assist individual companies meet
their filing requirements. Although the IRS has made great progress
this area, some companies are still experiencing problems. The IRS has
made a decision to continue to work in a cooperative manner with all
companies that demonstrate a desire to address their problems and come
into compliance with the ExSTARS filing requirements.
The IRS is using the system today. It has the ability to track the
movement of fuel in all States--but within the limitations of the
problems outlined above. If the issue of paper returns is addressed,
the IRS will be able to match individual filers to the ExSTARS
database. This will enable the IRS to better determine where to
allocate its enforcement resources to combat fuel tax non-compliance.
This same information will allow States that have the same tax point as
the Federal Excise Tax to ``piggyback'' on this data to enhance their
own compliance efforts.
On the question of the return on investment to the American
taxpayers, one needs to look at the effectiveness of information
reporting for compliance with income taxes. Matching information
received from employers, financial institutions, and other businesses
with information reported by taxpayers has long been recognized as one
of the most powerful tools that the Internal Revenue Service has used
to ensure income tax compliance. In fact, third parties report
approximately 80 percent of the personal income received by taxpayers.
Through its document matching programs, the Internal Revenue Service is
able to use this data as an effective compliance tool. The ExFIRS
Program will deliver the same effectiveness to the Excise Fuel Tax
arena. The information gathered by the ExFIRS Program will be shared
with all State motor fuel taxing agencies and will lead to increased
compliance for the States. The States will directly benefit from the
increased revenues that will be generated by a higher level of
compliance in both the Federal and State areas.
Question. How were systems requirements determined and were other
Federal and State law enforcement agencies involved in defining the
requirements?
Answer. The design, development, and implementation of ExSTARS is a
result of a working collaboration between the Internal Revenue Service,
Contractors, Federal Highway Administration, State tax administrators,
and industry stakeholders over more than a 5-year time period. A key
goal in the development process was to create a system that would
benefit State revenue agencies as well as the IRS. The system uses the
Uniform Reporting Standards developed by the States to ensure all data
is compatible with State systems. The Excise Tax On-line Exchange
(ExTOLE) module was developed specifically for use by the States.
ExTOLE allows States to exchange data that relates to motor fuel tax
issues.
Question. What is the total cost of ExFIRS to date? What is the
cost, funding, and schedule status of any development effort still
needed for the system? What is the annual cost to operate and maintain
the system?
Answer. The IRS and FhWA have provided funding for ExFIRS. The IRS
funding is used to cover the incorporation of legacy system into
ExFIRS. The two charts below show the cost to date:
FHWA ExFIRS EXPENDITURES
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Cost Categories 1999 2000 2001 2002 2003 Totals
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Distribution from FHWA...................... $9,430,000 $7,923,000 $4,479,000 $4,609,000 $4,739,000 $31,180,000
Budget Reduction from FHWA.......................... (180,000) .............. (11,000) .............. (32,500) (223,500)
Total Available for Project......................... 9,250,000 7,923,000 4,468,000 4,609,000 4,706,500 30,956,500
Contractors......................................... 6,151,747 4,237,216 3,913,663 3,938,222 2,922,850 21,163,698
Labor............................................... 517,849 943,910 ............... 114,489 ............... 1,593,948
Training............................................ 20,615 33,270 85,320 112,165 96,653 348,023
Travel.............................................. 521,052 968,000 ............... 165,000 287,610 1,941,662
Background Investigations........................... ............... 32,175 20,000 4,000 5,425 61,600
Hardware............................................ 1,871,037 772,693 89,015 108,315 271,358 3,112,418
Software............................................ ............... 769,676 146,079 13,819 918,060 1,847,634
Maintenance......................................... ............... 2,000 28,140 2,990 54,544 87,674
Criminal Investigation Division..................... 150,000 150,000 150,000 150,000 150,000 750,000
Telecom............................................. ............... 14,060 35,783 .............. ............... 49,843
---------------------------------------------------------------------------------------------------
Total Spent on Project........................ 9,232,300 7,923,000 4,468,000 4,609,000 4,706,500 30,956,500
--------------------------------------------------------------------------------------------------------------------------------------------------------
IRS ExFIRS EXPENDITURES
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Cost Categories 1999 2000 2001 2002 2003 Totals
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Request from IRS........................... $2,510,000 $2,101,000 $3,758,000 $5,204,000 $9,106,000 $22,679,000
Budget Reduction from IRS.......................... (92,338) .............. (1,037,469) (3,406,000) (7,220,000) (11,755,807)
Total Available for Project........................ 2,417,662 2,101,000 2,720,531 1,798,000 1,886,000 10,923,193
Contractors........................................ 1,173,062 2,077,039 2,720,531 1,319,000 1,886,000 9,175,632
Labor.............................................. ............... .............. ............... ............... ............... ...............
Training........................................... ............... .............. ............... ............... ............... ...............
Travel............................................. ............... .............. ............... ............... ............... ...............
Background Investigations.......................... ............... .............. ............... ............... ............... ...............
Hardware........................................... 967,462 8,000 ............... 62,000 ............... 1,037,462
Software........................................... 149,998 15,961 ............... ............... ............... 165,959
Maintenance........................................ 127,140 .............. ............... 417,000 ............... 544,140
Criminal Investigation Division.................... ............... .............. ............... ............... ............... ...............
Telecom............................................ ............... .............. ............... ............... ............... ...............
----------------------------------------------------------------------------------------------------
Total Spent on Project....................... 2,417,662 2,101,000 2,720,531 1,798,000 1,886,000 10,923,193
--------------------------------------------------------------------------------------------------------------------------------------------------------
In addition, here are spreadsheets detailing future development,
maintenance and operating cost through fiscal year 2006. Funding is
provided each year to assist the IRS CI in their efforts on motor fuel
issues.
ExFIRS SUPPORT CONTRACTOR COST ESTIMATES BY FISCAL YEAR
[In thousands of dollars]
------------------------------------------------------------------------
Fiscal Year Fiscal Year Fiscal Year
ExFIRS SW Develop/Enhance/ 2004 Oct 2005 Oct 2006 Oct
Maint Via TIPSS Type Contract 2003-Sep 2004-Sep 2005-Sep
2004 2005 2006
------------------------------------------------------------------------
ExFON Dev/Maint/Enhancement 700.8 790.4 160.0
(includes Legacy Maint, New
ExFON Dev In Web Envir and
Data Migration)..............
ExSTARS Dev/Maint/Enhancement 2,945.0 1,594.2 400.8
(includes Maint of ExSTARS 1
and Dev/Maint of ExSTARS 2)..
ExTRAS Dev/Maint/Enhancement 80.0 372.8 160.0
(includes legacy maint and
development in Web
environment).................
BTRIS Dev/Maint/Enhancement 424.0 1,118.2 225.0
(includes maint of current
BTRIS and development of the
Analyst Module)..............
ExCIDS Dev/Maint/Enhancement 190.6 1,182.7 120.0
(includes devel of case mgt
and workflow modules)........
ExTAC Dev/Maint/Enhancement 770.8 691.2 320.0
(includes maint of current
system, development of GM
module, and migration to Web
environment).................
ExTOLE Maint/Enhancement 80.0 160.0 120.0
(includes maint of current
system and development of
enhancements called out in
SOW).........................
ExMIS Dev/Maint/Enhancement 546.0 597.1 120.0
(includes DW and ExCIS maint
and analysis/reporting
enhancements)................
Common Costs Associated with 2,466.2 2,476.1 1,866.4
all Subsystems (includes Prog
Mgt, Sys Engr, CM, QA,
Testing, SEI/CMM, Security,
Subcontract Mgt, travel
expenses, etc.)..............
Infrastructure Costs--See 3,779.0 3,789.0 3,568.0
Infrastructure sheet
(includes SW/HW Upgrades/
Migrations, Tier 2 and
Modernization Requirements,
COTS and SW Licenses/
Maintenance, Technology
Advancements, Service Center
Support, etc.)...............
-----------------------------------------
Subtotal................ 11,982.4 12,771.7 7,060.2
-----------------------------------------
FhWA Funding at Current Rate.. 4,200.0 4,200.0 4,200.0
Projected Need................ 7,782.4 8,571.7 2,860.2
IRS Funding Allotted.......... 4,959.0 4,250.0 3,453.0
Funding Shortfall............. 2,823.4 4,321.7 -592.8
------------------------------------------------------------------------
ExFIRS INFRASTRUCTURE COST ESTIMATES BY FISCAL YEAR
[In thousands of dollars]
------------------------------------------------------------------------
Fiscal Year Fiscal Year Fiscal Year
ExFIRS Infrastructure 2004 Oct 2005 Oct 2006 Oct
Estimates 2003-Sep 2004-Sep 2005-Sep
2004 2005 2006
------------------------------------------------------------------------
Annual COTS Licenses, Yearly 656.0 637.0 668.0
Maintenance and New User
Licenses (Oracle,
Informatica, Paper Free,
Mecator, Business Objects,
MapInfo, FileNet, Ventica)...
ExFIRS SW Migrations for New 924.0 236.0 970.0
RDBMS/OS/COTS (Oracle/Sun/
NT). Major migration every
other year (even years)......
Tier 2 Requirements (New CM 231.0 243.0 100.0
tool, additional security,
move to Tier 2 infrastructure
and web page compliance--
508J)........................
ExFIRS Harware Migrations 236.0 892.0 248.0
(production, development, and
test servers/user desktops,
laptops and handheld devices/
gateway firewalls and routers/
technology upgrades). Major
upgrade every other year (odd
years).......................
ExFIRS Service Center Expenses 982.0 1,031.0 1,082.0
(SA/DBA personnel and
training covered by SLA--9.9
staff years).................
Other ExFIRS Expenses (SW 750.0 750.0 500.0
upgrades for technolgy
advancements, new user
functionality and IRS
modernization initiatives)...
-----------------------------------------
Subtotal................ 3,779.0 3,789.0 3,568.0
------------------------------------------------------------------------
Question. What benefits does FHWA derive from the system? Does IRS
believe FHWA receives satisfactory return on investment from the
system?
Answer. Tax receipts deposited in the Highway Trust Fund Account
totaled $35.2 billion in fiscal year 2003, of which $30.2 billion went
to the Highway Account and $5 billion to the Mass Transit Account. As
described above, the ExFIRS Program will enhance fuel tax compliance
directly impacting the FHWA's mission. In addition, the FHWA will be
able to use data from the system in its own planning process. Just
recently the IRS met and provided summary data to FHWA to assist in its
efforts to develop their model of State revenue sharing.
Question. Has an independent audit or review ever been performed of
the ExFIRS development effort?
Answer. ExFIRS has a requirement to operate at a minimum of
Maturity Level 2 of the SEI CMM. Yearly Process Appraisal Review
Methodology (PARM) review of the process was completed in February 23,
2004. At Technology Solutions Center a CMMI SEI Level 2 rating was
verified by independent evaluations (external SCAMPI Class A) on
February 27, 2004.
Question. Fuel tax fraud creates a drain on Highway Trust Fund
(HTF) revenues, which FHWA estimates costs at least $1 billion
annually. Department of Transportation Secretary Mineta has called
evasion of Federal motor fuel taxes ``a serious and growing problem
that requires a serious Federal response.'' The loss of motor fuel
taxes is also detrimental to State programs. The impact of these losses
is even greater coming at a time when we have experienced a reduction
in the growth of HTF revenues, while demands on highway capacity have
reached unprecedented levels, and replacement and rehabilitation costs
for aging infrastructure are rapidly increasing.
Although fuel excise taxes represent less than 2 percent of total
Federal tax revenues, they are a critical funding source for DOT
programs. Taxes on gasoline, diesel, and other fuels provide about $33
billion each year, or 89 percent of the HTF revenues used to finance
highway and transit projects nationwide. Increased tax collections mean
increased Federal revenues for funding the Nation's highways and
transit programs.
In July 2002, FHWA Administrator Peters testified before Congress
that the administration proposed to halt fuel tax evasion through ``a
vigorous and more collaborative enforcement effort by State and Federal
agencies'' and a significant increase in funding over TEA21. The
administration proposed providing $202 million for the Highway Use Tax
Evasion Project, of which $163 million would be transferred to the IRS.
What does IRS currently estimate the losses from fuel tax evasion
to be and how was this estimate derived?
Answer. KPMG, not the Federal Highway Administration, estimates
drain on the Highway Trust Fund revenues to be the $1 billion. Although
it is difficult to estimate evasion because the IRS does not know what
is not being reported, the IRS identified and is addressing critical
areas of excise tax non-compliance. These include the:
--Continuing misuse of dyed diesel fuel;
--Smuggling to evade payment of taxes;
--Cocktailing (increasing the fuel volume by mixing in other
products) to illegally reduce the effective tax rate; and
--Diverting aviation jet fuel to highway use to illegally evade motor
fuel taxes.
The IRS continues to discover misuse of dyed diesel fuel for tax
evasion purposes despite the numerous legislative and regulatory steps
Federal and State governments have taken. The 140 fuel compliance
officers (FCO) monitor 1,400 terminals, all fuel wholesalers, thousands
of retail motor fuel outlets, and U.S. border crossings. Additionally,
FCOs periodically inspect on-road vehicles on highways throughout the
country. From January 1, 2003 through December 15, 2003, FCOs have
assessed over 1,400 penalties totaling over $1,400,000 for misuse of
dyed diesel fuels. A further analysis of these results indicates that
70 percent of the penalties involved the misuse of fuel by taxpayers in
the construction and agriculture industries. Both of these industries
are subject to broad-based tax exemptions for non-highway use of motor
fuels, thereby, presenting opportunities for abuse.
Another critical compliance problem is smuggling of motor fuel.
This involves the illegal introduction of fuel into the United States
to evade payment of excise taxes. This problem may occur at border
crossing points and points of entry for ocean-going vessels. More than
9 million trucks pass through the 55 border crossings between Canada
and Mexico into the United States each year.
The IRS also has found instances of fuel smuggled into the country
by people using barges that off load from ocean-going vessels. The IRS
is involved in two investigations of barges being used to smuggle fuel;
however, it does not know the full extent of activities in this area.
These activities are extremely hard to identify due to the multitude of
locations and means smugglers may use. The Corps of Engineers has
identified over 600 locations that are not terminals but are known to
have the ability to off load fuel from barges. In addition, barges may
have portable devices that become mobile racks, providing the ability
to off load fuel at any location.
Another compliance problem is the use of adulterated fuel through
cocktailing. This technique increases profits by increasing the volume
of diesel fuel with used motor oil and other distillates including
pollutants, cleaning agents, and unfinished refinery products. This
form of tax evasion is attractive for two reasons. First, the
substances used to extend the fuel are often not regulated, so they are
not recorded in any fuel reporting system. Second, in some cases, the
substances are regulated as waste materials, providing an unscrupulous
individual an opportunity to get paid to dispose of the product(s) and
then blend them into gasoline and get paid again. This tax evasion
technique results in an ongoing revenue loss. It may also be dangerous
to the public when the taxable fuels are blended with hazardous waste.
Aviation fuel is the last interchangeable product available within
the legal fuel distribution system that is not taxed when the fuel
leaves a terminal. In any given month, hundreds of millions of gallons
of aviation fuel flow into and out of registered terminals. This exempt
removal at the rack creates incentives and opportunities to divert
aviation fuel to highway use. From fuel inspections, the IRS knows
aviation fuel is being diverted. However, the IRS does not know for
certain the amount diverted. The IRS is finding aviation fuel in small
amounts blended into normal diesel in the propulsion tanks of trucks/
tractors. Also, the IRS has found aviation fuel in larger quantities in
retail outlets through its Below The Rack compliance efforts. The IRS
has found a blend of 5 to 10 percent in most cases.
In 2002, KPMG released a report alleging that the possible loss
each year to aviation fuel diversion may exceed $1 billion. The results
from IRS internal efforts do not support or disprove an estimate of
that size. The IRS initiated an audit program to determine if it could
identify significant diversion through aviation fuel distributors
operating as 637 H Registrants. In most situations, the distributor had
the paperwork to support a tax free/reduced tax sale of the fuel. To
date, the IRS has not identified registrants with massive amounts of
fuel for which they cannot account. Due to the lapse of time between
the sale of the fuel and the audit, the IRS could not successfully
track down the ultimate users of the fuel to verify that the fuel was,
in fact, used in a proper fashion. The only way to ensure the fuel is
used properly is to track the fuel to each end user. The diversion of 1
percent of the aviation fuel that leaves the terminals in the United
States represents the loss of over $65,000,000 per year. Based on IRS's
findings in the fingerprinting test, it believes that a 3 percent
diversion is a conservative estimate. This amount of diversion would
cost $195,000,000 per year.
Dyed Fuel Misuse.--Dyed Fuel used on highways.--The IRS does not
have an exact figure that it can state as the extent of total non-
compliance for the misuse of dyed fuel. Based on penalties asserted
over the past 3 years, the IRS assesses a penalty on an average of 1
percent of the trucks it inspects on the highway and 6 percent of the
end user sites that it inspects. The IRS does not have data on the
total volume of fuel involved in each of these cases; however, these
results indicate a continuing non-compliance issue with the proper use
of dyed fuel. Based on this experience, the IRS believes that at least
1 percent of dyed fuel sold each year is diverted, resulting in loss of
tax of at least $50,000,000.
Cocktailing/Illegal Blending.--The Internal Revenue Service has
developed a ``fuel fingerprinting'' technology to combat fuel tax
evasion occurring ``below the rack''--particularly bootlegging,
smuggling, and adulterated fuel through ``cocktailing'' or blending the
product. Fuel fingerprinting is a technique that examines the
``chemical fingerprint'' of samples taken from retail stations for
adulteration or for a mismatch with samples taken from the terminal
racks that normally supply those stations. This technology allows for
the detection of untaxed kerosene intended to be used as aviation fuel,
``transmix'' taken out of pipelines, waste vegetable oils, used dry-
cleaning fluids, and other chemicals that may be mixed with diesel fuel
and find their way into the tanks of trucks on the road. Fuel
fingerprinting provides a more efficient and comprehensive method to
monitor compliance compared to traditional audit techniques. The IRS
has conducted sampling on diesel fuel in several parts of the country.
Results indicate approximately 8 percent of the diesel fuel tested has
some form of adulterant. The amount of adulterant found in retail
outlets has been in the range of 2 percent-25 percent with an average
of 8.2 percent. Using these results, the IRS estimates that there is a
minimum of $50,000,000 each year in tax loss due to illegal blending of
diesel fuel.
Due to safety issues with handling gasoline, the IRS has not
conducted fuel fingerprinting tests for gasoline. The IRS has anecdotal
information from informants that illegal blending is much more common
for gasoline then diesel. The reason given is the huge demand for
gasoline and the ease to hide the adulterants among the large volume of
fuel moving through a location. Using estimates for diesel fuel and
comparing the sale of gasoline to diesel (3 to 1), the IRS has a
minimum estimate of $150,000,000 per year for illegal gasoline
blending.
Although the IRS has evidence of fuel being smuggled into the
country, it does not have a reasonable basis for an estimate at this
time. As mentioned in the discussion of the various schemes used for
motor fuel tax non-compliance, the IRS does not have exact estimates of
the potential revenue losses. All of these schemes are outside the law
and the information is based on information the IRS has gathered
through examinations and fuel testing. The IRS believes this is a
conservative estimate and, in fact, does not include any estimation for
smuggling in these numbers. In summary, estimates for the overall loss
of revenue are as follows:
------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Misuse of Aviation Fuel................................. $195,000,000
Misuse of Dyed Fuel..................................... 50,000,000
Cocktailing of Diesel................................... 50,000,000
Cocktailing of Gasoline................................. 150,000,000
---------------
Overall Estimate.................................. 445,000,000
------------------------------------------------------------------------
Question. How is IRS working with other Federal agencies and States
to leverage enforcement resources? Since 2000, how many cases are being
jointly investigated with other Federal and State law enforcement
agencies?
Answer. The IRS has a long history of working fuel cases with its
State counterparts and, when appropriate, with other Federal agencies.
With current disclosure provisions it is difficult to jointly
investigate motor fuel cases with other Federal agencies. In the past,
the IRS has successfully worked with other Federal agencies under the
umbrella of the grand jury. Working with State counterparts is most
effective when the State has a similar point of taxation, that being at
the terminal rack.
The IRS does not have a measurement process for determining how
many cases have been worked with State or other Federal agencies. These
situations have been on a case-by-case basis with the documentation in
the case file.
Question. Who is responsible for coordinating the overall Federal
and State efforts for pursuing all fuel tax evasion-related offenses?
Answer. The Internal Revenue Service is responsible for Federal
efforts to pursue fuel tax evasion. It works in a collaborative fashion
with State agencies and other Federal agencies. In these efforts, the
IRS does not direct the resources of the other agencies; however, it
does share information that it can properly share under the existing
disclosure provisions. As stated earlier, the ability to share
information with these partners must conform with the provisions of IRC
6103 for disclosure of taxpayer information.
Question. What is the total Federal ``level of effort'' in terms of
staff and resources, being directed at these crimes?
Answer. The IRS has several programs/activities that support motor
fuel tax compliance and other taxes that support the Highway Trust
Fund. The Small Business/Self Employed (SB/SE) Division has
approximately 260 revenue agents who are excise tax specialists and
approximately 140 fuel compliance officers (FCOS). Historically, IRS's
revenue agents spend 40-50 percent of their direct examination time on
the taxes that support the Highway Trust Fund. The FCOs spend 100
percent of their time enforcing the dyed fuel laws and detecting
illegally blended fuel through its below the rack (BTR) efforts. In
addition to these employees, the IRS has approximately 50 tax examiners
that audit claims for excise tax refunds, the majority being for motor
fuel taxes. Motor fuel excise tax compliance is a priority for Criminal
Investigation (CI) and included in its fraud program along with
bankruptcy, insurance, healthcare, and other financial frauds. CI
resources are applied to this program area based on the degree of
criminal activity identified.
Question. What is the IRS's budget request for fuel tax enforcement
activities for fiscal year 2005? Please compare to funding allocated to
this area of enforcement for the past 5 fiscal years. Does IRS have any
plans to increase the number of resources devoted to this area? Should
funding for this project increase?
Answer.
COSTS FOR EXCISE AGENTS \1\
----------------------------------------------------------------------------------------------------------------
FTE Salaries Benefits Total
----------------------------------------------------------------------------------------------------------------
Fiscal year 2000........................................... 271 $59,636 $18,832 $21,264,828
Fiscal year 2001........................................... 267 61,249 19,342 21,517,797
Fiscal year 2002........................................... 285 63,451 20,037 23,794,080
Fiscal year 2003........................................... 282 65,421 20,659 24,274,560
Fiscal year 2004........................................... 252 68,103 21,506 22,581,468
Fiscal year 2005 \2\....................................... 240 69,465 21,936 21,936,240
----------------------------------------------------------------------------------------------------------------
\1\ Based on GS-13 Step 5 RUS.
\2\ Projected.
The above chart reflects the total number of Excise Agents that
worked all Excise returns. The IRS is currently evaluating the staffing
levels for fiscal year 2005 but no decisions have been made to date. In
its SAFETEA legislation, the administration proposed $54.5 million for
highway use tax evasion projects in fiscal year 2005. This funding
would enable the IRS to increase resources applied to motor fuel tax
compliance. As ExFIRS becomes a more viable system, the IRS anticipates
having improved data to determine the appropriate level of future
staffing.
Question. What is IRS's current fuel tax evasion investigative
caseload? How many staff does IRS devote to this area? Does the IRS
need to devote additional revenue agents or criminal investigators to
fuel tax evasion fraud? Why or why not?
Answer. Criminal Investigation currently has fourteen motor fuel
cases under investigation. In fiscal year 2003 the IRS devoted nine
special agent FTE and three non-special agent FTE to excise tax cases.
Criminal Investigation does not anticipate a significant increase in
resources devoted to motor fuel excise tax evasion cases because the
legislative changes enacted over the past decade have significantly
curtailed opportunities for abuse that previously existed, but CI will
commit additional resources if local or regional compliance problems
arise.
Question. How does IRS measure the success or failure of its fuel
tax evasion efforts? What indictments, recoveries, and convictions has
IRS attained as a result of their fuel tax evasion efforts? What
successes or failures have the States and other Federal agencies had in
this area?
Answer. Criminal Investigation has no formal measures to gauge the
success of its excise tax program. Ultimately, it is the impact of
successful prosecutions that ultimately determine success or failure.
During the period fiscal year 1993 through fiscal year 2003, the IRS
prosecuted 364 people for participating in schemes to evade excise
taxes. In aggregate, these prosecutions involved over $500,000,000 in
tax revenue and involved many prominent members of organized crime. CI
reported the magnitude of this effort in the excise tax case summaries
contained in their annual reports from fiscal year 1993 through fiscal
year 2001. These summaries chronicle many prominent cases and the
history of motor fuel enforcement efforts over the last decade. After
fiscal year 1997, motor fuel tax evasion case initiations began to
decline. Subsequent schemes lacked the complexity and scope previously
seen. This decline is attributable to the following factors:
--The cooperative efforts of Federal and State revenue and regulatory
agencies;
--Support from the motor fuel distribution industry and professional
associations;
--Effective criminal prosecutions;
--Development of improved auditing and compliance tools (particularly
fuel tracking systems, fuel dyeing and the on road inspection
programs; and,
--Passage of fundamental legislative changes that reduced the
opportunities for evasion.
Question. Does the IRS have a plan for achieving a more vigorous
and collaborative Federal and State effort for pursuing fuel tax
evasion? If so, please describe the plan. Does IRS see any barriers to
expanding current efforts to collaborate with other agencies on fuel
tax fraud-related investigations?
Answer. The IRS is continuing to work closely with other Federal
and State agencies that enforce motor fuel laws. It also works with
State environmental agencies when notified of misuse of hazardous
materials in illegal cocktailing and blending. The IRS is participating
with nine regional task force groups as part of the joint project with
FHWA. IRS staff meets periodically with State counterparts to share
information and conduct joint investigations. The IRS is involved in
several ongoing cases with multiple States and agency.
With the expansion of the ExSTARS reporting, several of the holes
will be plugged in tracking motor fuel products. With the enhanced
reporting, the States and the IRS will be able to easier identify fuel
diversions. The principal roadblock to collaborating with other Non-
revenue State and Federal agencies is the disclosure restrictions.
Question. How do fuel tax evasion-related crimes relate to homeland
security? How is IRS working with the U.S. Customs and Border
Protection agency to combat this problem?
Answer. Motor fuel product is a very volatile liquid and in the
hands of the wrong individuals could have disastrous results. Criminal
Investigation is a member of the FBI's Joint Terrorism Task Forces.
These task forces are aware fuel tanker trucks could be utilized by
terrorists to perpetrate a terrorist attack. Since September 11, 2001,
all allegations involving fuel tanker trucks have been vigorously
investigated, as have allegations that persons potentially affiliated
with terrorist groups may be acquiring licenses to operate fuel tankers
or transport hazardous materials.
The IRS believes the ExFIRS/ExSTARS programs have the capability to
handle enhanced tracking of fuel systems and it supports the
legislation that would track vessels both for security and tax
purposes. The IRS has also developed an acoustical device for
identifying product that is being transported to ensure that the actual
product being shipped matches the shipping paperwork.
BANK SECRECY ACT ENFORCEMENT
Question. Given the limited resources in the IRS budget for
enforcement and compliance, what standards does the IRS use to select
cases to review for Bank Secrecy Act (BSA) compliance?
Answer. The Internal Revenue Manual (IRM) 4.26.3.2.4, Selection for
Assignment provides specific guidelines to the Anti-Money Laundering
(AML) coordinators about case selection. It provides:
--The AML coordinator should select entities from the nonbank
financial institution (NBFI) database or the Form 8300
inventory, using risk-based analysis to select those entities
with the highest potential for noncompliance for compliance
examinations or reviews, such as:
--Entities with a high volume of cash transactions or abnormal cash
activity;
--Entities in local geographic areas with high potential in money
laundering;
--Entities which have a previous history of noncompliance; and
--Entities which have been cited for poor or inadequate
recordkeeping.
--The AML coordinator should consider available resources as well as
balanced coverage (geographic area and industry) when selecting
NBFIs or Non-financial trade or Businesses (NFTB) for
compliance examinations or reviews.
--Input from other operating divisions (e.g. TE/GE) can assist the
coordinator in assessing risk.
--Prior to opening the exam or review the names of selected entities
are to be furnished to Criminal Investigation (CI) for
clearance.
The IRS and the Financial Crimes Enforcement Network (FinCEN)
jointly establish the priorities for types of NBFIs to be examined, and
the IRS provides these priorities to its AML coordinators in an annual
program letter. In addition, as part of the efforts to improve the
effectiveness of the AML program, the IRS provided training for its AML
coordinators in March 2003 on methods to apply against the Currency
Banking and Retrieval System (CBRS) to identify cases. Since that time,
CBRS analysis has been provided to the coordinators on a regular basis
to assist them in the identification of cases. To further ensure
consistency in case selection, the IRS plans to centralize the case
identification process by October 2004. The IRS is also working with
its SBSE Research to enhance the case selection criteria.
Question. Are the standards for determining BSA cases for review
uniform in every office? Please provide a copy of those uniform
standards.
Answer. The standards for selecting cases for review are detailed
in the response to the question above. During the AML program reviews
conducted by the headquarters office, conformity with these guidelines
is reviewed specifically.
The IRS is currently centralizing case selection. BSA typed
inventory varies demographically and changes or moves constantly. The
IRS is seeing the shift of currency cells away from banks and larger
cities. Efforts to centralize inventory selection will better help the
IRS recognize these trends and quickly shift field resources as needed.
Question. How many cases were reviewed for BSA compliance? How many
possible cases are there? What percentage of total cases are forwarded
for prosecution or further review?
Answer. In fiscal year 2003, the IRS closed 3,655 NBFI cases. The
IRS also contacted an additional 8,800 businesses to determine if those
that had a requirement to register had done so. The number of possible
Money Service Businesses (MSB) is constantly changing, but there are
currently more than 88,000 potential NBFIs on the database. One of the
objectives of the program is to identify new businesses while removing
from the database those that no longer are in business.
In fiscal year 2003, seven cases were forwarded to the IRS's
Criminal Investigation Division and two cases were referred to FinCEN
for penalty consideration. The number of cases is less than 1 percent
of those examined.
Question. Does the IRS train its compliance personnel in the IRS's
responsibilities under the USA PATRIOT Act?
Answer. IRS Compliance personnel involved in the AML program
receive specific training regarding BSA AML Compliance Programs and
related proposed regulations. IRS revised its Basic AML Course to
reflect the changes resulting from the USA PATRIOT Act. As part of this
training, personnel are:
--Instructed on how to access the Office of Foreign Asset Control's
(OFAC) website to identify individuals and countries which have
been placed on OFAC's Specially Designated Nationals (SDN)
list. In addition, information regarding the SDN list is placed
on the AML Website to insure that examiners are aware of any
changes to the list.
--Trained to look for transactions going to OFAC sanctioned
countries. If such transactions are found, personnel are
trained to contact the OFAC's Compliance Hotline and proceed
directly to OFAC.
--Trained to look for unlicensed money transmitters. Two Continuing
Professional Education (CPE) modules have been developed
specifically addressing Informal Value Transfer Systems and
Section 352 of the USA PATRIOT Act.
--Trained in audit procedures to detect structuring, using data from
actual examples of structured transactions. They are taught to
follow the transaction through the final clearing in order to
identify structured transactions through OFAC sanctioned
countries.
Question. What training does each compliance officer receive each
year related to BSA and the USA PATRIOT Act?
Answer. This year, the IRS provided CPE modules to IRS's AML
examiners: Suspicious Activity Reports, Structuring, Informal Value
Transfer Systems, and Section 352 of the USA PATRIOT Act. The IRS
provides examiners with workshops regarding the BSA during group
meetings held at least once a year. The IRS makes AML Technical
Advisors available to attend these group meetings.
In addition, information regarding new regulations is forwarded
from Headquarters to Territory Managers for immediate dissemination to
examiners, and examiners review FinCEN's SAR Activity Reviews Digests
as well as other issued guidance. In addition, examiners are required
to refer to the AML website on a regular basis for any changes to
procedures and/or regulations.
Question. When the IRS audits a casino, is the auditor versed in
the intricacies of the Patriot Act?
Answer. AML examiners, all of whom have received training that
deals specifically with the USA PATRIOT Act (for example, the four
recent CPE modules: Suspicious Activity Reports, Structuring, Informal
Value Transfer Systems, and Section 352 of the USA PATRIOT ACT),
conduct the IRS's examinations of casinos. In addition, the Casino
Course these examiners attend includes changes in the law under the
Patriot Act, and the IRS makes these changes available to all casino
examiners on the AML web page.
Question. Does IRS have any performance measures to determine
auditor knowledge of the laws they enforce?
Answer. The official IRS position descriptions for the AML
examiners outline the job knowledge required as well as Critical Job
Elements. The Critical Job Elements on which AML examiners are
evaluated include Knowledge and Application of Anti-Money Laundering
Law. The IRS is currently developing case review procedures that will
centralize closed case reviews using full time reviewers as well as
provide managers with a review document. The attributes in the case
review document include the interview conducted, managerial
involvement, interpretation and application of the law, fact gathering,
penalty determination, and documentation.
Question. Is there any follow-up with the casinos or money service
businesses to get feed-back on its audit?
Answer. The IRS has an effort under way to develop a customer
satisfaction survey for the AML Program by the end of fiscal year 2004.
Question. How many cases were referred by the IRS in fiscal year
2003 for enforcement action? What were the outcomes of the referrals?
Answer. In fiscal year 2003, seven cases were referred to IRS's
Criminal Investigation (CI) Division; three are currently under active
investigation. In addition, during the first 6 months of fiscal year
2004, SB/SE referred an additional seven cases to CI, five of which are
under investigation. As a result of referrals from its AML program, the
IRS also examined and closed 538 cases for income tax violations in
fiscal year 2003.
Question. How many cases were referred by the IRS in fiscal year
2003 to FinCEN for further review? What were the outcomes of the
referrals?
Answer. In fiscal year 2003, the IRS referred two cases to FinCEN
for penalty consideration. Both were issued warning letters. The IRS
referred two additional cases in the first half of fiscal year 2004,
and is currently developing another two for referral.
Question. What level of oversight regarding the compliance of
casinos and money service businesses (MSB's) does the IRS exercise?
Please describe those efforts in detail.
Answer. The IRS has been delegated responsibility for civil
examinations for BSA compliance. In addition to examinations, the IRS
also conducts outreach (in coordination with FinCEN) to ensure
businesses are aware of their filing, recordkeeping and registration
responsibilities. The IRS currently has approximately 350 examiners
(including managers) assigned to the Anti-Money Laundering (AML)
program. They are supported by 16 Area AML coordinators and
approximately 8 computer audit specialists from LMSB. IRS AML examiners
currently are conducting 5,576 examinations, which reflects 6 percent
of the IRS-known potential population.
In addition to the examination of NBFIs, the AML examiners also
conduct reviews for compliance with the currency reporting requirements
of Sec. 6050I of the Internal Revenue Code. Since Sept. 30, 2000, the
IRS has added 48,688 potential NBFI entities to the database. As of
March 31, 2004 the NBFI database reflected over 88,000 potential NBFIs.
The IRS is also conducting investigations on 690 businesses for
potential registration requirements.
From September 30, 2000 through the present, the IRS has closed
13,288 cases and conducted 5,940 (fiscal year 2003 and fiscal year
2004) registration examinations.
Since 2002, the AML Compliance program has transitioned from
conducting individual education visits to focusing on examinations. The
education and outreach now is performed by the Small Business and Self-
Employed operating Division's (SB/SE) Taxpayer Education and
Communication (TEC) Division. TEC delivers education/outreach to
external stakeholders, using leveraged resources to reach a larger
number of covered businesses. The National TEC AML strategy was
designed in conjunction with SB/SE Compliance, IRS's Criminal
Investigation Division and FinCEN to increase compliance of MSBs, NBFIs
and casinos with the BSA.
Question. What performance measures are in place to measure IRS
compliance efforts as they relate to MSB's and casinos?
Answer. The current measures for the AML examination program
include the number of NBFIs identified, the number of examinations
conducted and closed, and the results of completed examinations. The
IRS also now has a database in place that provides information on the
hours per closed case as well as the cycle time of cases. In the course
of the BSA examinations conducted, the IRS also identifies potential
cases for unreported income under Title 26. On the education/outreach
side, the TEC organization monitors the number of outreach events they
deliver and the number of participants at the events.
Question. The Tax Inspector General for Tax Administration (TIGTA)
reports that the IRS small business/self employed (SB/SE) division
responsible for compliance of the BSA for non-bank financial
institutions lacks meaningful performance measures, has no useful data
to provide oversight of program performance, and does not base case
selection in risk factors. Similar findings also occurred in a previous
audit in December of 2000. The IRS has known since at least 2000 that
these problems were pervasive in the compliance program. In September
of 2003, the IRS continues to fail in delivering compliance results
commensurate with the resources spent. In the response on this issue to
the committee the IRS has stated that the agency ``does not
characterize this as a problem''. There are two TIGTA audit reports
which demonstrate the IRS has failed repeatedly to make meaningful
progress in its compliance efforts for BSA. If the IRS and FinCEN do
not believe this as a problem, what would elevate it to warrant
recognition? How can the IRS allow these types of lapses to recur?
Answer. In 2002, the IRS made a commitment to ensure the effective
operation of the Anti-Money Laundering Program. In particular, the IRS
has taken the following steps:
--Named a national AML program manager in February 2002;
--Created 32 groups nationwide dedicated to the AML program (added
one additional group in 2004);
--Replaced part-time revenue agents, for whom AML was a collateral
duty, with full-time, fully trained revenue agents dedicated to
AML;
--Minimized the use of lower-graded tax compliance officers, who
previously handled many of the AML examinations;
--Designated a territory manager in each IRS Area for AML program
responsibility;
--Designed a Management Information System to capture the results of
BSA examinations; and
--Secured funding from FinCEN, beginning in fiscal year 2003, to add
70 additional FTEs to the AML compliance program.
As a result of these improvements, all program indicators (numbers
of MSBs identified, outreach contacts, and examinations) are trending
up. In the first half of fiscal year 2004, the IRS's SB/SE Division
made more referrals to FinCEN and had more referrals accepted by CI
than in all of fiscal year 2003. In fiscal year 2003, SB/SE also
focused on ensuring that MSBs that had a requirement to register did,
in fact, register. Those efforts resulted in an additional 2500
registrations, which represented a 20 percent increase in the number of
registered MSBs.
In a recent review of the AML program, TIGTA acknowledged the IRS's
efforts to enhance the program but identified the need for further
improvements. Ongoing efforts include the following:
--Centralization of case identification, incorporating leads from the
field and CI, as well as CBRS analysis for October 2004;
--Piloting of MSB examinations at the entity's corporate headquarters
level to facilitate the identification of MSB agents with the
highest risk of noncompliance;
--Incorporation of quality performance measures into the embedded
quality process in October 2004;
--Transition of outreach activities from Compliance to TEC within SB/
SE to provide broad educational opportunities to external
stakeholders;
--Completion of a template for a Fed/State MOU to provide reciprocal
opportunities to leverage resources for examinations, outreach,
and training;
--Partnership with FinCEN to identify locations of potential
noncompliance, as well as the first joint examination of a
major MSB with FinCEN; and
--MOU with FinCEN to allow IRS full access to SARs (for purposes of
BSA examinations only).
Question. What is the IRS doing to ensure case selection criteria
are uniform? Please provide a copy to explain how case selection
criteria have changed since the Tax Inspector General for Tax
Administration (TIGTA) audit in 2003.
Answer. As mentioned previously in questions 1 and 2, the Internal
Revenue Manual provides guidelines about case selection to the AML
coordinator in IRM 4.26.3.2.4, Selection for Assignment. During AML
program reviews conducted by the SB/SE headquarters office, conformity
with the guidelines is an item specifically reviewed.
TIGTA identified a concern that there was no consistency in how the
IRS selected AML cases for examination. To remedy this situation, the
IRS increased program oversight to ensure the compliance risk case
selection tools provided to the field are being used to identify cases.
The centralization of case identification, incorporating leads from the
field and Criminal Investigation, as well as CBRS analysis, is
scheduled to be in place by October 2004. The centralization of
workload identification will ensure consistency in risk based case
selection. The IRS is including FinCEN in this process. Case selection
methods are addressed in Area program reviews. In addition, SB/SE's
Research organization has undertaken a project to possibly identify
other methods for selection.
Question. The IRS has a poor record regarding regulatory compliance
operation and management of BSA data according to numerous IG, GAO, and
TIGTA reports. What is the IRS doing to correct these long-standing
problems? What guarantees can the IRS provide that will show they will
do the job right this time?
Answer. In recent years, the IRS has shown significant commitment
to the effective operation of the Anti-Money Laundering Program, and
considers the identification of opportunities for improvement to be an
ongoing process. Improvement efforts in progress include the
centralized review process, the embedded quality initiative, improved
management information systems and centralized compliance examinations.
In particular, the IRS has taken the following steps to enhance the
effectiveness and professionalism of the AML program:
--Named a national AML program manager in February 2002;
--Created 32 groups nationwide dedicated to the AML program (added
one additional group in 2004);
--Replaced part-time revenue agents, for whom AML was a collateral
duty, with full-time, fully trained revenue agents dedicated to
AML;
--Minimized the use of lower-graded tax compliance officers, who
previously handled many of the AML examinations;
--Designated a territory manager in each IRS Area for AML program
responsibility;
--Designed a Management Information System to capture the results of
BSA examinations; and
--Secured funding from FinCEN, beginning in fiscal year 2003, to add
70 additional FTEs to the AML compliance program.
As a result of these improvements, all program indicators (numbers
of MSBs identified, outreach contacts, and examinations) are trending
up. In the first half of fiscal year 2004, the IRS's SB/SE Division
made more referrals to FinCEN and had more referrals accepted by CI
than in all of fiscal year 2003. In fiscal year 2003, SB/SE also
focused on ensuring that MSBs that had a requirement to register did,
in fact, register. Those efforts resulted in an additional 2500
registrations, which represented a 20 percent increase in the number of
registered MSBs.
In a recent review of the AML program, TIGTA acknowledged the IRS's
efforts to enhance the program but identified the need for further
improvements. Ongoing efforts include the following:
--Centralization of case identification, and incorporating leads from
the field and CI, as well as CBRS analysis for October 2004;
--Piloting of MSB examinations at the entity's corporate headquarters
level to facilitate the identification of MSB agents with the
highest risk of noncompliance;
--Incorporation of quality performance measures into the embedded
quality process in October 2004;
--Transition of outreach activities from Compliance to TEC within SB/
SE to provide broad educational opportunities to external
stakeholders;
--Completion of a template for a Fed/State MOU to provide reciprocal
opportunities to leverage resources for examinations, outreach
and training;
--Partnership with FinCEN to identify locations of potential
noncompliance, as well as the first joint examination of a
major MSB with FinCEN; and
--MOU with FinCEN to allow IRS full access to SARs (for purposes of
BSA examinations only).
Question. The IRS, in its response to the committee, states that
there are standards in place to select cases in all compliance
programs. TIGTA states in its 2000 and 2003 audit that the program
still lacks performance standards. The only performance goal that
exists for this program is ``delivery of Direct Examination Staff Years
(DESYs).'' To accomplish this goal the IRS need only assign sufficient
personnel to the program to meet the allocated DESYs. There are no
other measures for evaluating the program's performance. Does the IRS
consider this performance measure sufficient to measure the outputs and
outcomes of this program? Are other compliance programs held to such a
low threshold?
Answer. In addition to the delivery of DESYs, the AML Program
currently measures the number of NBFIs identified, the number of
examinations conducted and closed, the results of completed
examinations, the number of Title 26 information items prepared and
related income tax examinations completed. The TEC organization
monitors the number of outreach visits, seminars, participants, and
mailings accomplished. Recent improvements to the MIS now provide
information on the hours per closed case, as well as the cycle time of
cases.
Question. The committee understands that IRS has begun to review
its performance measures and is in the process of establishing
measurable performance-based indicators for BSA programs. What is the
status of this effort? Please include in your response the new
performance measures being used to measure fiscal year 2004
performance?
Answer. The current measures for the AML examination program
include the number of NBFIs identified, the number of examinations
conducted and closed, and the results of completed examinations. The
IRS also now has a database in place that provides information on the
hours per closed case, as well as the cycle time of cases. In the
course of the BSA examinations conducted, examiners also identify
potential cases for unreported income under Title 26. On the education/
outreach side, the TEC organization monitors the number of outreach
events they deliver and the number of participants at the events.
Question. In Treasury's April 30 responses to the committee, the
Department and the IRS contend that IRS compliance programs include
reviews of examiners work. Performance plans for all managers include
the requirement to review cases and to be involved in case development.
Yet the IRS in its response to the TIGTA report state ``there continues
to be significant risk of undetected noncompliance and inconsistent
program delivery. Based on our review of a judgmentally selected sample
of 76 cases from 3 Area Offices, standard case selection criteria are
not used, cases are not properly documented and potential noncompliance
information is not available''. How does the IRS explain the
discrepancy between stated requirements and failed results?
Answer. The quote attributed above to the IRS was actually a
statement made by TIGTA in their Report (Audit No. 200330004). The
relevant TIGTA recommendations from that report, and the actions the
IRS is taking to implement them, are as follows:
--Develop standard risk-based case selection criteria that would
provide minimum requirements and parameters for case selection.
The SB/SE Division Research function is developing a scoring
system, or set of rules, to prioritize workload by using
Currency Banking Retrieval System data. Until the scoring
system is implemented, the IRS has taken other steps to ensure
appropriate case selection. The IRS has increased program
oversight to ensure the compliance risk case selection tools
already provided to the field are being used to identify cases.
In addition, case selection methods are addressed as part of
the Area program reviews. The centralization of case
identification, incorporating leads from the field and Criminal
Investigation, as well as CBRS analysis, is scheduled to be in
place by October 2004. This centralization will ensure
consistency in using risk based case selection for the AML
cases.
--Reinforce the importance of case documentation with specific
instructions or case models and implement a centralized quality
review process.
The IRS has taken a number steps to increase the quality of the
cases. In July 2003, two technical advisors were added to
headquarters staff to provide technical assistance to the
field. Since their arrival, they have visited several areas, to
review cases and meet with the examiners and managers to
discuss their observations. This has been well received by the
field personnel, and requests for their participation continue
to increase. The first AML Technical Digest, which addresses
examination issues, will be published on the AML web page in
late May 2004.
The IRS is on target to incorporate quality performance measures
for AML into the new embedded quality process that will be in
place in October 2004. Including AML in the embedded quality
process will provide a systemic method for consistent
managerial feedback. In addition, the centralized closed case
review process, which will be a part of embedded quality, will
provide headquarters with the ability to identify trends and
training needs.
--Coordinate with the FinCEN to secure BSA examiner and RA access to
SARs.
The Commissioner, SB/SE Division, initiated a Memorandum of
Understanding with the Director of the FinCEN to permit BSA
examiners access to SARs for the purpose of MSB compliance
checks. That MOU has been signed by both the IRS and FinCEN.
IRS senior executives are continuing to pursue access to SARs
for RAs in the regular examination program.
Question. TIGTA found that ``no standard criteria exist for
selecting BSA compliance cases.''
Should the committee be concerned that there are no standards that
exist for case selection?
IRS states that AML coordinators use their own criteria. Please
provide a complete list of those criteria.
Given Mr. Everson's strong statements about the need for more
resources, does this program not point out that IRS has enormous
savings to be realized by using its current resources in a smarter and
more efficient manner?
Answer. Through its Internal Revenue Manual (IRM) 4.26.3.2.4,
Selection for Assignment, the IRS provides specific guidelines to its
AML coordinators about case selection. It reads as follows:
--The AML coordinator should select entities from the nonbank
financial institution (NBFI) database or the Form 8300
inventory, using risk-based analysis to select those entities
with the highest potential for noncompliance for compliance
examinations or reviews, such as:
--Entities with a high volume of cash transactions or abnormal cash
activity;
--Entities in local geographic areas with high potential in money
laundering;
--Entities which have a previous history of noncompliance;
--Entities which have been cited for poor or inadequate
recordkeeping;
--The AML coordinator should consider available resources as well as
balanced coverage (geographic area and industry) when selecting
NBFIs or NFTBs for compliance examinations or reviews;
--Input from other operating divisions (e.g. TE/GE) can assist the
coordinator in assessing risk;
--Prior to opening the exam or review the names of selected entities
are to be furnished to Criminal Investigation (CI) for
clearance.
The IRS has increased program oversight to ensure these compliance
risk case selection tools provided to the field are being used to
identify cases. In addition, the IRS and FinCEN jointly establish the
priorities for types of NBFIs to be examined, and the IRS provides
these priorities to its AML coordinators in an annual program letter.
Further, as part of the efforts to improve the effectiveness of the AML
program, the IRS provided training for its AML coordinators in March
2003 on methods to apply against the Currency Banking and Retrieval
System (CBRS) to identify cases. Since that time, CBRS analysis has
been provided to the coordinators on a regular basis to assist them in
the identification of cases. Case selection methods also are addressed
during Area program reviews.
To further ensure consistency in case selection, the IRS plans to
centralize the case identification process by October 2004. This
centralization, which will incorporate leads from the field and
Criminal Investigation, as well as CBRS analysis, will ensure
consistency in risk based case selection and allow for improved trend
analysis. In addition, SB/SE's Research organization has undertaken an
effort to enhance the case selection criteria.
To improve its utilization of resources, the IRS is piloting the
examination of Money Service Businesses (MSB) at the entity's corporate
headquarters level. Three such examinations are currently underway.
Working with the business, IRS will be able to identify the MSB's
agents with the highest risk of noncompliance. This is a new approach
for the program, one that was developed in cooperation with FinCEN, and
one that will provide better customer service.
Question. IRS indicates that it is creating a scoring system to
prioritize its BSA workload. Please provide an update to the committee
on the development of this system?
Answer. SB/SE Research is designing a process that uses the
Currency and Banking Retrieval System (CBRS) data to prioritize or
select entities for Title 31 and Form 8300 examinations based on risk
factors. The project is organized into five phases, including
assessment of current processes used to select workload (Phase 1),
development of rules that express predictive and evaluative factors of
non-compliance with BSA requirements (Phase 2), engineering of formulas
to evaluate and rank entities for risk of non-compliance based on CBRS
data and completion of the decision factor set that will be used (Phase
3), suitability testing to ensure the proposed system follows the best
practices identified by AML technical advisors (Phase 4), and
assessment of automation and programming needs required to pilot the
proposed system (Phase 5).
To date, much of the data and knowledge acquisition activity has
been completed. As a by-product of this work, the research team
developed a work flow diagram depicting ``best practices'' of
processes, tools, techniques, and decisions in the AML program.
Following review by the technical advisors, the IRS plans to make this
interim work product will be available to Compliance Policy/AML
examiners in July 2004 for use in the current program. The work that
SB/SE Research is doing to develop a risk-based selection process using
CBRS data will assist the IRS in applying case selection standards
uniformly across the country. The proposed system will use the same
identified scoring factors (with priorities and weights) to rank all
entities for examination potential. Subsequently, local program
managers will be able to filter the ranked list for geographic
location, providing a local list that reflects the same selection
criteria as any other case. A potential side benefit of the proposed
system will be IRS's ability to assess whether their resources are
appropriately deployed geographically and make adjustments based on
where the prioritized workload actually exists.
Question. TIGTA has identified that IRS examiners have a perception
that FinCEN does not assess penalties. TIGTA has also identified that
FinCEN has a negative perception of the IRS case quality and that the
cases referred for enforcement actions do not contain sufficient
information to assess penalties. What are these two organizations doing
to overcome these barriers?
Answer. FinCEN and the IRS are jointly committed to identifying
opportunities to improve case development and the ability to assess
civil penalties when appropriate. As a part of the IRS's revamped
training efforts, FinCEN is participating in AML basic training classes
to provide guidance on developing cases for penalty referral to FinCEN.
For fiscal year 2004 the IRS has committed to taking a more proactive
approach to getting FinCEN's input when serious violations have been
identified, by providing them opportunity for involvement early in the
development of the penalty case. To support this commitment, the IRS
also has developed new referral guidelines based on previous well-
developed cases, and has included these guidelines in the AML Technical
Digest.
Question. The SB/SE division is responsible for compliance with the
BSA. This unit spends $43 million for BSA compliance including
examinations outreach and compliance. Please provide a detailed break
out of how the $43 million is spent on by activity. Given the numerous
reports about the failures of the SB/SE division, what is the IRS doing
to correct the deficiencies identified?
Answer. The original estimate of $43 million for BSA compliance
included some one-time training costs related to BSA, but did not
include costs associated with Currency Transaction Report (CTR)
processing (which is essential to the AML program). Based on a revised
estimate, which reflects only annualized costs, SB/SE expects to spend
$53.7 million in fiscal year 2004 in support of BSA compliance,
including examinations, education and outreach activities, and
processing of CTRs. The breakdown of these costs for both fiscal year
2003 and fiscal year 2004 is shown in the following table:
EXPENDITURES FOR BSA COMPLIANCE
[In millions of dollars]
------------------------------------------------------------------------
Fiscal Year
Functional Activity Fiscal Year 2004
2003 (Actual) (Projected)
------------------------------------------------------------------------
Compliance.............................. 33.66 34.97
Taxpayer Education and Communications... 0.86 1.14
CTR Processing \1\...................... 7.81 17.57
-------------------------------
Total for SB/SE................... 42.33 53.68
------------------------------------------------------------------------
\1\ In fiscal year 2003, IRS's Modernizing Information Technology
Systems spent $8.84 million in support of CTR Processing. In fiscal
year 2004, SB/SE is responsible for the full program.
As described in the responses to the earlier questions, the IRS has
taken, and is continuing to take, a series of proactive steps to
improve its AML program. To summarize, the IRS has:
--Revamped the structure and staffing of its AML program by:
--Naming a national AML program manager in February 2002;
--Creating 32 groups nationwide dedicated to the AML program (added
one additional group in 2004);
--Replacing part-time revenue agents, for whom AML was a collateral
duty, with full-time, fully trained revenue agents
dedicated to AML;
--Minimizing the use of lower-graded tax compliance officers, who
previously handled many of the AML examinations;
--Designating a territory manager in each IRS Area for AML program
responsibility; and
--Securing funding from FinCEN, beginning in fiscal year 2003, to
add 70 additional FTEs to the AML compliance program;
--Focused increased attention on case selection using current
guidelines, while developing a centralized case identification
process;
--Ensured all AML examiners receive appropriate training, including
the changes resulting form the USA PATRIOT Act;
--Undertaken a research-driven effort to design and develop a method
for prioritizing case selection based on CBRS data;
--Taken steps to improve AML case quality via technical case reviews
and included the AML program in the embedded quality measures
process to be implemented in October 2004;
--Transferred AML outreach activities from Compliance to TEC within
SB/SE to provide broad educational opportunities to external
stakeholders; and
--Increased its coordination with FinCEN, especially in the areas of
training, workload identification and penalty referrals.
WORKFORCE AND FACILITY REALIGNMENT
Question. The IRS expects to receive some savings from the closure
of the Brookhaven Service Center. Are you going to increase the
frontline enforcement personnel with these savings?
Answer. The IRS anticipates savings in fiscal year 2005 of $6
million and 147 FTE because of e-file efforts, including the closure of
the Brookhaven facility. These savings, along with $105 million
additional savings, will be reapplied as described in the IRS's fiscal
year 2005 Congressional Justification. These reinvestments are:
[Dollars in millions]
------------------------------------------------------------------------
Millions of
Reinvestment Dollars FTE
------------------------------------------------------------------------
Curb Egregious Noncompliance................ $31.4 293
Select High Risk Cases for Examination...... $6.0 ...........
Embedded Quality \1\........................ $1.6 26
Consolidation--Case Processing.............. $13.7 80
Consolidation--Insolvency................... $2.1 15
Combat Corporate Abusive Tax Schemes........ $5.0 34
Leverage/Enhance Special Agent Productivity. $2.5 28
Standardize CLMC Training Rooms............. $0.5 ...........
IRS Reorganization Transition............... $5.0 ...........
Servicewide Competitive Sourcing............ $9.1 ...........
MITS Reorganization Transition.............. $34.0 236
---------------------------
Total................................. $110.9 712
------------------------------------------------------------------------
\1\ This initiative, through an Embedded Quality system in Submission
Processing (EQSP), will create a new measurement system that will
identify the cause and impact of errors, apply common measures to
every level of the new organization, and enable frontline employees to
understand how their contributions impact IRS's performance. An
embedded quality system links individual and business performance with
multiple quality review sources. EQSP will instill complete
accountability for quality performance across operations.
TAX LAW ENFORCEMENT BUDGET PRIORITIES AND RESOURCE ALLOCATION
Question. Given IRS's inability to increase enforcement in recent
years, what will be different in fiscal year 2005?
Answer. The IRS's enforcement statistics for fiscal year 2003
demonstrate that IRS has arrested the enforcement decline that began in
the 1990's and continued through the implementation of RRA 98. Audits,
criminal investigations, and monies collected have all increased. In
particular, when compared with fiscal year 2001, audits of taxpayers
with incomes over $100,000 increased by over 50 percent by fiscal year
2003.
The administration's 2005 budget request for the IRS will continue
to rebuild its enforcement activities. Two-thirds of the new monies
requested will be devoted to addressing abuses by high-income taxpayers
and corporations, and increasing criminal investigations.
In fiscal year 2005, the IRS is seeking an additional $300 million
for enforcement activities to focus on the following four objectives in
enforcement:
--Discourage and deter non-compliance, with emphasis on corrosive
activity by corporations, high-income individuals and other
contributors to the tax gap;
--Ensure that attorneys, accountants and other tax professionals
adhere to professional standards and follow the law;
--Detect and deter domestic and off-shore tax and financial criminal
activity; and
--Discourage and the misuse of tax-exempt and government entities for
tax avoidance and other purposes.
These incremental resources will help IRS to address the tax gap,
the difference between what is owed and what is paid due to non-filing,
underreporting, and underpayment, and secure billions of extra dollars
for the Treasury. Once the IRS hires and trains enforcement personnel,
it estimates the direct return on investment will be about 6 to 1 for
direct revenue-producing initiatives. Beyond the incremental revenues
directly associated with the increased audits, investigations and
collection activity, the increased publicity of these actions will
discourage other taxpayers from cheating.
FUTURE STAFFING REQUIREMENTS
Question. What is IRS's assessment of the IRS's long term
requirements?
Answer. The vision of the IRS remains to re-center the agency with
the proper balance of service and enforcement poised to quickly meet
technological and demographic changes, and customer expectations.
The IRS's goals remain the same--to improve taxpayer service,
enhance enforcement through uniform application of the law, and improve
the IRS infrastructure and modernize technology. The IRS working
equation is that service plus enforcement equals compliance. The IRS is
maintaining high levels of taxpayer service while focusing on corrosive
areas of non-compliance. Ensuring fairness will help restore faith in
the Nation's tax administration system.
Question. Can the IRS assure this committee that the current
refocus can put this program back on schedule so that it will not go
the way of TSM?
Answer. The IRS needs a more versatile team of seasoned executives
to provide long-term stability to the program. The IRS is complementing
the skills of experienced IRS tax executives with outside seasoned
technology executives who have experience managing large-scale, complex
IT projects. As such, the IRS is hiring two Associate Chief Information
Officers to join the MITS organization, and an executive search firm is
conducting searches for five senior executives with a wide range of
diverse experience in developing and implementing large modernization
systems.
In addition, the IRS used the results from independent studies
commissioned during the summer of 2003 to create a BSM Challenges Plan
comprised of 40 some action items. Given the strategic importance of
the plan, the Commissioner appointed an IRS business unit deputy
commissioner to oversee the implementation of the plan.
As a first step, the BSM project team developed a crosswalk to
ensure that the BSM Challenges Plan's definition of the issues
addressed and/or satisfied all of the recommendations from the four
commissioned studies as well as the recommendations submitted by the
IRS Oversight Board, and the Software Engineering Institute (SEI) study
of CADE.
While the deputy commissioner made significant progress in
implementing the plan, the full closure of all actions items was
unrealistic within the elapsed timeframe of the 6-month appointment.
Concurrently, the CIO created a new direct report position for
modernization management and assigned responsibility for implementing
the plan to the individual recently hired into this newly created
position.
Under the leadership of the deputy commissioner, the IRS and CSC
team brought closure to several key actions items, including:
clarifying the roles of committees as advisory, identifying
``blockers'' on contracting issues, appointing business leaders to each
project, establishing a risk-adjusted schedule and new baseline for
CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews
with the business owner to twice monthly. The majority of the action
items are still works-in-progress, some of which will take time to
fully complete. Others will span the life of the BSM program.
For example, strengthening systems engineering capabilities by
hiring external candidates will take time since it involves conducting
the searches, interviewing the candidates, and negotiating the new
hires to come on board. The IRS and CSC developed ground rules for
escalating issues, but they will need to be continually enforced
throughout the life of the program. The IRS rewrote the charters of the
governing committees to reflect their advisory role and clearly
articulated their responsibilities, however, it will probably take a
year to truly evaluate and measure their effectiveness.
As stated, the IRS has made progress toward closing all the action
items, but it has much more work to do in critical areas. For example,
the IRS needs to religiously follow the proper methodologies and hold
people accountable if they do not. The IRS must start ``doing things
right'' as opposed to ``doing things fast'' such as exiting milestones
prematurely. An ongoing challenge will be balancing the scope and pace
of projects consistent with capacity, ensuring that the right people
are in place before launching a project, and setting realistic delivery
schedules and cost estimates. The IRS is committed to staying-the-
course and delivering on its promise to modernize America's tax
systems, but it is important for everyone to acknowledge this is a
monumental effort.
The magnitude and evolution of the BSM program dictates that the
IRS will always be going through an evolution of assessment and
improvements. In that regard, the BSM Challenges Plan is still evolving
and the IRS is using certain action items to continuously improve the
program.
BSM MANAGEMENT
Question. Is IRS's schedule for completing the remaining corrective
actions identified in the associated BSM Action Plan?
Answer. Please see response to previous question.
ACTUARIAL SOFTWARE PROGRAM
Question. What number of life insurance companies or what
percentage of the industry does the IRS consider an appropriate amount
to examine in order to provide the IRS with ``sufficient data to
conduct a cost benefit analysis?''
Answer. The IRS has determined that a sample of four Coordinated
Industry life insurance audits (based on the criteria as described in
the question below) will give sufficient data for preliminary results
from a cost benefit analysis. The fact that the IRS anticipates closing
four cases led it to determine that a 5 percent completion rate would
give it preliminary figures so that it could project over the total
population.
Question. What selection criteria is the IRS using to make sure
that the initial examination results analyzed are an accurate
estimation or cross-section of the industry?
Answer. The IRS based the selection criteria it used on a mix of
variables, such as the stage of the audit cycle, product mix, and size
of taxpayers. These criteria allowed the IRS to have a cross-section of
the industry. Due to the length of time it takes to examine life
insurance reserves, the stage of the audit means that the IRS needs to
examine reserves very early in the audit and not when the audit's
estimated completion date is approaching. Product mix means that the
IRS attempted to select taxpayers for audit who sold different kinds of
policies such as traditional life insurance, universal life insurance,
variable life insurance, single premium annuities, and etc. Size of the
taxpayer means that the IRS is looking to select not only the extremely
large taxpayers in the Coordinated Industry arena but also the ones who
have lesser gross receipts and assets in size.
Question. When does the IRS expect to have sufficient data?
Answer. The IRS is projecting to have four audits complete by the
end of the fiscal year that would give sufficient data. The fact that
the IRS anticipates closing four cases led it to determine that a 5
percent completion rate would give it preliminary figures so that it
can project over the total population.
Question. Congress has funded the program for 3 years, yet due to
the very late start date of the program, although the program has been
provided fiscal year 2004 funding, the program is still using fiscal
year 2003 funding. Has the IRS set aside the fiscal year 2004 funding
provided for the third year of the program?
Answer. The appropriation language for fiscal year 2003 reads that
the IRS will provide up to $4 million from available funds to support
the program. As services are rendered and invoices received, the IRS is
currently paying amounts to the vendor out of fiscal year 2003 funding
for the actuarial software license, maintenance, actuary salaries, and
related travel costs to conduct training sessions. In addition, the IRS
has available $2 million from fiscal year 2004 funding for IRS employee
travel and training expenses, testing and the related implementation
costs, the purchase of additional memory to upgrade revenue agent
computers to 512MB capacity, the purchase of additional software which
is required for the vendor's Total Life software to work, and the
possibility of hiring additional life insurance actuaries to assist on
examinations.
Question. What plans does the IRS have for this funding?
Answer. Please see response to previous question.
Question. In March 2004, the IRS stated that after software
training for 2004 is complete, ``this will result in 41 coordinated
life insurance examinations having the use of the software.'' How many
coordinated life insurance examinations currently exist?
Answer. There currently are approximately 75 Coordinated Industry
life insurance examinations, of which 30 are either using the software
or are planning to use it in the near future. Another class is
scheduled for the second week in June where more teams will receive
training in using the software. The fact that the IRS anticipates
closing four cases led it to determine that a 5 percent completion rate
would give it preliminary figures so that it can project over the total
population.
Question. Should not the software be used on all life insurance
examinations?
Answer. If the results of the cost benefit analysis prove
productive and promote compliance, the goal would be to use the
software on any life insurance examination, as appropriate. The stage
of the audit cycle, as mentioned in the second question above, will
dictate when it is appropriate to use the software on the balance of
the Coordinated Industry life insurance cases.
Question. Given the technical nature of the program, does the IRS
have personnel with sufficient expertise and knowledge to effectively
implement the program? What additional personnel, if any, does the IRS
believe it needs to make the program fully effective?
Answer. Experience has shown over the last year of training revenue
agents and computer audit specialists that they would have the
expertise to utilize the software on audits immediately following
training with the assistance of a life insurance actuary. The Large and
Mid-Size Business Operating Division has two in-house life insurance
actuaries with the level of expertise and knowledge to implement the
program. Since audit cycles are normally 2 to 3 years in length, on an
average, a revenue agent may only use this software once during this
time frame, which may result in a high learning curve or the need for
additional refresher training for subsequent and additional audit
cycles. The IRS believes that it is essential for life insurance
actuaries to be involved as the focal point to utilize this software
effectively.
Depending on the benefit analysis results, the IRS will evaluate
the opportunity to hire additional life insurance actuaries as funding
permits.
______
Questions Submitted by Senator Patty Murray
FAILURE TO COLLECT DELINQUENT TAXES
Question. Based on your collections to date, it appears that IRS is
not pursuing billions of dollars in uncollected taxes. In recent
testimony before the Finance Committee, Treasury Deputy Secretary
nominee Samuel Bodman stated that:
--As of the end of fiscal year 2003, $16.5 billion was in deferred
status, meaning that these taxpayers have filed a return and
owe tax, but have not paid it or have only partially paid.
--The largest delinquent amount in deferred status is more than $50
million.
--In recent years, accounts in deferred status have decreased
slightly but the dollar amounts have increased.
Mr. Everson, how do you respond to this pathetic record of
collecting unpaid taxes?
Answer. The collection results for accounts that are in a deferred
status are not indicative of the IRS's overall Collection effort.
During fiscal year 2003, the IRS issued first notices to about 11.8
million new balance due accounts, as required by IRC section 6303.
During the same period, the IRS resolved about 7.6 million accounts by
full payment, installment agreement, or other means as a result of the
taxpayer's response to the first or subsequent notices. The IRS
subsequently resolves a significant portion (on average, about 67
percent) of the balance due accounts, which are not resolved in notice
status and become Taxpayer Delinquent Accounts (TDAs), through full
payment or the initiation of an installment agreement.
Deferred accounts are placed in a suspended category because of
other collection priorities and resource limitations and they are first
subject to risk and collection probability analysis. Cases that have a
modest compliance risk, i.e., lesser impact on tax administration and
subsequent noncompliance, and low probability of collection are
deferred, freeing Collection resources to work more in-business trust
fund cases and cases where there is a likelihood of full payment.
However, the IRS is refining its Collection models for these cases and
evaluating the benefit of filing notices of Federal tax liens on
deferred accounts.
Question. Mr. Everson, your budget documents say that a growing
number of Americans think it is okay to cheat on their taxes and that
``this trend threatens the government's future revenue stream and basic
respect for the law.'' Why should these taxpayers take their IRS debt
seriously if the agency never presses for collection?
Answer. All delinquent accounts receive Collection action. The
treatment for a particular delinquent account depends on the amount
owed and the predicted compliance risk. Taxpayers generally receive at
least two notices and if they fail to respond, enforcement action is
likely. Each year, the IRS resolves a large percentage of its
delinquent accounts through full payment or installment agreement. Many
others are ultimately resolved through refund offsets, abatements, and
Offers in Compromise. As shown in the following chart, overall
enforcement actions on taxpayer delinquent accounts have increased
significantly since fiscal year 2000. In fiscal year 2003, the IRS
filed 548,683 Notices of Federal Tax Lien and served 1,680,844 Notices
of Levy. Passage of the administration's proposed Private Collection
Agent (PCA) legislation will further improve these results.
----------------------------------------------------------------------------------------------------------------
Activity 2000 2001 2001 2003
----------------------------------------------------------------------------------------------------------------
Enforcement activity (actual numbers):
Number of notices of Federal tax liens filed 287,517 426,166 482,509 548,683
Number of notices of levy served upon third 219,778 674,080 1,283,742 1,680,844
parties....................................
Number of seizures.......................... 74 234 296 399
----------------------------------------------------------------------------------------------------------------
In addition, the IRS has taken a number of steps recently to
further address taxpayers' noncompliance with their filing and payment
obligations, including:
--Case Selection.--The IRS refined its inventory delivery system so
that the higher priority cases (in terms of impact on tax
administration and subsequent noncompliance as well as
potential for collection) are selected for assignment to the
Collection field function and the Automated Collection System.
The IRS continually examines how case selection can be
improved.
--Employment Taxes.--The failure of employers to make their Federal
tax deposits and pay over the withheld trust fund taxes is a
serious compliance issue. The IRS has developed and is
implementing a strategy to improve collection of employment
taxes.
--Causes for Underpayment and Non-Filing.--The IRS is working to
identify the components of its potentially collectible
inventory, the main causes of non-compliance, and the
contributing market segments. The information obtained is being
used to address taxpayers through outreach and education, and
to determine potential systems and policy changes. One
significant component involves estimated tax compliance.
--Taxpayer Education.--The IRS is aggressively reaching out to
taxpayers before they either intentionally or inadvertently,
fail to file or fail to pay the full amount of tax due.
Stopping noncompliance before it occurs is far preferable than
having to find it afterwards. The IRS website has been a
tremendous success and has been an important resource for
taxpayers. It also is an important way for the IRS to
communicate to taxpayers, including reaching out to those
taxpayers who may be missing out on important tax benefits when
they fail to file a return. The IRS is continuing to examine
how taxpayer outreach can be improved and made more effective.
Question. A recent report by the Treasury Inspector General for Tax
Administration (TIGTA) found that IRS's existing procedures are
ineffective in ensuring even that criminals who are convicted in court
for tax evasion are paying their civil tax liabilities. Why can't IRS
collect from tax cheats?
Answer. In response to problems identified in the TIGTA audit, the
IRS completed a review of the process for referring criminal cases for
civil disposition that have conditions of probation. CI conducted this
review in partnership with SB/SE. Furthermore, CI and SB/SE have taken
the following steps:
--The Chief CI and SB/SE Commissioner issued a joint memorandum on
April 13, 2004, to field office personnel stressing the
importance of cooperation in handling civil closings for
sentenced taxpayers and provided operating procedures for
processing the civil closings of all sentenced taxpayers. CI
and SB/SE are revising the Internal Revenue Manual to implement
these procedural changes.
--The Technical Service, Advisory Unit within SB/SE is reviewing
assessed tax liabilities in these cases to identify cases
wherein the conditions of probation were not met and will
report this information to CI.
--CI's Research Unit has identified all cases within their management
information system that have outstanding conditions of
probation or appear anomalous. The Research Unit forwarded the
information to the appropriate CI field office for review and
corrective action, if necessary. Twice a year, the Research
Unit will submit similar information to the responsible field
office(s) for verification and correction.
--The CI Research Unit added additional tracking codes to the
management information system to ensure that management only
tracks and reviews viable open cases.
--CI revised its Criminal Investigation Closing Report. This report
will serve as CI's notice to the SB/SE Territory Manager of
Technical Services that the court has sentenced a taxpayer and
document the tax-related conditions of the sentence.
--CI is developing a ``Fraud Life Cycle'' communications model as an
educational tool to improve its understanding of the
interaction among the various CI and SB/SE functional
processes. This model will help CI and SB/SE develop ways to
improve the processing of conditions of probation cases.
--CI front line managers received refresher training on using current
systems to effectively identify, report, and monitor terms and
conditions of probation on tax investigations.
--CI's Review and Program Evaluation (RPE) Section has incorporated,
as part of its field office review process, an analysis of the
CIMIS information on terms and conditions of probation. Senior
executives in CI will use RPE reports to ensure that all
conditions of probation procedures are effectively implemented
in each field office.
--The Program Manager, Technical & Insolvency of SB/SE will include
the monitoring of conditions of probation in fiscal year 2005
reviews of Technical Services operations and keep the Director,
Payment Compliance informed of adherence to IRM procedures.
These procedures require Technical Services to immediately
report to CI evasive or uncooperative taxpayers, as well as
taxpayers who have fully complied with conditions of probation.
For other non-compliant taxpayers subject to conditions of
probation, Technical Services must provide the required reports
to CI no later than 6 months before the probation expires. CI
will advise the Courts of these conditions.
These steps will improve coordination between CI and SB/SE, clarify
areas of responsibility, enhance employees' understanding of newly
implemented procedures, and improve the processing of conditions of
probation cases.
Question. Ms. Gardiner, given the fact that the head of IRS-
Criminal Investigations disagreed with a number of your
recommendations, are you confident that this grotesque abuse will be
stopped? Mr. Everson, would you care to comment as well? Ms. Gardiner,
why do you believe that IRS has not cleared up even the simplest of
cases of uncollected taxes? Do you consider it a possibility that IRS
has not done so in order to build a case for the use of private
collection agencies?
Answer. The IRS unequivocally states that no collection action has
been taken or not been taken for the purpose of building a case for the
use of private collection agencies (PCAs). Under the administration's
proposals, PCAs would supplement, and not supplant, IRS collection
efforts. PCAs would expand the IRS's overall capability to address
outstanding tax liabilities while also allowing the IRS resources to be
directed at more complex cases and issues.
TIGTA will respond separately.
Question. Ms. Gardiner, why do you believe that IRS has not cleared
up even the simplest of cases of uncollected taxes?
Answer. TIGTA will respond separately.
Question. Do you consider it a possibility that IRS has not done so
in order to build a case for the use of private collection agencies?
Answer. TIGTA will respond separately.
Question. In response to questions posed at the Treasury Deputy
Secretary's nomination hearing, Mr. Bodman said that IRS has
implemented several actions to ensure that all deferred accounts
receive adequate collection. But as I read it, only one of these four
actions actually tries to collect from the taxpayer: the annual notices
that remind taxpayers to pay their obligations. The other three seem to
only further penalize the already delinquent party. How do these other
activities really help in the collection of tax debts? Don't they
simply compound the problem? Are these really the best ways to go after
tax cheats?
Answer. The actions described by Dr. Bodman (refund offsets, the
Federal Payment Levy Program (FPLP), and reactivation) are the
principal methods of collection for deferred accounts; the IRS also
uses these techniques as supplemental collection techniques for other
types of cases. Since these methods generally employ automated
processes, they allow the IRS to pursue these accounts at relatively
low cost. Reactivation of a deferred account may be triggered when the
taxpayer incurs a new liability, a tax filing delinquency occurs, or
the IRS learns of a source of income. Based on the triggering event,
the IRS reevaluates the priority of the case in terms of compliance
risk and potential to collect the delinquency. Typically, if the case
is deemed collectible, the IRS can expect to collect 64 percent of the
debt through full payment or an installment agreement.
As noted in Dr. Bodman's response, many of the accounts in deferred
status represent taxpayers who have filed a tax return showing an
amount of tax due, but who have failed to pay the tax. Other accounts
represent taxpayers who have been assessed additional tax by the IRS
and have made three or more voluntary payments to satisfy that
additional tax, but who have stopped making payments. These taxpayers
are aware of their outstanding liabilities. The IRS, however, is unable
to continuously pursue each taxpayer with an outstanding tax liability
because of other resource and collection priorities. Many taxpayers
with outstanding tax liabilities, however, would make payment if
contacted by telephone and, if necessary, offered the ability to make
payment of the full amount in installments. The administration's fiscal
year 2005 budget proposes to permit the IRS to use private collection
agencies (PCAs) to address accounts in deferred status.
Question. Mr. Everson, a recent IRS Oversight Board report claims
that each year, ``the IRS must absorb millions of unfunded costs, such
as rent increases and postage, left uncovered by the administration's
budget request.'' The Board estimates that in both fiscal year 2004 and
fiscal year 2005, there will be at least $100 million in unfunded
expenses. Further, the ``resulting shortfalls mean that the IRS is
consistently unable to hire the personnel assumed in the
administration's request.'' In what areas has the IRS cut, in order to
pay these unfunded costs?
Answer. The IRS took reductions across-the-board from all programs
to fund pay parity, but protected enforcement initiatives. When
absorbing the appropriation reduction, the IRS protected enforcement
initiatives and related support costs, and took the majority of the cut
from Information Systems and other support.
The fiscal year 2005 budget includes a 1.5 percent increase for
pay. If Congress approves and the President signs the anticipated 3.5
percent increase, the impact of this increase would result in a
shortfall of $109 million. Most of the IRS budget is composed of labor
(71 percent) and most of the remainder is composed of items that
support staff directly (travel, rent, supplies and equipment). The
total percentage of the IRS budget that does not support staff directly
is less than 18 percent. Any reduction to IRS funding or any absorption
of an unfunded mandate like a pay raise would, of necessity, have a
direct impact on FTE. Because most IRS staffing is devoted to taxpayer
casework--answering telephones, collecting overdue money, or auditing
returns--reductions inevitably affect these taxpayer assistance areas,
affecting both taxpayer service and enforcement.
[Clerk's Note.--The report follows:]
Report
BACKGROUND
The National Commission on Restructuring the IRS issued a report in
1997 defining ``A Vision for a New IRS.'' In 1998, the IRS
Restructuring and Reform Act (RRA 98) codified much of that vision into
law. Since the passage of RRA 98, the IRS has undergone enormous
changes, including the most extensive reorganization of the agency in
the past 50 years. Prior to the IRS reorganization, all ten IRS
Submission Processing Centers performed similar functions and processed
returns for both the Individual Taxpayers (IMF) and Business Taxpayers
(BMF). Each center also handled Taxpayer Accounts (correspondence/
telephones) and Compliance programs for both IMF and BMF.
Although the ten-center configuration was successful and worked for
many years, we felt we could improve our business results and better
respond to customer needs by organizing around our customer segments.
We based the initial IMF Consolidation Strategy of our 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
realigned the ten Processing Campuses into eight W&I (IMF) and two SB/
SE (BMF) Submission (paper returns) Processing Centers. We completed
this realignment of the customer base in 2002. Now, all BMF taxpayers
file their paper returns at our processing centers located at either
Ogden, Utah or Cincinnati, Ohio. All IMF taxpayers file their paper
returns at one of the W&I centers.
The RRA 98 also mandated that the IRS improve the Electronic Tax
Administration program to reach the goal of 80 percent of individual
returns filed electronically by 2007. With increased emphasis and
success of electronic filing, the volume of paper returns has
decreased. To effectively administer and manage this change in taxpayer
behavior, the IRS analyzed ``E-file versus Paper Trends'' and developed
a detailed business plan to gradually reduce the number of IMF paper
Processing Centers. We approved this ``Business Plan,'' which will take
several years to fully implement, in 2002. The plan calls for the
consolidation of an IMF paper processing center every few years,
contingent on the public's continued migration from paper to
electronically filed returns.
At the completion of each filing season, we assess both the e-file
progress and the paper return filing pattern to see if we need to
adjust the consolidation timelines for the next filing season.
Flexibility is a key component in this plan, allowing the IRS to plan
and react appropriately as paper return volumes fluctuate. Many
restructuring changes have already taken place at the Ogden, Utah;
Cincinnati, Ohio; and Brookhaven, New York campuses. At Memphis,
Tennessee; Philadelphia, Pennsylvania; and Andover, Massachusetts, the
IRS will consolidate the paper return processing function over the next
several years.
However, compliance and tax account work will remain at all the
campuses, making them key employment centers. Our timetable for
consolidating IMF paper processing at the campuses is as follows:
--Consolidate the processing of BMF paper returns into two sites
(Ogden, Utah and Cincinnati, Ohio). We completed this migration
in 2002.
--Discontinue the processing of IMF paper returns at Brookhaven, New
York. We completed this change in October 2003.
--Discontinue the processing of IMF paper returns at Memphis,
Tennessee by June 2005.
--Discontinue the processing of IMF paper returns at Philadelphia,
Pennsylvania by June 2007.
We will determine the specific dates for consolidating of the
remaining centers based on e-file and paper volume projections for
subsequent years.
ELECTRONIC FILING
In 1999 the IRS processed 29 million electronically filed returns,
and in 2003, 53 million taxpayers chose to file electronically. We
estimate that nearly half of all taxpayers will e-file in 2004. We are
encouraged by both the growth of e-file to date and the projected
growth through 2010. We will continue to strive to reach the RRA 98
goal, but believe that individual returns filed electronically will not
reach 80 percent by 2007; however the IRS's electronic tax filing
program has experienced tremendous gains in customer acceptance. The
chart below reflects the progress we made in e-file from 1997 through
2003, and our projections for the future look equally promising.
ACTUAL
[Volume in millions]
----------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Total Returns............................. 120.7 125.2 126.0 128.4 131.0 131.7 130.1
Total Paper............................... 101.5 100.6 96.7 93.0 90.9 85.0 77.2
Total Electronic.......................... 19.2 24.6 29.3 35.4 40.1 46.7 52.9
Percent e-filed........................... 15.9 19.6 23.3 27.6 30.6 35.5 40.7
Percent growth Electronic................. ........ 28.1 19.1 20.8 13.3 16.5 13.3
Percent decrease Paper.................... ........ 0.9 3.9 3.8 2.3 6.5 9.2
----------------------------------------------------------------------------------------------------------------
PROJECTED--2004 AND BEYOND
[Volume in millions]
----------------------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 2010
----------------------------------------------------------------------------------------------------------------
Total Returns............................. 130.9 133.3 135.5 137.3 139.0 140.5 141.9
Total Paper............................... 71.1 66.6 62.2 58.1 54.8 51.9 49.5
Total Electronic.......................... 59.8 66.7 73.3 79.2 84.2 88.6 92.4
Percent e-filed........................... 45.7 50.0 54.1 57.7 60.6 63.1 65.1
Percent growth Electronic................. 13.5 11.5 9.9 8.0 6.3 5.2 4.3
Percent decrease Paper.................... 8.1 6.3 6.6 6.6 5.7 5.3 4.6
----------------------------------------------------------------------------------------------------------------
PROCESSING PAPER RETURNS
As a result of the increase in e-file volume, the paper return
volume has decreased each year since 1998. For example, in 1999 we
processed over 97 million paper returns, or 77 percent of the total
returns processed by the IRS. From 1999 through 2003, paper return
volume has decreased by almost 26 million returns, a 26 percent
reduction. In 2004, we project we will process 71 million paper
returns, which is 54 percent of the total returns processed. This is an
average of over 4 million fewer paper returns each year; a trend that
we expect will continue. Based on these trends, we analyzed the impact
on operations and developed a comprehensive business plan by looking at
the impact e-file would have on our processing centers (Phase I), and
then developing a strategy to address the decline in paper return
volumes (Phase II).
PHASE I OF CONSOLIDATION STRATEGY
Due to the actual and projected increases in electronic filing
(ELF), we decided to assess the current and future impact of e-file on
our paper processing sites. In 2000, we developed a long-term strategy
by answering three key questions about the future of IMF return
processing:
--How does an increased ELF volume affect the workforce?
--What is the ideal configuration (end state) of centers when we
achieve 80 percent ELF?
--How will the IRS manage the path toward the end-state
configuration?
We assessed projected volumes of ELF and paper processing capacity
at each site, multiple transition scenarios, and business objectives to
arrive at a consolidation strategy. The results of this analysis showed
that continuing to operate ten paper processing sites was inefficient.
Although we analyzed multiple strategies, consolidating one IMF center
at a time (as the volume of e-file returns continues to increase) was
the most efficient strategy. We shared this strategy with all our
internal and external stakeholders, then proceeded to implement this
``Modernization/Consolidation of Submission Processing Centers,''
starting with the consolidation of the Brookhaven IMF Submission
Processing operation. As a result, Brookhaven stopped processing
individual paper returns as of October 2003.
Our strategy will allow us to improve customer service, increase
business performance, and adjust the plan as paper and e-file volumes
and patterns dictate. It will also permit us to reduce overhead and
real estate costs campus by campus.
PHASE II OF CONSOLIDATION STRATEGY
For the second phase of our analysis, we reviewed each site against
factors including business operational alignment, economies of scale,
labor market issues, and real estate costs. This analysis identified
the order of the consolidation of IMF processing centers, starting with
the Brookhaven Submission Processing center in October 2003, the
Memphis Submission Processing center in October 2005, and the
Philadelphia Submission Processing Center in October 2007.
We expect these consolidations to be followed by the Andover
Submission Processing center, and so forth, until the IRS reaches its
``end state'' configuration. Again, this plan is contingent on the
continued growth in the number of e-filed returns.
TAXPAYER IMPACT
At the very beginning of our modernization efforts, we recognized
the challenge we would face in ensuring our customers understood the
reason for consolidating our operations and the changes they could
expect to see. We have tried to minimize the impact of these changes by
consulting with various groups including the National Treasury
Employees Union (NTEU) and Tax Practitioner groups. Working with our
own Multi-Media operation, we made sure that various tax packages
included updated instructions on the location to send returns. We also
made presentations at various tax forums around the country. Although
this effort has been challenging, we have successfully consolidated IMF
and BMF customer processing sites and the Brookhaven Submission
Processing operation. Even though we substantially reduced the number
of returns processed at Brookhaven in 2003, we completed one of our
most successful filing seasons. We review each consolidation process
and build on that foundation as we continue our consolidation efforts.
WORKFORCE IMPACT
We recognize that one of our greatest assets is the people who help
in the daily processing of taxpayers' returns. We also recognize that
consolidating paper processing operations will affect our workforce. In
anticipation of the consolidation, we stopped hiring ``career
conditional'' employees and started hiring ``temporary'' employees in
Memphis, Philadelphia, and Andover. The new hires understand their
appointment is temporary. When job reductions occur, we will make every
effort to minimize the adverse effects on our employees. For example,
when we realigned the processing of IMF/BMF paper returns into eight
IMF centers and two BMF centers, we did so without a loss of jobs. In
addition, in the Brookhaven and Memphis centers we prepared for staff
downsizing by consolidating our Centralized Offer in Compromise (COIC)
program in the centers, creating hundreds of job opportunities at each
location. We also recently announced the proposed consolidation of Case
Processing and the Insolvency Program, which will also create hundreds
of jobs in Memphis and Philadelphia.
We are working with NTEU to develop workforce transition plans and
to take advantage of every tool we have to help employees through this
transition. We have held ``Town Hall'' meetings with the employees at
all our campuses and will continue to do so as we schedule specific
campuses for consolidation. We will also continue to provide our
employees with job placement assistance. Of course, if we must
involuntarily separate employees from the IRS, we will give them all
the benefits to which they are entitled under the law.
CONCLUSION
We began modernizing our paper processing centers in 1998. We
conducted an extensive business plan analysis before making
consolidation decisions, and we continue to rely on this business plan
as we move forward with consolidation. We also adjust our plan based on
our initial experiences with the streamlining of the service centers.
This report captures at a high level the analysis, efforts and progress
we have made in improving our processing operations. We would welcome
the opportunity to present this extensive business case to you and your
staff at your earliest convenience.
Question. In addition to the new enforcement funding IRS is seeking
from Congress, the IRS's budget justification states the following
about its intention to fund enforcement from other areas: ``In fiscal
year 2005, $111 million will come from current operations to improve
enforcement and infrastructure.'' ``The majority of resources ($61
million) generated from base mining will be diverted to enforcement
activities. . . .'' Why is only a little more than half of the money
going toward enforcement? For what specific purposes is the other money
going and what is meant by infrastructure?
Answer. The IRS is emphasizing enforcement, but it cannot ignore
service or the infrastructure supporting it. Thus, in order to balance
its efforts, the IRS redirected some funds to modernizing IRS
infrastructure. The IRS budget strategy is designed to redirect
productivity enhancements from increases in electronic processing and
modernization of business systems to continue to improve taxpayer
service and enforcement.
Of the $111 million in redirected resources, $61 million will be
diverted to enforcement activities. The remaining $50 million will be
redirected as follows:
INFRASTRUCTURE EXPENSES
[In millions of dollars]
------------------------------------------------------------------------
Amount
------------------------------------------------------------------------
Cost of Transitioning Employees\1\...................... 39.0
Continue Competitive Sourcing Studies................... 9.0
Embedded Quality \2\.................................... 1.6
Create ADA-Compliant Training Facility.................. 0.5
---------------
TOTAL............................................. 50.1
------------------------------------------------------------------------
\1\ Includes lump-sum leave, severance and relocation.
\2\ This initiative, through an Embedded Quality system in Submission
Processing (EQSP), will create a new measurement system that will
identify the cause and impact of errors, apply common measures to
every level of the new organization, and enable frontline employees to
understand how their contributions impact IRS's performance. An
embedded quality system links individual and business performance with
multiple quality review sources. EQSP will instill complete
accountability for quality performance across operations.
Infrastructure refers to programs and activities that support
enforcement and taxpayer service. These activities align with the IRS's
third strategic goal, ``modernize the IRS through its people,
processes, and technology.''
Question. As part of its budget request, IRS proposes spending
$121.6 million and 1,167 FTE to ``curb egregious noncompliance''.
Please provide a table citing each instance of egregious noncompliance,
along with the associated dollar amount and FTE.
Answer. The ``Curb Egregious Noncompliance'' (CEN) enforcement
initiative addresses the continuing concern over the proliferation of
abusive domestic and international tax avoidance transactions and
schemes. In addition, requested staffing will allow the IRS to address
issues associated with certain individual taxpayers and those who use
structured transactions and flow-through entities to conceal or
improperly reduce taxable income and avoid payment of taxes owed. This
noncompliance represents a real threat to the American system of
voluntary compliance. Traditional approaches aimed at maintaining audit
coverage and managing growing case inventories with a declining
resource base have failed to adequately address these complex
enforcement issues.
To address these issues, the CEN initiative will allow the IRS to
hire and train new staff in the Examination, Collection and Document
Matching programs during fiscal year 2005.
The following table shows the projected expenditures of FTE and
dollars by program.
[Dollars in millions]
------------------------------------------------------------------------
Program FTE Amount
------------------------------------------------------------------------
Field Examinations...................... 492 $66.0
Field Collection........................ 332 $29.2
Automated Underreporter................. 53 $4.2
Automated Collection (ACS).............. 125 $10.9
Correspondence Exams.................... 165 $11.3
-------------------------------
Total............................. 1,167 $121.6
------------------------------------------------------------------------
Question. Please provide a breakdown by percentage of how proposed
enforcement resources would be allocated toward the various segments of
the taxpayer population within $25,000 increments.
Answer. In fiscal year 2005, proposed increases for the Tax Law
Enforcement account, including annualization and enforcement
initiatives, total $393 million. The IRS aligns increases in
enforcement as follows:
--Corporations.--$59 million (22 percent) and 562 FTE;
--High-income taxpayers (>$100,000).--$57 million (21 percent) and
674 FTE;
--Criminal activity.--$64 million (23 percent) and 299 FTE;
--Tax-exempt organizations.--$16 million (6 percent) and 180 FTE; and
--Other contributors to the tax gap.--$76 million (28 percent) and
1,226 FTE.
The increase also includes $121 million for inflation to maintain
current levels.
IRS REORGANIZATION
Question. Please summarize in detail what has happened to IRS
employees who were determined to be ``transitional'', stating from
which program area they were taken and when, how many reassigned, how
many were lost due to attrition, as well as how the requested $5
million will remove the remaining employees ``from the rolls.''
Answer. Upon stand-up in September 2000, approximately 5,000
employees did not align with the new organizational structure. Over the
next 3 years, the IRS placed approximately 4,450 employees into
permanent positions or they voluntarily left the IRS. Approximately
1,000 of these employees left under Voluntary Early Retirement
Authority (VERA) or Voluntary Separation Incentive Payment (VSIP). On
August 9, 2003, the IRS terminated the ``transition'' designation and
declared permanent all employees previously designated as
``transition.'' At that time, there were approximately 550 formerly
transition employees. Of this group, the IRS placed approximately 290
employees in permanent positions and 260 remained in non-continuing
positions. The IRS expects to offer VERA/VSIP to the employees in the
non-continuing positions to facilitate voluntary separations.
Question. In early January, IRS officials announced a major
organizational restructuring resulting in 2,400 layoffs as well as
office consolidations. As part of the same announcement, IRS indicated
its intention to then fill 2,200 new positions. What is the cost of the
2,200 new enforcement positions the IRS intends to add? What is the
cost savings associated with the layoffs and consolidations?
Answer. As noted in the January announcement, as a result of our
planned consolidation, the IRS expects to perform its Case Processing
and Insolvency operations while using fewer full-time employees--saving
approximately 350 staff years. Similarly, the IRS expects that Support
Optimization initiative will allow it to deliver its operations support
services while saving approximately 750 staff years. The Memphis
Submissions Processing ramp-down will eliminate approximately 2,200
positions. The January announcement stated the intention to redeploy
the personnel reductions towards enforcement priorities.
In determining the approximate numbers of full-time positions that
could be redirected to enforcement activities, the IRS assumed a 1-for-
1 redeployment of the full time positions (i.e., approximately 350 from
Case Processing and Insolvency and 750 from Support Optimization) and a
2-for-1 redeployment for the submissions processing positions (i.e.,
for every two submission processing positions eliminated the IRS could
expect approximately one full-time position available for redeployment,
or approximately 1,100 positions). Thus, the IRS estimated that
approximately 2,200 positions would be available for redeployment to
enforcement activities that would not be otherwise available without
such efficiencies.
In determining the numbers of employees potentially subject to
involuntary separation, the IRS estimated the numbers of employees in
positions to be eliminated, and reduced that figure to account for the
numbers of employees who are expected to voluntarily leave through
normal attrition, the use of Voluntary Early Retirement Authority
(VERA) and Voluntary Separation Incentive Payments (VSIP), and those
employees expected to be placed in other positions with the IRS. For
this determination, the IRS did not include employees hired for
limited-term appointments, because employees accepted these positions
with the understanding that the positions would ``sunset'' in 2005 and
because the elimination of these positions does not require the same
involuntary separation procedures.
For the income tax returns processing initiative, the IRS estimates
that approximately 2,200 positions will be eliminated. Of this number,
approximately 400 are term appointments. Therefore, the IRS determined
that approximately 1,800 permanent (full-time or seasonal) positions
would be eliminated. Based on this figure, the IRS anticipates
approximately 1,000 employees will be involuntarily separated. For the
case processing and insolvency initiatives, the IRS estimates that
approximately 1,400 positions will be eliminated. Of this number, it
anticipates that approximately 1,000 employees will be involuntarily
separated (because the case processing and insolvency initiative
involves consolidating work, i.e., eliminating positions in field
offices while creating positions in the four consolidated campus
locations, the net number of positions available for redeployment
(approximately 350) is less than the gross numbers of positions being
eliminated (approximately 1,400)). The Support Optimization initiative
involves eliminating approximately 750 positions, and based on that
figure, the IRS anticipates approximately 400 employees will be
involuntarily separated. Thus, the total number of employees estimated
to be subject to involuntary separation is estimated to be 2,400.
Question. The nationwide case processing and insolvency support
workforce would be reduced from 1,600 positions to 1,200, a 25 percent
reduction. What analysis has been done to show that 25 percent fewer
employees can perform this work? What cost savings does the IRS project
from this? All background on how the savings are projected should be
provided.
Answer. The IRS has been studying the reengineering of the case
processing and insolvency operations since 2000. Even after taking into
account costs such as severance, hiring, training, salary cost
differentials, and infrastructure, the IRS expects these initiatives to
yield more than $300 million in savings over the next 10 years. These
savings will allow us to redirect the equivalent of 350-425 full-time
employees to front line tax law enforcement.
The IRS considered alternative approaches, including switching
staffing allocations from the area offices to the campuses at a pace
driven by natural attrition. The IRS rejected this approach because of
low return on investment and implementation difficulties. Competitive
outsourcing was also considered and rejected because case processing
and insolvency work is mainly inherently governmental.
The IRS's analysis involved baselining the existing case processing
and insolvency processes currently performed in the areas, identifying
best practices, and standardizing the processes to be implemented in
the campus from these baselines and best practices. The new operational
structure builds on existing processes currently being performed at IRS
campuses, provides economies of scale and standardization, allows the
creation of a quality review unit, offers staffing flexibility, and
creates space savings due to shift work.
The IRS's analysis of sources such as OMB and best practices used
in private industry predicted that a 35 percent reduction in case
processing and insolvency costs would be possible through consolidation
and process standardization. The results predicted from external
indicators were compared with area and campus case closure
efficiencies. Centralized staffing calculations were updated based on
area and campus efficiency and projected work plans resulting in a more
conservative of 25 percent cost savings projection.
Question. IRS has stated that no employee would be involuntarily
separated before January 2005. When would new employees be hired and
what kind of training will be provided? How would IRS deal with an
inexperienced workforce--reduced by 25 percent from current levels--
that will have no institutional memory?
Answer. The IRS is currently in negotiations with NTEU regarding
the potential reduction in force. Until negotiations are finalized, no
employee will be involuntarily separated. However, the IRS has recently
entered into a separate memorandum of understanding with NTEU that
authorizes a staged hiring at the campus consolidated sites to address
excess workload in the area offices created by the natural attrition of
staff. This step will allow the organization to begin ramp up by
providing training and significant experience with the work before any
off rolls occur.
Once this IRS reaches its final agreement with NTEU, full
implementation will occur with a staged deployment of hiring at the
campuses, redirecting work from the field, and workforce transition in
the non-continuing sites. This approach allows campus personnel
additional experience with total centralization before off rolls will
occur in 2005.
The IRS established a training team made up of subject matter
experts from case processing, insolvency, and campus employees to
revise existing training material, write additional training lessons
and develop training guidelines and timeframes. All campus hires will
be given a combination of classroom and on the job training as soon as
they are hired, which is a significant improvement over current field
practices in case processing and insolvency.
Learning curves were projected for centralized case processing and
insolvency new hires aligned by grade level and skill set. These
learning curves provided the underpinnings for decisions regarding the
timing for early ramp up and staging the implementation. Projections
for the time needed for training are conservative as many of the hires
will already have experience from positions and activities currently
performed on the campus that are similar to those in centralized case
processing and insolvency.
Question. How is it more efficient to move these case processing
staff away from the collection staff they are supporting to centralized
locations?
Answer. In a centralized situation, a smaller team of employees can
focus on one function for longer periods of time, and can work more
efficiently than the larger number of staff in the separate locations.
The workload can also be more easily managed and scheduled because of
the consolidation. Training expenses and other costs have been
considered, and the resulting savings shows centralization is cost
effective.
Many revenue officers and revenue agents currently mail their work
to the area offices and under the new design the only change for them
would be the address they mail to. To address lingering concerns of the
collection staff there will be a FORT (Field Office Resource Team)
consisting of revenue officers who will be responsible for assisting
tax examiners and field collection personnel in making any necessary
corrections to reports or closing documents.
Question. How is it more efficient to centralize insolvency/
bankruptcy staff when this work is ruled in large part by 50 different
State laws?
Answer. Over 900 Insolvency Specialists and Advisors will remain in
the area offices to address the more technical issues. They will no
longer be pulled away from the technical work to help with clerical and
para-professional duties. Therefore, centralization will actually
enhance the relationships with the bankruptcy courts, trustees and
external stakeholders that have been established over the years and
increase customer service.
The new structure provides economies of scale and standardization,
allows the creation of a quality review unit, offers staffing
flexibility, and creates space savings due to shift work.
Centralization will also help create an environment suitable for
electronic processing and transmission of Proofs of Claim. The planned
use of an electronic knowledge system will provide a national resource
for State law information.
Question. Have you discussed this reorganization with the affected
parties? What do the revenue officers and agents think the impact of
this will be on their efficiency? What do tax practitioner groups think
of this?
Answer. There is a natural concern and uneasiness that accompanies
any change. Focus interviews and customer surveys were conducted with
area directors, revenue officers, revenue agents, and other bargaining
unit employees in which the case processing redesign team received
valuable information on issues and ideas to be considered for possible
centralization. As a result of this feedback, the IRS developed the
concept of the Field Office Resource Team (FORT). The FORT, consisting
of revenue officers, will be available to address the needs of field
collection personnel in making any necessary corrections to reports or
closing documents.
Insolvency has little contact with revenue officers, revenue
agents, or practitioners. A centralized phone number and phone unit
will be established to answer calls and concerns of trustees, taxpayers
as well as any internal customers.
The Case Processing Team had conversations with some of the large
institutional practitioner groups and received support for the
redesign.
Question. At the Memphis Service Center, 2,200 current employees
would be laid off and not replaced. IRS claims that this is aimed at
reducing paper processing staff in response to increases in electronic
filing. IRS has already downsized returns processing employees at the
Brookhaven, NY Service Center. The House report accompanying the fiscal
year 2004 Transportation, Treasury Appropriations bill recommended that
IRS refrain from initiating any premature and ill-considered reductions
in force until reporting to Congress. What progress has been made on
the report to Congress and when will it be submitted? What are the cost
savings associated with the reduction in force?
Answer. The IRS delivered the report to Congress on April 22, 2004.
A copy is attached. The IRS estimates the cost savings for Memphis to
be $12.5 million for the period 2004 through 2006 and then an annual
cost avoidance of $9.5 million dollars a year starting in 2007.
Question. GAO has indicated that electronic filing is far short of
IRS projections. What is the level of electronic filing compared to IRS
projections? What level of increase in electronic filing is IRS
projecting that will make it plausible to lay off 2,200 return
processing employees within the next year?
Answer. While the IRS is below projections needed to achieve the
goal of 80 percent of individual returns filed electronically by 2007,
it is continuing to make strong gains. The Consolidation Strategy is
based on projections that are keyed to the workload shifts necessary to
process the reduced paper volumes. In 2004, the IRS projected 59.8
million electronic returns would be filed. As of May 14, taxpayers
exceeded the number e-filed returns from the prior year by over 8
million returns to reach the 60 million mark. This figure equates to
approximately 50 percent of all individual returns filed and represents
a milestone in e-file progress. The IRS's Consolidation Strategy is on
track.
PROBLEMS WITH IRS BUSINESS SYSTEMS MODERNIZATION (BSM)
Question. In a March 2004 review, GAO found that although IRS has
made some progress in implementing their recommendations and improving
its modernization management, certain recommendations have not yet been
fully implemented or institutionalized. These weaknesses have
contributed, at least in part, to BSM project cost and schedule
shortfalls. GAO states that, ``Projects continue to incur cost
increases and schedule delays for several reasons, including inadequate
definition of systems requirements, increases in project scope, and
cost and schedule estimating deficiencies.'' Mr. Everson, this
modernization effort has been plagued with these problems from the
start. What have you done to ensure that IRS staff is adequately
prepared to define its systems requirements instead of relying
completely on the contractors to do so? What steps are you taking to
ensure that cost and schedule estimates, which have been grossly off-
track, will now be more accurate?
Answer. Recent improvements to the IRS Enterprise Life Cycle (ELC)
will ensure that the IRS adequately defines system requirements in the
future. The recent updates to the ELC include a new milestone
(Milestone 4A), that requires a detailed definition of a systems'
physical design baseline under strict configuration management (CM)
control. This baseline can be used for awarding fixed priced contracts
for the development, integration, and testing of the system. As a
prerequisite to the implementation of MS 4A, the ELC now requires
redefinition of requirements management, and strict CM control for
projects in prior milestones. For example, at Milestone (MS) 2,
business requirements constitute the functional baseline. The
functional baseline is then decomposed into logical systems
requirements that are baselined under CM control at MS 3. Requirements
that evolve from milestone 1 through 4A are verifiable and traceable in
both directions and must be compliant with the Enterprise Architecture
in order for a project to gain approval to move to the next stage of
development. There will be a major systems engineering review at the
end of each development phase, conducted by IRS business and technical
personnel.
As the IRS moves forward, constant involvement of the IRS
stakeholder organizations is critical. Stakeholder involvement in the
definition, approval, and coordination of system requirements will
ensure that what the IRS develops is closely traced to IRS's business
needs and that ownership is clearly identified and understood. As this
revised ELC strategy is unveiled, training will be provided to ensure
that IRS personnel are adequately prepared to achieve success.
The IRS has been working jointly with MITRE and CSC (the PRIME
Contractor) to improve cost and schedule estimating capability. The IRS
is using the well-recognized Carnegie Mellon Software Engineering
Institute's (SEIs) Requisites for Reliable Estimating Processes as a
guide. The requisites provide for development and execution of the
following key cost and schedule estimating objectives:
--Maintaining historical data;
--Structured estimating processes;
--Mechanisms for extrapolating estimates from successful past
projects;
--Audit trails; and
--Ensuring integrity in dealing with dictated costs and schedules.
Both CSC and the IRS have made significant progress towards
achieving these key objectives. The IRS has implemented procedures for
validating contractors' estimating systems and for reviewing cost and
schedule estimates. The procedures provide guidance for evaluating
reliability of documentation supporting individual estimates and for
tracking compliance with sound estimating practices. Furthermore, the
procedures also address professional development of personnel with the
right skill set for developing and evaluating cost and schedule
estimates. CSC has established a historical database, calibrated
estimating models and developed detailed requirements for documenting
and supporting bases of estimates along with related guidance and
directives. Work is also in progress for continuing refinement and
improvement in each of these elements.
In addition, joint training is being conducted for IRS, CSC and
MITRE personnel as an integral part of the overall plan to ensure
competent deployment of improved processes and procedures. The IRS,
with MITRE's assistance, recently completed a review of CSC's
estimating system. The IRS is finalizing the results and will issue
them in a report in the latter part of June. In general, there have
been improvements. The report will include a time phased corrective
action plan for addressing deficiencies. To ensure the tools, guidance,
processes and procedures are part of a mature repeatable process, a
concerted effort is underway to fully validate all aspects of the
processes and procedures prior to official roll-out within the IRS.
This pilot program is intended to verify the soundness of the processes
and procedures and provide lessons learned, before full implementation
is effected.
The IRS is making every effort to hire qualified staff and fully
implement its improved tools, guidance, processes, and procedures as
soon as possible. However, this is taking more time than the IRS would
like. This is a pervasive problem on programs of the size and
complexity of the modernization initiative. Nonetheless, the IRS
believes that there will be evidence of increased accuracy by the end
of fiscal year 2004 and continued improvements over time.
Finally, all of these efforts are part of a highly visible set of
plans geared to identifying, tracking, reporting, and reviewing the
critical cost and schedule estimating commitments with IRS Executive
Management and GAO/TIGTA.
Question. The modernization of IRS business systems has suffered
numerous problems and delays and now some IRS staff integral to the
process are leaving, including the director of BSM. How will this
affect the program, what steps are being taken to ensure that
institutional knowledge of the modernization program remains?
Answer. In addition to putting a succession management plan in
place, the IRS needs a more versatile team of seasoned executives to
provide long-term stability to the program. The IRS is complementing
the skills of its experienced tax executives with outside seasoned
technology executives who have experience managing large-scale, complex
IT projects. As such, the IRS is hiring two Associate Chief Information
Officers to join the MITS organization, and an executive search firm is
conducting searches for five senior executives with a wide range of
diverse experience in developing and implementing large modernization
systems. The new Associate CIOs will assume modernization management
responsibilities so that the Associate CIO of business systems
modernization can focus primarily on delivering projects.
Question. Until recently, IRS has used its information technology
services staff with minimal input from its business units. The business
units will be the ultimate users of this program. What steps has IRS
taken to incorporate the business managers into BSM?
Answer. The Commissioner is holding IRS senior business unit
managers accountable for the success of modernization efforts as it
relates to defining, developing, and controlling business requirements.
For example, a senior business unit manager is responsible for working
closely with the BSM and Modernization and Information Technology
Services (MITS) executives to ensure that the delivery of the CADE
project meets all business requirements.
Question. GAO has concluded that the IRS must institutionalize the
management processes and controls necessary to resolve the deficiencies
identified by the reviews and assessments in order to strengthen
management of the Business Systems Modernization program. What steps is
IRS undertaking to accomplish this?
Answer. Over the past 2 years, the BSM organization has been
working diligently toward integrating and institutionalizing the
management processes of the BSM program. While the IRS has achieved
real progress, as recognized by TIGTA and GAO, the BSM Challenges Plan
has complemented ongoing efforts by providing a special focus on
significant issues that needed more attention.
GAO recognized the need for continual growth in the maturity of the
BSM management processes and raised concerns in key areas such as
configuration management, human capital management, contract
management, and cost and schedule estimating. Accordingly, BSMO
committed to maturing its management processes and established
corrective action plans for each area, assigned responsibilities and
set milestones, and initiated a formal monitoring process for measuring
progress in each area.
For example, the IRS has developed configuration management
processes and is institutionalizing configuration procedures. It
established a process for determining the type of task order to be
awarded and MITS is implementing plans for attracting, developing, and
retaining requisite human capital resources. Key stakeholders are
reviewing documented procedures for how to effectively validate the
cost and scheduling estimates submitted by the PRIME.
Question. The IRS Oversight Board stated in a December 2003 report
that, as the foundation of the modernization project, the Customer
Account Data Engine (CADE), requires special attention. CADE will
replace the existing IRS Master File of taxpayer accounts. It is the
most costly, complex, largest, and longest-running project within the
BSM portfolio. IRS has engaged Carnegie Mellon's Software Engineering
Institute (SEI) to review CADE. One of SEI's findings is that a key
component of CADE, its ``business rules engine'' which translates tax
processing rules into computer code, must be defined and modeled in
order for CADE to succeed. Is IRS following this recommendation and if
so, what is the status? If not, why not?
Answer. The IRS is following the recommendation from Carnegie
Mellon's Software Engineering Institute. The IRS tasked PRIME to do a
business rules engine performance engineering study that measured and
modeled the performance of the business rules engine. The IRS also
tasked PRIME to evaluate design alternatives that lowered risk of
implementing business rules. The PRIME has completed performance tests.
Senior engineers from IRS, PRIME, MITRE, and Sapiens (the business
rules vendor) met the week of May 10, to review the test results and
assess alternatives that will improve the performance of CADE and lower
the risk of implementing business rules. Design changes will be modeled
using the performance data obtained in the tests. The final report is
due to be completed June 20, 2004.
Question. In Ms. Gardiner's formal testimony, she states that
oversight groups are starting to lose confidence in the ability of your
PRIME contractor to meet its commitment in modernizing the IRS's
business systems. This observation is clearly based on the deadlines
that have already been missed and the cost overruns already incurred.
Mr. Everson, what is your current assessment of your PRIME contractor's
ability to get the job done without further delays and further cost
overruns? Are you giving any consideration to changing your PRIME
contractor on this critically important endeavor? If so, what would be
the cost to the taxpayer of changing your PRIME contractor at this
time?
Answer. There are no current plans to replace CSC as the PRIME
contractor, however, Commissioner Everson has made it vividly clear to
Mike Laphen, the President and Chief Operating Officer of CSC, that CSC
needs to significantly improve their performance. In February 2004, he
announced his decision to direct the upcoming enforcement modernization
projects for collection contract support and filing and payment
compliance to other contracts. It is the Commissioner's hope that this
action, while no doubt unwelcome to CSC, will lead to a sharpened focus
and discipline, and will in fact enhance the prospects for successful
and timely delivery of other modernization projects by CSC.
While CSC has improved their performance somewhat, the IRS
carefully assessing CSC's performance on current projects and the
results of CSC's overall program management and integration efforts
before awarding any follow-on work for existing projects. The IRS needs
consistent, high-level performance and service from CSC. The IRS has
also moved to capped or fixed price contracts for almost all
development work to balance the financial risk on modernization
projects.
COMPETITIVE SOURCING
Question. Mr. Everson, you are very familiar with the President's
competitive sourcing initiative since you served as Deputy Director for
Management at OMB. I understand that you plan to spend $9.1 million in
unbudgeted funds in fiscal year 2005. What areas are you planning to
contract out?
Answer. The $9.1 million you cite is the amount the IRS has
requested in the fiscal year 2005 budget submission to support the
Competitive Sourcing program. The IRS plans to use public-private
competition to improve operations, but only if it makes economic sense.
Traditionally, the employee government bid teams have won over 50
percent of the public-private competitions. Historically, organizations
that have successfully used competition to improve operations have
achieved an overall 30 percent reduction in operating costs. These
reductions are typically in the support functions and are achieved
through such actions as consolidation of existing facilities (releasing
commercially leased space), staff reductions, and increased use of
technology. Similarly, the IRS focus is on support functions.
Question. What is the status of all the competitive sourcing
studies that have been undertaken at IRS? Please include year, area,
and result. How much money has been spent on these competitions? Since
the competitions are not budgeted for, where has the money come from?
Answer. It has been difficult to finance the Competitive Sourcing
Program since the IRS does not know the outcomes in advance, the exact
level of savings are yet to be determined, and it takes time to realize
these savings. The IRS had to internally realign. However, the
investments made today in public-private competitions show a return on
investment usually within 2-3 years (including payment of transition
costs--voluntary early retirement, voluntary separation incentive,
etc.). At that time, the IRS plans to reinvest the savings to fund
future competitions and cover transition costs. It will take several
years to get there. The IRS does request funding in the fiscal year
2005 budget for the Competitive Sourcing program.
Status of IRS Competitive Sourcing Studies
Architects and Engineers (10 FTE).--Streamline competition resulted
in in-house award. The in-house team was most efficient.
No savings achieved.
Area Distribution Centers (500 FTE in Bloomington, IL; Rancho
Cordova, CA; Richmond, VA).--The three Area Distribution Centers
distribute tax forms, instructions and publications to taxpayers and
internal use documents to IRS employees.
Standard Competition with award decision scheduled for June 28,
2004.
Expected Saving and Benefits: Consolidation of activities and
geographic locations resulting in the release of commercial space,
revised operational processes and procedures to gain efficiencies, new
information system, reduced staff and increased managerial span of
control.
Anticipated return on investment (fiscal year 2005-fiscal year
2009): $22 million.
Building Delegations or Operation and Maintenance (O&M) of
Delegated Buildings (100 FTE in Covington, Fresno, Austin, Ogden,
Philadelphia, Headquarters).--O&M are those functions identified in the
Building Delegation Agreements between the General Services
Administration (GSA) and the IRS. These services include
responsibilities to operate and maintain building systems (electrical,
HVAC, control systems, etc.).
Standard Competition with solicitation release scheduled for June
2004.
Expected Saving and Benefits: Revised operational processes and
procedures to gain efficiencies; reduced staff; and increased
managerial span of control.
Anticipated return on investment (fiscal year 2006-fiscal year
2010): $3.9 million.
Mail Rooms (70 FTE).--Mailroom services functions include all
aspects of the delivery of mail from full service delivery to mail stop
or desktop to self-service mailrooms where customers pick up their own
mail. The IRS made a decision to divide the study among headquarters,
nationwide ``stand alone sites'' and campuses.
The IRS plans to use public-private competition to improve
operations.
Direct Conversion--in progress.
Fully Implemented--Denver, CO; Detroit, MI; Plantation, FL; Detroit
Computing Center, MI; Houston (Leland), TX; Laguna Niguel, CA; Oklahoma
City, OK; and San Francisco, CA.
Partially Implemented--Washington, DC; New Carrollton, MD.
Scheduled for Implementation--Cincinnati, OH; Jacksonville, FL (5/
17); and Nashville, TN.
Implementation Not Scheduled--Atlanta, GA; Baltimore, MD; Boston,
MA; Buffalo, NY; Dallas, TX;; Greensboro, NC; Hartford, CT; Houston
(Alliance), TX; Indianapolis, IN; Los Angeles, CA; Milwaukee, WI; New
Orleans, LA; Oakland, CA; Philadelphia, PA; Phoenix, AZ; Richmond, VA;
Chicago, IL; Springfield, NJ; St. Louis, MO; St. Paul, MN.
Anticipated return on investment (fiscal year 2005-2009): $399,000.
Campus Operations (Information Technology) (350 FTE in Ogden, UT;
Atlanta, GA; Brookhaven, NY; Andover, MA; Cincinnati, OH; Fresno, CA;
Austin, TX; Memphis TN; Kansas City, MO; Philadelphia, PA).--This
functional area provides the Information Systems (IS) computer
operations at the ten IRS Campus facilities. The positions include
computer operators, production controllers, tape librarians, computer
specialists, and clerks.
Standard Competition with award decision scheduled for July 2004.
Expected Saving and Benefits: Revised operational processes and
procedures to gain efficiencies; reduced staff; and increased
managerial span of control.
Anticipated return on investment (fiscal year 2005-2009): $12.7
million.
Logistics Support (formerly Warehouse and Transportation) (160 FTE
in Andover, MA; Philadelphia, PA; Brookhaven, NY; Atlanta, GA;
Covington, KY; Austin, TX; Kansas City, MO; Ogden, UT; Fresno, CA;
Memphis, TN).--This functional area provides warehousing and
transportation, mainly at the 10 campus sites. This activity includes
positions such as material handlers, warehouseman, motor vehicle
operators, laborers, and clerks.
Standard Competition with Performance Work Statement development
underway.
Expected Saving and Benefits: Revised operational processes and
procedures to gain efficiencies, release of leased space, reduced staff
and increase of managerial span of control.
Anticipated return on investment (fiscal year 2006-2010): $4.8
million.
Campus Files Activity (1458 FTE in Austin, TX; Andover, MA;
Philadelphia, PA; Brookhaven, NY; Cincinnati, OH; Memphis, TN; Atlanta,
GA; Kansas City, MO; Ogden, UT; Fresno, CA).--This functional area
receives, controls, shelves and maintains all returns/documents for
retention and retirement. They retrieve documents as requested by
customer organizations. Liaison work is critical with the Federal
Records Centers for final retention of documents. The work is routine
and does not involve making complex determinations or present unique
fact patterns.
Standard Competition with solicitation release scheduled for the
fourth quarter of 2004.
Expected Saving and Benefits: Revised operational processes and
procedures to gain efficiencies; reduced staff; and increased
managerial span of control.
Anticipated return on investment (fiscal year 2006-2010): $22
million.
Learning and Education (617 FTE Service-wide).--This functional
area is responsible for determining service-wide and division-level
professional training requirements, developing training plans and
curriculum, evaluating the effectiveness of training, and performing a
broad spectrum of program administration.
Standard Competition with Performance Work Statement development
underway.
Expected Saving and Benefits: Consolidation of activities, revised
operational processes and procedures to gain efficiencies,
implementation of learning content management and learning management
systems, reduced staff and increased managerial span of control.
Anticipated return on investment (fiscal year 2006-2010): $25
million.
Competitive Sourcing Competition Costs
[In millions of dollars]
------------------------------------------------------------------------
Amount\1\
------------------------------------------------------------------------
Fiscal year 2003........................................ 5.0
Fiscal year 2004........................................ 6.3
------------------------------------------------------------------------
\1\ Travel, training, staffing, expert contractor support (PWS, Most
Efficient Organization, Independent Review)--does not reflect
transition/separation costs.
Note.--Return on investment includes cost of conducting competition and
transition/separation costs. The IRS calculated savings calculated
through fiscal year 2007.
Business Case Analysis/Feasibility Studies
Tax Law Telephone.--This is a preliminary feasibility assessment of
having a vendor provide tax law telephone assistance. After the
completion of the preliminary feasibility assessment, the IRS will make
a decision as to whether to go forward with the competition.
Fuel Compliance Activity (140 FTE Service-wide).--This function
area monitors 1,400 terminals, all fuel wholesalers, thousands of
retail motor fuel outlets, and U.S. border crossings. Additionally,
these personnel are charged with conducting periodic inspections of on-
road vehicles on highways throughout the country.
IT Support (Service-wide).--This is identification and development
of sourcing strategy to identify candidate public-private competition
activities.
Question. One of the provisions included in last year's
appropriations bill was a prohibition against using fiscal year 2004
funds to contract out any Federal job overseas. To my shock, the
President's budget specifically requests that this provision be deleted
for fiscal year 2005. Mr. Everson, could you cite for me some instances
at IRS where you might take work that is currently be conducted by
Federal employees and send that work overseas?
Answer. The IRS has no specific plans to move work overseas. There
are added complexities and security challenges that make moving work
that would involve access to the IRS's information technology systems
and/or sensitive data cost prohibitive.
However, while the IRS has no specific plans to contract work
overseas, it is conceivable that qualified bidders with overseas
operations may be responsive to future IRS public-private competitions
that do not involve access to the IRS's information technology systems
and/or taxpayer return information. The IRS will continually identify a
series of functions that are commercial in nature in accordance with
the FAIR Act. At that time, a business case is developed that indicates
whether or not a more efficient method of operation may be available.
If so, a competitive sourcing initiative is begun under the guidelines
of the OMB A-76 Circular. A contractor may then bid for that work. It
is highly unlikely that a contractor would bid work to be performed
overseas given the nature of the work the IRS has identified to date or
anticipates identifying. Under the IRS Competitive Sourcing Program, no
initiative has resulted in Federal jobs being outsourced overseas. The
IRS adheres primarily to the Federal Acquisition Regulations (FAR) and
the A-76 Circular when conducting public-private competitions for work
performed by Federal employees. The FAR currently contains some
limitation on issuance of contracts to some overseas locations.
CUSTOMER SERVICE
Question. IRS consistently finds its own accuracy rates higher than
TIGTA does when measuring taxpayer assistance functions, whether we are
talking about toll-free telephone assistance, walk-in service at
Taxpayer Assistance Centers, or the IRS website. Mr. Everson, how do
you explain the discrepancy? Ms. Gardiner, would you care to comment?
Answer. Typically, TIGTA's reports on accuracy are based on limited
judgmental sampling conducted during the brief period of their
fieldwork on a particular audit. The results that they report are not
statistically valid. The IRS results for telephone accuracy and for
irs.gov e-mail assistance are based upon an on-going process that is
statistically reliable. TIGTA typically acknowledges the limitations of
their data in their reports with statements such as, ``We selected a
judgmental sample of calls to monitor between April 21 and May 16,
2003. Our results cannot be compared to the statistical results
reported by the IRS.''
The discrepancy between the TIGTA accuracy rates and the Taxpayer
Assistance Center (TAC) walk-in service accuracy rates is due to the
calculation methodology. TIGTA and the IRS treat responses to tax law
questions differently. In contrast to the IRS, TIGTA includes referrals
to publications, service denied, and referrals to other employees in
its accuracy calculation. The IRS disagrees with the assertion that a
non-response is synonymous with providing an incorrect answer. While it
is clear that there is some disparity in methodology, it is important
to note that neither of these methods of measuring walk-in service
accuracy is statistically reliable.
TIGTA will respond separately.
Question. As stated in testimony, TIGTA found that IRS employees
incorrectly prepared 19 of the 23 tax returns prepared during TIGTA
audit visits to Taxpayer Assistance Centers. What steps has IRS taken
to remedy this egregious example of inaccuracy and Mr. Everson, do you
plan to implement the additional actions that TIGTA recommended?
Answer. The IRS implemented the recommendations made by TIGTA and
has taken several steps to remedy inaccurate return preparation. The
IRS directed all TAC employees to adhere to existing screening
procedures to ensure taxpayers meet the return preparation criteria. In
addition, the IRS required all employees to use the appropriate
worksheets in the return preparation software and the publication
method guide to assist in determining a taxpayer's eligibility for
deductions and credits claimed on the tax return.
The IRS also implemented a quality review plan to ensure TAC
employees adhere to these and other return preparation procedures in
the Internal Revenue Manual. The IRS requires group managers to
complete three employee return preparation reviews and the quality
review staff is required to visit each Area and conduct at least two
return preparation reviews.
Question. As stated in testimony, TIGTA found that IRS didn't
respond to several of the questions TIGTA submitted anonymously to the
website. Do you have statistics about the number of questions that go
unanswered? How is this allowed to happen? What is being done to
prevent this in the future?
Answer. During the period from February 22 to March 6, 2002, TIGTA
anonymously submitted 90 questions through the website. TIGTA reported
that they did not receive a response to 14 of these questions. During
that period of time, the IRS was making system changes that affected
its responsiveness. As it transitioned to a new server and a new
contractor, some messages did not transfer between servers. The IRS was
able to recover most messages, but unfortunately lost several,
including some initiated by TIGTA.
In an October 2002 report, Reference No. 2003-40-014, TIGTA
recommended that the IRS improve its control system by sending an e-
mail receipt acknowledgement to the requestor and develop a system to
track each question submitted to ensure the IRS provides a response.
The IRS concurred with these recommendations and modified the program
to add both new features in 2003. Both of these enhancements are
performing as designed. However, taxpayer e-mail limitations, such as
address problems, discontinued service, mailbox full, and stringent
spam filters may continue to block delivery of an IRS response.
Question. Ms. Gardiner points out that the IRS revised its
modernization plan for fiscal year 2003 to focus on executable segments
that could be accomplished in a timely manner. Despite all of the IRS's
assurances to the contrary, all of the projects on the newly downsized
list still experienced delays and most incurred significant cost
increases. What are her observations regarding the IRS's abilities to
deliver modernization projects on time and on budget for the current
fiscal year and next year? Why should we believe that the IRS and its
contractors will improve its performance on these projects going
forward? Mr. Everson, do you care to comment on this matter?
Answer. The BSM program is--without a doubt--one of the largest,
most visible, and most sensitive modernization programs ever undertaken
in the world.
When nominated in February 2003, the Commissioner set three
priorities for his term as Commissioner. First, the IRS must continue
to improve service to make it easier for taxpayers to understand and
comply with tax laws. Second, modernization of IRS information
technology is also a high priority. The third priority is to strengthen
the integrity of the American tax system with enhanced enforcement
activities. The Commissioner's first action to address the
modernization priority was to appoint two new leaders to the
modernization effort.
Commissioner Everson appointed John Dalrymple, a 30-year IRS
veteran who has spent his career focusing on front-line taxpayer
issues, as the Deputy Commissioner for Operations Support to own the
modernization initiative and drive productivity across the IRS.
Simultaneously, he appointed the former IRS Chief Financial Officer, W.
Todd Grams, to the position of Chief Information Officer to bring
stronger leadership and discipline to the technology modernization
program.
These executive appointments to the IRS modernization program
represent a major change in the way the IRS has managed previous
modernization projects. They were necessary steps to bring more
management discipline and increased business unit knowledge and
involvement to the modernization program. The following is a brief
recap of IRS's progress and struggles over the past year.
The results have been mixed. The IRS built a strong technical
infrastructure, and designed and implemented stringent security and
control mechanisms into the infrastructure. It also developed a
rigorous enterprise life cycle methodology. Over the past 2 years, the
IRS has been working toward maturing its management processes. The IRS
has made progress, but a major thrust now focuses on sustaining a solid
balance of business commitment, accountability, and scope management.
Finally, the IRS has achieved a great deal of success with the projects
delivered to date.
For the first time ever, corporations and tax exempt organizations
have the option of filing their annual income tax and information
returns electronically using Modernized e-File (MeF). This new
electronic filing system significantly reduces the time and cost for
corporations and tax exempt entities to file their Forms 1120 and 990.
Simply by using a secure Internet connection to file 1120 and 990
forms, corporations and tax exempt organizations eliminate the need to
submit hundreds of pages of paper returns. The e-Gov Institute recently
chose MeF as a winner of the Government Solutions Center Pioneer
Awards.
The IRS has achieved a great deal of success with the e-Services
projects. All e-Services Release 1.0 products are fully deployed and
available over the Internet, including: registration and online address
change access for third parties and IRS employees through secure user
portals; Preparer Tax Identification Number (PTIN) online application;
interactive Taxpayer Identification Number (TIN) matching; secure
Electronic Return Originator (ERO) application processing; and access
to e-Services registration and application processes by Modernized e-
File (MeF) participants.
E-Services Release 2.0 products are also now in production and
available for use by IRS staff and taxpayers, including: Application
for e-Filing (external); Electronic Account Resolution (EAR);
Electronic TIN Bulk Matching (Bulk Requests); Disclosure Authorization
(DA); and infrastructure support for outbound facsimile service.
In March 2004, James D. Leimbach appeared before the Ways & Means
Oversight Subcommittee on behalf of the National Association of
Enrolled Agents (NAEA), the professional society of enrolled agents, to
present NAEA's views regarding e-Services delivering electronic
services to tax practitioners. NAEA's overall assessment was that the
2003 filing season has run very smoothly--and the NAEA gave the IRS a
great deal of praise.
Mr. Leimbach said, ``The difficulty in integrating a 1960's era
mainframe with the Internet and doing so in an environment using highly
complex encryption is enormous, costly, and worth every effort and
every dime spent.'' He added, ``This new capability is truly going to
revolutionize the way we conduct future business with the IRS. The
ultimate beneficiary is the American taxpayer. We are truly amazed and
thrilled beyond description at this way of doing business with the IRS
and we would like for you to understand why we feel as we do.''
Mr. Leimbach cited numerous examples of eliminating time delays of
over a week and reducing response times from weeks and months to 3 days
simply by having the ability--24 hours a day, 7 days a week--to submit
information directly to the IRS using the Internet.
The IRS delivered several additional applications that are
providing tangible benefits to taxpayers and improving the efficiency
and effectiveness of tax administration systems such as Where's My
Refund?, Where's My Advance Child Tax Credit?, Internet EIN, Modernized
e-File, HR Connect, etc. The following chart highlights the
applications the IRS delivered, as well as the measurable business
benefits being realized.
BSM DELIVERS REAL BUSINESS VALUE (RESULTS AS OF 6/15/04)
----------------------------------------------------------------------------------------------------------------
Project Description Recent Statistics
----------------------------------------------------------------------------------------------------------------
Internet Refund Fact of Filing Improves customer self-service by --17.9 million inquiries in 2003; 22
(2002). providing instant refund status million inquiries to date in 2004
information and instructions for (1/1/04-6/6/04).
resolving refund problems to --32 percent of all real time IRS
taxpayers with internet access. assistance calls come from IRFoF.
--Modest reduction of
telecommunications costs (about
$250,000).
--Every 1,000 IRFoF contacts
eliminate 1,500-2,000 refund
assistance calls.
Advanced Child Tax Credit (2003)... Modifies the Internet Refund --15.5 million inquiries in 2003;
application to provide taxpayers 11.9 million inquiries to date in
with Advance Child Tax Credit refund 2004 (10/1/03-6/13/04).
status on the internet. --Peak date 1.1 million interaction.
Customer Communications (2001)..... Improves communications --68,000 calls in one 3-minute
infrastructure, including telephone period during initial week
call management, call routing and (coincided with start of Advanced
customer self-service applications. Tax Refund of 2001).
--50 percent reduction in waiting
time for assistor to answer call.
--50 percent reduction in abandoned
calls.
--Number of Spanish calls doubled.
--More accurate pre-routing of
calls.
Internet Employee Identification Allows businesses and taxpayers to --1.37 million internet EIN
Number (2003). apply for and receive employer applications received to date (as
identification numbers over the of 6/5/04).
internet.
HR Connect (2002).................. Delivers an enterprise solution to --75,000 internal users.
allow IRS employees to access and --Cited by Commissioner Everson as
manage their human resources an enabling factor in the
information online. redirection of approximately 750
staff years to enforcement.
--Treasury was selected as 2004
ComputerWorld Honors Laureate for
HR Connect development and
implementation.
e-Services R1 (2003-2004).......... Creates a web portal and value adding --Over 69,624 PTIN applications
e-Services services to promote the (W7P) entered to date, data entry
goal of conducting most of the IRS's productivity doubled (from 8/15/03-
transactions with tax practitioners 6/10/04).
electronically. --Over 58,201 e-File applications to
the Third-Party-Data-Store (TPDS)
entered to date (from 8/15/03-6/10/
04).
--Approximately 24,939 Registered
(and confirmed) User Portal (RUP)
to date (from 10/1/03-6/10/04).
Customer Relationship Management Provides standard tax computation --Deployed to almost 4,000 Revenue
Exam (2001). software to Large & Mid-Sized Agents.
Business Revenue Agents.
Modernized e-File (2004)........... Provides e-filing to large businesses --Went live on 2/23/04.
(1120 family) and tax exempt --Over 35,090 returns (1120 family)
organizations (990 family). accepted as of 6/13/04.
--Over 3,287 participating
Electronic Return Originators as of
6/13/04.
--Winner of Government Solutions
``Best-of-the Best'' Pioneer
Solutions.
----------------------------------------------------------------------------------------------------------------
The bad news, however, is major. Significant cost overruns and
repeated schedule delays have plagued critical projects, such as the
Customer Account Data Engine (CADE), the Integrated Financial System
(IFS), and the Custodial Accounting Project (CAP). CADE replaces the
current master files that are the IRS's repository of taxpayer
information. IFS will be the IRS's new core accounting system. CAP
provides an integrated link between tax administration (revenue) and
internal management (administrative) financial information.
The IRS has delayed the CADE program four times. It originally
planned to deliver the first release of CADE in December 2001. The IRS
then rescheduled it for August 2003, and later rescheduled it for April
2004. The IRS recently finalized the re-planning effort for CADE and
set the latest delivery date for September 2004. While CADE is farther
along than the IRS has ever been in replacing a component of the master
file, there are still major hurdles to overcome. The CADE delays
stemmed from infrastructure upgrades, initial poor software quality
during the startup of systems integration testing combined with the
failure to understand the complexity of balance and control, and the
resolution of operational and performance issues that occurred during
Phase 3 of the Release 1.0 pilot.
Like CADE, IFS has been plagued with schedule delays. The IRS
originally planned to deliver the first release of IFS in October 2003.
The IRS then rescheduled it for January 2004. The IRS later rescheduled
it for April 2004. The IRS has subsequently scheduled Release 1.0 for
October 2004. The IRS delayed the first release of IFS because of the
need to make technical changes to comply with the enterprise
architecture, the inability to resolve key design and integration
issues in a timely manner, the identification of the health coverage
tax credit interface requirement late in the development process, and
delays experienced in integration testing due to poor application
quality and interface testing issues.
IFS Release 1.0 will cover core accounting functions such as budget
preparation, general ledger, accounts payable, accounts receivable,
financial reporting, and purchasing. Problems continue to seriously
jeopardize the scheduled delivery of this first release of IFS. The IRS
is 2 weeks behind schedule on testing, which puts the data conversion
schedule at risk. The IRS is negotiating a fixed price contract for the
October delivery.
The IRS is also encountering delays on the first release of the
Custodial Accounting Project (CAP), which provides an integrated link
between tax administration (revenue) and internal management
(administrative) financial information. The first release of CAP will
address revenue from individual taxpayers on initial tax payments.
Later releases of CAP will address businesses and collections. CAP
delays resulted from unstable CADE and IFS interface definitions,
needing additional testing time due to a much larger than anticipated
volume of data anomalies discovered during the conversion of data from
the current Individual Master File (IMF), and the time required
resolving system performance issues.
In addition, though not directly responsible for CAP delays to
date, the IRS has made some adjustments to the functionality that it
needs to have in CAP Release 1 to support the GAO financial audit as
well as internal accounting and management. These adjustments will
increase the cost of later sub-releases of CAP Release 1. The IRS has
now completed all testing for CAP Release 1, and is adding changes to
reflect IMF changes from the start of the 2004 filing season (Release
1.1). The IRS plans to start production, which includes the initial
load of IMF data, in mid-August. The IRS negotiated a fixed price
contract for Release 1 and Release 1.1 in May 2004.
Question. Ms. Gardiner, in her testimony, points out that she found
several instances where the Business System Modernization project teams
at the IRS were cutting corners and not following established testing
procedures due to their desire to meet overly optimistic project
schedules. It seems that the IRS responds to missing its deadlines by
cutting corners and thus undermining the likelihood that the agency
will get what it paid for. What has Ms. Gardiner concluded about the
IRS's ability to manage these projects effectively and ethically? Is
there any reason to hope that the IRS is turning a corner and actually
getting value for the taxpayer from these modernization projects? Mr.
Everson, would you care to comment?
Answer. The IRS used the results from independent studies
commissioned during the summer of 2003 to create a BSM Challenges Plan
comprised of 40 some action items. Given the strategic importance of
the plan, The Commissioner appointed an IRS business unit deputy
commissioner to oversee the implementation of the plan.
As a first step, the BSM project team developed a crosswalk to
ensure that the BSM Challenges Plan's definition of the issues
addressed and/or satisfied all of the recommendations from the four
commissioned studies as well as the recommendations submitted by the
IRS Oversight Board, and the Software Engineering Institute (SEI) study
of CADE.
While the deputy commissioner made significant progress in
implementing the plan, the full closure of all actions items was
unrealistic within the elapsed timeframe of the 6-month appointment.
Concurrently, the CIO created a new direct report position for
modernization management and assigned responsibility for implementing
the plan to the individual recently hired into this newly created
position.
Under the leadership of the deputy commissioner, the IRS and CSC
team brought closure to several key actions items, including:
clarifying the roles of committees as advisory, identifying
``blockers'' on contracting issues, appointing business leaders to each
project, establishing a risk-adjusted schedule and new baseline for
CADE Releases 1.0 and 1.1, and increasing the frequency of CADE reviews
with the business owner to twice monthly. The majority of the action
items are still works-in-progress, some of which will take time to
fully complete. Others will span the life of the BSM program.
For example, strengthening systems engineering capabilities by
hiring external candidates will take time since it involves conducting
the searches, interviewing the candidates, and negotiating the new
hires to come on board. The IRS and CSC developed ground rules for
escalating issues, but they will need to be continually enforced
throughout the life of the program. The IRS rewrote the charters of the
governing committees to reflect their advisory role and clearly
articulated their responsibilities, however, it will probably take a
year to truly evaluate and measure their effectiveness.
As stated, the IRS has made progress toward closing all the action
items, but it has much more work to do in critical areas. For example,
the IRS needs to religiously follow the proper methodologies and hold
people accountable if they do not. The IRS must start ``doing things
right'' as opposed to ``doing things fast'' such as exiting milestones
prematurely. An ongoing challenge will be balancing the scope and pace
of projects consistent with capacity, ensuring that the right people
are in place before launching a project, and setting realistic delivery
schedules and cost estimates. The IRS is committed to staying-the-
course and delivering on its promise to modernize America's tax
systems, but it is important for everyone to acknowledge this is a
monumental effort.
The magnitude and evolution of the BSM program dictates that the
IRS will always be going through an evolution of assessment and
improvements. In that regard, the BSM Challenges Plan is still evolving
and the IRS is using certain action items to continuously improve the
program.
______
Questions Submitted by Senator Richard J. Durbin
TAX EVASION/IRS COLLECTION
Question. In the days leading up to April 15, newspapers around the
country ran features on personal and corporate tax evasion and the
IRS's failure to collect many of the taxes it is owed. The President
proposes a 4.6 percent increase in IRS funding for fiscal year 2005,
claiming that this will allow the hiring of 5,000 new auditors and
collectors. While increasing the number of IRS agents and officers is
central to more effective tax collection, the IRS Oversight Board
argues that much of the 4.6 percent increase will be swallowed by
rising salaries and administrative costs. In fact, the Oversight Board
claims that fiscal year 2005 is the fourth year in a row in which the
administration has called for IRS staff increases while failing to
cover pay raises or required expenses.
In your estimation, how many new auditors and collectors would be
hired as a result of a 4.6 percent increase in IRS funding in fiscal
year 2005, and what would be the impact of such an increase on the
IRS's ability to collect some of the estimated $250 billion in owed
taxes that go unpaid each year due to tax evasion?
Answer. The IRS will hire approximately 5,000 new enforcement
personnel. These new hires will improve voluntary compliance by
increasing the number of individual and corporate returns examined and
directly increasing collections of delinquent revenue owed to the
government by approximately $3 billion in the first 3 years of the
initiative, fiscal year 2005 through fiscal year 2007, and additional
collections of $1.5 billion annually thereafter. This increase in IRS
enforcement personnel also improves voluntary compliance by deterring
would-be tax cheats from engaging in illegal behavior.
TAX ASSISTANCE PROGRAM--ILLINOIS
Question. In the fiscal year 2004 Senate Transportation-Treasury
Appropriations report, language was included regarding the Tax
Assistance Program in Chicago, Illinois. ``The Committee is aware of an
innovative financial literacy and tax assistance project in Chicago,
Illinois--Tax Assistance Program--designed to assist low income workers
and their families with tax education and filing, in cooperation with
the State of Illinois and the City of Chicago's Earned Income Tax
Credit (EITC) outreach efforts. The Committee encourages the IRS to
continue to provide appropriate technical and financial assistance for
this worthwhile initiative.''
Is the IRS working with the Tax Assistance Program in Chicago,
Illinois, and what Federal resources are being provided? Will the IRS
continue to work with programs like TAP in Chicago in fiscal year 2005?
Answer. The IRS has partnered with the Tax Assistance Program (TAP)
for several years and each year has been increasingly impressed with
the achievements and the dedication of the staff and volunteers. The
IRS is very fortunate to have this fine organization as a partner in
providing free tax preparation to low income taxpayers in the Chicago
metro area. The IRS hopes to sustain this relationship in fiscal year
2005 and for many years to come. However, outside the Low Income Tax
Clinic (LITC) Grant Program, the IRS has no legal authority to offer
funding to the TAP organizations. The TAP currently receives Federal
funds available through the LITC Grant Program, and the IRS anticipates
that the TAP will continue to apply for funding through this program in
the future.
______
Questions Submitted to the Treasury Inspector General for Tax
Administration
Questions Submitted by Senator Richard C. Shelby
MODERNIZATION
Question. How much more is needed to complete and modernize the
IRS's outdated systems and processes?
Answer. We do not know the true total cost needed to complete the
Business Systems Modernization (BSM) effort. To date, the Internal
Revenue Service (IRS) has received $1.6 billion for this effort. The
IRS anticipates that the value of the PRIME \1\ contract will be $8
billion. However, the PRIME contract is not the only cost associated
with the BSM effort as other contractors, such as Northrop Grumman,
International Business Machines, and MITRE Corporation, are involved in
the BSM effort. In addition, the IRS is incurring substantial internal
costs in managing the BSM effort. The sum of all PRIME contractor,
other modernization contractors, and IRS costs for the life of the BSM
program is not known.
---------------------------------------------------------------------------
\1\ The PRIME contractor is the Computer Sciences Corporation,
which heads an alliance of leading technology companies brought
together to assist with the IRS's efforts to modernize its computer
systems and related information technology.
---------------------------------------------------------------------------
Question. Is the fiscal year 2005 budget request consistent with
that TIGTA assessment?
Answer. Yes. We have recommended since September 2002 that the IRS
slow the pace of the BSM program due to some of the risks that have
surfaced. The fiscal year 2005 budget request is consistent with our
past recommendations.
Question. When will BSM be completed?
Answer. The BSM program is currently in its sixth year of a 15-year
contract. However, the IRS and the PRIME contractor have been
experiencing significant delays. For example, the Customer Account Data
Engine (CADE) \2\ project is approximately 30 months behind schedule,
and the detailed planning for the business taxpayer account portion
(Federal tax deposits, corporate entities, partnerships, etc.) of the
project has not been completed. Unless the IRS and the PRIME contractor
take actions to make up the lost time and thoroughly plan all projects,
it is difficult to know how long the BSM effort will last.
---------------------------------------------------------------------------
\2\ The CADE is the foundation for managing taxpayer accounts in
the IRS's modernization plan. It will consist of databases and related
applications that will replace the IRS's existing Master File
processing systems and will include applications for daily posting,
settlement, maintenance, refund processing, and issue detection for
taxpayer tax account and return data.
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Question. What is the status of IRS's efforts to resolve the
findings and deficiencies identified by the various internal and
independent assessments of BSM?
Answer. To address the results of the recent assessments, the IRS
and the PRIME contractor have developed a 48-point action plan, known
as the ``BSM Challenge Plan''. While the 48 planned corrective actions
should help improve the BSM program, it will take time to
institutionalize new processes and ensure they are being followed. Only
at that time will it be possible to determine if the actions have been
effective.
The IRS recently reported that 44 of the 48 action plan items were
closed. However, our preliminary analysis shows that additional actions
are scheduled for many of these closed items. The IRS Chief Information
Officer acknowledged that follow-on actions are required to completely
address the various internal and independent BSM assessments.
It should be noted that the various assessments resulted in 21
recommendations for improvement in the BSM program, 15 of which are
similar to those made in Treasury Inspector General for Tax
Administration (TIGTA) reports issued during the past 3 years. In
several instances, the principal recommendations were reported multiple
times during this period. Since many of the prior TIGTA recommendations
have resurfaced as part of the recent assessments, we conclude that
previous weaknesses have proven difficult to correct. Only time will
tell whether actions taken as part of the 48-point plan will completely
address the root causes identified in the various assessments.
______
Questions Submitted by Senator Patty Murray
MODERNIZATION
Question. Ms. Gardiner, your testimony says that IRS plans to
request $142 million--the remainder of the $388 million appropriated
last year--for Business Systems Modernization in fiscal year 2004. In
your opinion, based on performance to date, should the Congress
withhold or make conditional the approval of that $142 million?
Answer. While we have not been provided with a copy of the revised
spending plan, our opinion is that the Congress should approve the
release of the remaining $142 million. In February 2004, the
Commissioner testified, ``It's no secret that our projects have
consistently run late, delivered less functionality than planned, and
cost significantly more than targeted.'' The IRS's track record is of
concern; however, the withholding of funds could cause projects to
stop, which would result in the loss of contractor expertise and would
lead to additional costs needed to restart the projects. In addition,
there has been little time to determine if the actions being taken as
part of the 48-point plan are leading to improvements.
We believe the $142 million in additional funding should be
provided, but we would recommend to the Appropriations Subcommittee
that the BSM program be monitored closely to determine if future
funding is warranted. The IRS and the PRIME contractor have developed a
48-point plan to respond to various internal and independent
assessments. Once the 48-point plan is implemented, it will take time
to institutionalize new processes and ensure they are being followed.
Only at that time will it be possible to determine if the corrective
actions have been effective.
Question. Ms. Gardiner, you point out that the IRS revised its
modernization plan for fiscal year 2003 to focus on executable segments
that could be accomplished in a timely manner. Despite all of the IRS's
assurances to the contrary, all of the projects on the newly downsized
list still experienced delays and most incurred significant cost
increases. What are your observations regarding the IRS's abilities to
deliver modernization projects on time and on budget for the current
fiscal year and next year? Why should we believe that the IRS and its
contractors will improve its performance on these projects going
forward? Mr. Everson, do you care to comment on this matter?
Answer. We believe that there are two critical areas that the IRS
needs to address to be able to deliver modernization projects on time
and on budget: requirements management and contract management. We have
provided recommendations for improvement to the IRS in these areas, and
the 48-point plan also addresses these areas. In addition, we have
additional concerns in the areas of portfolio management, integration
management, and staffing.
Requirements Management
The PRIME contractor testified that the heart of the problem has
been the lack of fully defined requirements. While it is inevitable
that some requirements changes will be needed, e.g., legislative
changes, the PRIME contractor testified that it often began work
without fully understanding requirements, and requirements were still
being identified during the testing phase. In our opinion, this is the
fault of both the IRS and the PRIME contractor. The IRS should create
detailed requirements before moving forward, and a contractor at the
maturity level of the PRIME contractor should know not to start work
without a full understanding of requirements. Requirements instability
will continue to lead to increased costs and schedule delays if not
corrected. This area has been a continuing concern and has been
reported in several TIGTA reports, beginning in November 2001.
Contract Management
Beginning in February 2001, we have made recommendations to assist
the IRS in shifting financial risk to the PRIME contractor. Our
recommendations have ranged from including positive and negative
contractor incentives in task orders to using firm-fixed price task
orders whenever possible. The recent BSM assessments also recommended
moving toward a firm-fixed price model. When requirements are fairly
stable, a firm-fixed price task order shifts some of the risk away from
the government and to the contractor. If requirements become stable and
firm-fixed price task orders begin to be issued, this will begin to
curb some of the cost overruns that have been experienced to date.
However, this may not have an effect on the timeliness of delivery.
Portfolio Management
Beginning in 2002, both the TIGTA and the General Accounting Office
recommended that the IRS slow the pace of the BSM program due to some
of the risks that have surfaced. The recent internal and independent
assessments also make this point. While the IRS responded to this
concern by scaling back the scope and number of projects in fiscal year
2003, we noted the fiscal year 2004 BSM plan includes an additional
modernization project (Collection Contract Support--part of the Filing
and Payment Compliance project).\3\ Since the IRS and its contractors
have been unable to deliver the scaled-back portfolio of projects on
time and within cost, we continue to be concerned that the IRS and its
contractors may not have the ability to successfully manage the BSM
portfolio.
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\3\ The Filing and Payment Compliance project will provide support
for detecting, scoring, and working nonfiler cases (filing compliance)
and delinquency cases (payment compliance).
---------------------------------------------------------------------------
Integration Management
When the BSM effort began, the PRIME contractor was responsible for
all modernization projects, with the exception of the Custodial
Accounting Project.\4\ As such, one significant role of the PRIME
contractor was to ensure integration between all modernization
projects. This role has become blurred recently with the PRIME
contractor not being responsible for the Modernized e-File project. In
addition, the Commissioner testified that he had decided to direct
upcoming enforcement modernization projects to other contracts. With
more modernization work being performed outside of the PRIME contract,
the risk increases that modernization projects will not work in a fully
integrated fashion.
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\4\ The CAP will be a single, integrated data repository of
taxpayer account information, integrated with the general ledger and
accessible for management analysis and reporting.
---------------------------------------------------------------------------
Staffing
Recently, the IRS reported to the IRS Oversight Board that it has
or will make changes in six of eight executive positions within the BSM
program in an effort to bring more outside experience into the program.
While the addition of new executives from outside the organization may
bring new ideas and energy to the program, we are concerned about the
potential disruption that it may cause. As part of our annual BSM
assessment, we have included the following challenge for the last 3
fiscal years: ``Maintain the continuity of strategic direction with
experienced leadership.''
Question. Ms. Gardiner, in your testimony, you point out that you
found several instances where the Business System Modernization project
teams at the IRS were cutting corners and not following established
testing procedures due to their desire to meet overly optimistic
project schedules. It seems that the IRS responds to missing its
deadlines by cutting corners and thus undermining the likelihood that
the agency will get what it paid for. Ms. Gardiner, what have you
concluded about the IRS's ability to manage these projects effectively
and ethically? Is there any reason to hope that the IRS is turning a
corner and actually getting value for the taxpayer from these
modernization projects? Mr. Everson, would you care to comment?
Answer. Our audits are not designed to examine the ethics of
project management and, therefore, we cannot answer this portion of the
question. The IRS and its contractors have deployed projects that
provide value to taxpayers and have built the infrastructure needed to
support these projects. Some of the BSM projects that have delivered
value to taxpayers are the Customer Communications, Internet Refund/
Fact of Filing (IRFOF), Internet Employer Identification Number (I-
EIN), e-Services, and Modernized e-File (MeF) projects.
Customer Communications.--This project has improved customer
service by increasing the capacity of the toll-free telephone system
and providing the ability to route taxpayers' calls to the appropriate
IRS employees. This project became operational in August 2001.
IRFOF.--This application (also known as ``Where's My Refund?'')
offers improved customer self-service by providing refund status
information via the Internet. The pilot version of the ``Where's My
Refund?'' application was deployed in May 2002. The application was
upgraded in 2003 and was accessed 17.9 million times that year
according to the IRS. In 2003, the application was modified to provide
taxpayers with Advance Child Tax Credit refund status via the Internet.
The IRS stated that 15.5 million Advance Child Tax Credit inquiries
were received in 2003.
I-EIN.--This application allows small businesses and self-employed
taxpayers to obtain EINs online, eliminating the need to send paperwork
to the IRS. This application was deployed in May 2003. The Commissioner
recently testified that the application had processed over 450,000
applications as of February 2004.
e-Services.--Deployed in August 2003, this project allows tax
professionals the ability to register online, create an electronic
account, and apply for a Preparer Tax Identification Number to use in
place of their Social Security Number for submitting returns. The IRS
reported in January 2004 that over 16,000 tax professionals had applied
to use the e-Services application.
MeF.--This project is developing the modernized, web-based platform
for electronically filing approximately 330 IRS forms. The first
release of the MeF project was deployed in late February 2004 and
provided electronic filing for 59 forms, including United States (U.S.)
Corporation Income Tax Return (Form 1120), U.S. Income Tax Return for
an S Corporation (Form 1120S), Return of Organization Exempt From
Income Tax (Form 990), Short Form Return of Organization Exempt From
Income Tax (Form 990-EZ), U.S. Income Tax Return for Certain Political
Organizations (Form 1120-POL), and Application for Extension of Time To
File an Exempt Organization Return (Form 8868). The IRS has stated that
over 18,520 tax returns had been accepted by March 21, 2004.
Progress is being made. Nonetheless, BSM projects are taking longer
and costing more to deliver less than originally anticipated. Over the
past 2 fiscal years, we have cited 4 primary challenges the IRS and its
contractors must overcome to be successful: (1) implement planned
improvements in key management processes and commit necessary resources
to enable success, (2) manage the increasing complexity and risks of
the BSM program, (3) maintain the continuity of strategic direction
with experienced leadership, and (4) ensure PRIME contractor
performance and accountability are effectively managed. Based on the
results of recent TIGTA audits, as well as the assessment findings, we
believe these four challenges still need to be met to achieve program
success.
While the actions in the 48-point plan mentioned previously should
help improve the BSM program, it will take time to institutionalize new
processes and ensure they are being followed. Only at that time will it
be possible to determine if the corrective actions have effectively
addressed the four major challenges.
FAILURE TO COLLECT DELINQUENT TAXES
Question. A recent report by the Treasury Inspector General for Tax
Administration (TIGTA) found that IRS's existing procedures are
ineffective in ensuring even that criminals who are convicted in court
for tax evasion are paying their civil tax liabilities. Why can't IRS
collect from tax cheats?
Answer. In response to our recommendations in the subject report,
the IRS issued an April memorandum to both the Small Business/Self-
Employed Division and the Criminal Investigation organization
containing interim procedures to process cases with terms of probation
and to monitor compliance with these cases.
Question. Ms. Gardiner, given the fact that the head of IRS-
Criminal Investigations disagreed with a number of your
recommendations, are you confident that this grotesque abuse will be
stopped?
Answer. The IRS did, in fact, disagree with several of our
recommendations. First, the IRS disagreed with our recommendation
concerning a technical legal matter on disclosure of tax information,
stating that it believed it already had sufficient instructions on the
matter. Our main concern in reporting the issue was to ensure that the
disclosure rules were interpreted consistently and with the broadest
possible application. The disclosure issue itself is tangential to the
main problem of inadequate monitoring of, and follow-up on, probation
cases.
The IRS also disagreed with our characterization of the impact of
the errors in the Criminal Investigation Management Information System.
Again, this issue is tangential to the main problem and does not affect
the IRS's need for or commitment to improving its processes on
monitoring terms of probation.
Finally, although the IRS disagreed with a recommendation to
establish certain procedures and part of another recommendation to
establish periodic systemic reports, it committed to reemphasizing its
existing instructions and procedures, which it did in the April
memorandum referenced above. As we stated in our report, we believe
that this commitment satisfied the intent of our recommendations.
As to whether we are confident that this abuse will be stopped, the
key will be the proper implementation and monitoring of the corrective
actions recently taken or planned. If done properly, the IRS should be
in a much better position to report to the courts whenever terms of
probation are not met. Of course, collecting delinquent taxes or
securing delinquent returns will also be a function of the taxpayer's
ability to pay or requirement to file.
Question. Ms. Gardiner, why do you believe that IRS has not cleared
up even the simplest of cases of uncollected taxes?
Answer. The IRS collection process for most cases begins with a
series of notices mailed to taxpayers, asking them to pay the balance
due. If the taxpayers do not respond, the cases are assigned either to
the Queue (which is a holding area for cases waiting further assignment
to the Collection Field function (CFf)) or the Automated Collection
System (ACS) to be worked by telephone collectors. Generally, higher-
priority cases are placed in the Queue while lower-priority cases are
assigned to the ACS. If the ACS cannot resolve the cases, some of them
are also assigned to the Queue. Cases in the Queue are assigned to
Revenue Officers in the CFf according to priorities established by IRS
management. In addition, the IRS has recently implemented a risk-based
approach that attempts to select those cases with the highest
probability of being collected. As a result, many lower dollar amount
cases for individual taxpayer liabilities may not be collected if the
taxpayer did not respond to the notice or a phone call.
Overall, the IRS is making some progress in collecting unpaid
taxes. As we reported in April 2004, the level of compliance activities
and the results obtained in many Collection function areas in fiscal
year 2003 showed a continuing increase. Enforcement actions were higher
in fiscal year 2003 than in fiscal year 2002, but they have not
returned to pre-1998 levels. Enforcement revenue collected increased
substantially in fiscal year 2003, while the total amount of
uncollected liabilities and the gap between new delinquent accounts and
account closures decreased slightly. Finally, the amount owed on
accounts in the Queue decreased in fiscal year 2003, but the number of
accounts in inventory increased.
Question. Do you consider it a possibility that IRS has not done so
in order to build a case for the use of private collection agencies?
Answer. The IRS does not have the resources to work every
delinquent account case. It has established risk-based priority systems
in an attempt to use ACS and CFf resources as efficiently as possible.
We have no evidence that the IRS is intentionally not working these
cases to build a case for the use of private collection agencies.
CUSTOMER SERVICE
Question. IRS consistently finds its own accuracy rates higher than
TIGTA does when measuring taxpayer assistance functions, whether we are
talking about toll-free telephone assistance, walk-in service at
Taxpayer Assistance Centers, or the IRS website. Mr. Everson, how do
you explain the discrepancy? Ms. Gardiner, would you care to comment?
Answer. The large number of taxpayers who use Toll-Free Telephone,
Taxpayer Assistance Centers (TAC), or the IRS's website, IRS.gov, to
get answers to their tax law and account questions prohibits us from
using statistical sampling techniques in our audits to determine the
accuracy of IRS answers.
----------------------------------------------------------------------------------------------------------------
IRS-Reported IRS-Reported TIGTA-Reported
Type of Service Customers Accuracy Accuracy
Served (Percent) (Percent)
----------------------------------------------------------------------------------------------------------------
Taxpayer Assistance Centers..................................... 8,588,850 \1\ 75 69
Referral-Mail................................................... 279,558 72 74
Toll-Free Accounts.............................................. 27,645,540 89 78
Toll-Free Tax Law............................................... 5,381,687 83 73
Internet-based IRS website, IRS.gov............................. 119,036 N/A Over 80
----------------------------------------------------------------------------------------------------------------
\1\ IRS accuracy rate reported in the Wage and Investment Operating Division Business Performance Report, page
10, dated May 11, 2003.
Figures for TACs, Referral-Mail, Toll-Free Accounts, and Toll-Free
Tax Law reported by the IRS are for fiscal year 2003. Figures for
IRS.gov reported by the IRS are for the 2002 Filing Season.
Toll-Free Telephone Assistance
The differences in the TIGTA's and IRS's accuracy rates are based
largely on the differences in the sampling methodologies, including the
sample sizes. For example, during the 2004 Filing Season, we monitored
over 350 toll-free tax law calls while during the same time period for
the same types of tax law questions (referred to as applications) the
IRS selected for monitoring a statistically valid sample of 1,527 tax
law calls. For fiscal years 2002, 2003, and 2004, we monitored a
judgmental sample of live taxpayer toll-free tax law calls received by
the IRS during the filing season, generally considered the months of
January through April. Although our judgmental sample is not
statistically valid, we attempt to ensure it is representative of the
population by creating a sampling plan in which the percentage of calls
monitored by type of tax law question is reflective of the IRS's
planned filing season volumes of calls per application. However, we do
not always monitor calls on late evenings and on the weekends.
See ``Improvement Is Needed in E-Mail Responses to Complex Tax
Questions Submitted Through Toll-Free Telephone Help Lines'' (Reference
Number 2004-40-029, dated December 2003); ``Toll-Free Account
Assistance to Taxpayers Is Professional and Timely, but Improvement Is
Needed in the Information Provided'' (Reference Number 2004-40-057,
dated February 2004); ``Toll-Free Tax Law Assistance to Taxpayers Is
Professional and Timely, but Improvement Is Needed in the Information
Provided'' (Reference Number 2003-40-216, dated September 2003).
Taxpayer Assistance Centers
The IRS did not measure the accuracy of its answers to tax law
questions asked in the TACs until fiscal year 2003. For 2003, the IRS
used judgmental sampling to determine accuracy. In fiscal year 2004,
the IRS is attempting to establish a baseline using statistical
sampling.
Though we used judgmental sampling for Calendar Years 2002 and 2003
to determine whether taxpayers were provided correct and prompt answers
to their questions, we did ensure all TACs were visited during these 2
years. For Filing Season 2004, we again used a judgmental sample of
TACs, ensuring that we visited at least one TAC in each of the IRS's
territory offices. We visited 199 TACs in 2002, 209 in 2003, and 64 in
2004 (note that these numbers are only TACs visited to ask questions
within the scope of TAC employees' training).
However, we average 80 questions per month while the IRS's Field
Assistance quality reviewers average 420 a month (Wage and Investment
Operating Division Business Performance Report, page 6, dated May 11,
2003). In addition, the IRS does not compute its accuracy rates the
same way we compute it. TIGTA results present the overall results of
auditor visits. Accuracy rates are calculated by dividing the total
response for each category (i.e., correct, incorrect, refer to
publication, etc.) by the total number of questions asked. In contrast,
the IRS disagrees with our methodology for including referrals to
publications and service denied when computing accuracy rates.
See ``Taxpayer Assistance Center Employees Correctly Answered More
Tax Law Questions During September and October 2003 Than Compared to
One Year Ago'' (Reference Number 2004-40-037, dated January 2004),
``Accuracy Rates Have Increased at Taxpayer Assistance Centers, but
Improvement Is Needed to Provide Taxpayers Top-Quality Customer
Service'' (Reference Number 2004-40-065, dated February 2004), and
``Taxpayer Assistance Center Employees Correctly Answered More Tax Law
Questions During November and December 2003 Than Compared to One Year
Ago'' (Reference Number 2004-40-090, dated April 2004).
IRS.gov
The differences in the TIGTA's and IRS's accuracy rates are based
on the different methodologies, including the sample sizes. For the
TIGTA fiscal year 2002 audit, TIGTA auditors anonymously submitted 90
tax law questions typical of those that may be submitted by an
individual taxpayer. We rated the answers to those questions we
submitted. In contrast, during the 2001 Filing Season, the IRS quality
review system selected 995 questions for quality review.
The IRS has a centralized quality review site that samples email
responses for accuracy and measures accuracy with a statistically valid
sampling plan designed by its Statistics of Income function. The
sampling plan requires the selection of email responses without regard
to the type of taxpayer or tax law category, i.e., whether the tax law
question pertains to individual or business taxpayers.
See ``Response Accuracy Is Higher for the Internet Program Than
Other Options Available to Taxpayers Needing Assistance With Tax Law
Questions'' (Reference Number 2003-40-014, dated October 2002) and
``Management Advisory Report: The Internal Revenue Service Needs a
Reliable Measure of the Quality of Electronic Tax Law Assistance
Provided to Small Businesses and Self-Employed Taxpayers'' (Reference
Number 2002-30-120, dated July 2002).
SUBCOMMITTEE RECESS
Senator Shelby. I appreciate both of you appearing here,
and we will be meeting and talking from time to time.
Ms. Gardiner. Thank you very much.
Senator Shelby. The hearing is recessed.
[Whereupon, at 11:27 a.m., Wednesday, April 7, the subcom-
mittee was recessed, to reconvene subject to the call of the
Chair.]