[JPRT 108-4-05]
[From the U.S. Government Publishing Office]



 
                    JOINT REVIEW OF THE STRATEGIC
                        PLANS AND BUDGET OF THE
                     INTERNAL REVENUE SERVICE, 2003
=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON WAYS AND MEANS
                      COMMITTEE ON APPROPRIATIONS
                     COMMITTEE ON GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                                AND THE

                          COMMITTEE ON FINANCE
                      COMMITTEE ON APPROPRIATIONS
                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE

                      One Hundred Eighth Congress

                             First Session

                               ----------                              

                              May 20, 2003

                               ----------                              

                                JCS-4-05






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                      COMMITTEE ON WAYS AND MEANS

William M. Thomas, California,       Charles B. Rangel, New York
    Chairman

                      COMMITTEE ON APPROPRIATIONS

C. W. Bill Young, Florida, Chairman  David R. Obey, Wisconsin

                     COMMITTEE ON GOVERNMENT REFORM

Tom Davis, Virginia, Chairman        Henry A. Waxman, California
                              ----------                              

                          COMMITTEE ON FINANCE

Charles E. Grassley, Iowa, Chairman  Max Baucus, Montana

                      COMMITTEE ON APPROPRIATIONS

Ted Stevens, Alaska, Chairman        Robert C. Byrd, West Virginia

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

Susan M. Collins, Maine, Chairman    Joseph I. Lieberman, Connecticut












                            C O N T E N T S

                              ----------                              
                                                                   Page
Press release of May 14, 2003, announcing joint review...........    iv
Opening statements...............................................     1

                               WITNESSES

Internal Revenue Service, Hon. Mark W. Everson, Commissioner.....     6
Internal Revenue Service, Ms. Nina E. Olson, National Taxpayer 
  Advocate.......................................................    34
Department of the Treasury, Ms. Pamela J. Gardiner, Acting 
  Treasury Inspector General for Tax Administration..............    43
IRS Oversight Board, Hon. Larry R. Levitan, Member...............    57
U.S. General Accounting Office, Mr. James R. White, Director, 
  Strategic Issues...............................................    63

                       SUBMISSIONS FOR THE RECORD

Hon. Mark W. Everson, Commissioner, Internal Revenue Service, 
  response to submitted questions from Senator Charles E. 
  Grassley.......................................................   107
Hon. Mark W. Everson, Commissioner, Internal Revenue Service, 
  response to submitted questions from Senator Max Baucus........   109
Hon. Mark W. Everson, Commissioner, Internal Revenue Service, 
  response to submitted questions from Senator Carl Levin........   110
Hon. Mark W. Everson, Commissioner, Internal Revenue Service, 
  response to submitted questions from Hon. Marsha Blackburn.....   113
Ms. Pamela J. Gardiner, Acting Treasury Inspector General for Tax 
  Administration, response to submitted questions from Hon. 
  Marsha Blackburn...............................................   114
Mr. James R. White, Director, Strategic Issues, Government 
  Accounting Office, response to submitted questions from Hon. 
  Marsha Blackburn...............................................   118














   REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL REVENUE 
                                SERVICE

                         TUESDAY, MAY 20, 2003

                          House of Representatives,
                               Joint Committee on Taxation,
                                                    Washington, DC.
    The Joint Committee met, pursuant to call, at 10:00 a.m., 
in Room 1100, Longworth House Office Building, Hon. Amo 
Houghton presiding.
    Present: Representatives Houghton, Tierney, Blackburn, 
Lewis of Kentucky, Pomeroy, and Portman.
    Senators Present: Senators Grassley, Bennett, and Sununu.
    Representative Houghton [presiding]. Good morning, 
everybody. On behalf of Senator Grassley and myself, we are 
delighted to see you here. I am going to make an opening 
statement. I will pass the mike then to Senator Grassley, and 
he will make his statement, and then we will be off and 
running.
    Today's hearing is unique in that we bring together House 
and Senate Members from six committees to review the operations 
of the Internal Revenue Service. The purpose, of course, of the 
joint review is to give coordinated oversight to the IRS and 
focus on their long-term objectives.
    This joint review, established by the IRS Restructuring and 
Reform Act, has been going on for 5 years. And in that time, 
the IRS has overhauled its organizational structure, which now 
features four operating divisions devoted to groups of 
taxpayers with similar needs, and has taken other steps to 
improve its service to taxpayers.
    For example, a new program on the IRS Web site lets 
taxpayers check the status of their refund, and more taxpayers 
are getting through to the IRS with questions by phone and in 
person at walk-in sites.
    While the IRS has made significant progress towards reform, 
significant challenges clearly remain. The long-term decline in 
collection activity raises questions about tax compliance and 
fairness to the majority of taxpayers who pay all of their 
taxes. The result of the conflicting trends of workload 
increases and declining of resources over time has led to what 
is called a compliance gap: more taxpayers who do not file or 
report honestly and less IRS capacity for audit and 
enforcement.
    So if the gap cannot be closed, the long-term fairness of 
tax administration--this is our major worry--may be called into 
question. So this hearing gives us the opportunity to look at 
several things: first, back on the last 5 years of IRS reforms; 
and, secondly, to look forward to challenges of the next 5 
years with the new Commissioner.
    This morning we will hear from the new IRS Commissioner, 
Mark Everson; and a panel consisting of Nina Olson, National 
Taxpayer Advocate; Larry Levitan, former Chairman of the IRS 
Oversight Board; Pamela Gardiner, the Acting Treasury Inspector 
General for Tax Administration; and James White, Director of 
Tax Issues at the General Accounting Office.
    We look forward to their testimony, and now I would like to 
recognize my distinguished Senator, Senator Grassley, and any 
other Members for any opening statements they may have.

  OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, U.S. SENATOR 
                           FROM IOWA

    Senator Grassley. Mr. Chairman, I have just a few short 
comments. First of all, I thank you for chairing a very 
important committee meeting, joint committee meeting, that 
meets once a year, which is part of the Restructuring Reform 
Act of 1998, to bring everybody together that has some 
congressional jurisdiction over the IRS and Treasury Department 
to once and for all kind of bring all issues to a focal point 
in one day of hearings.
    I have longstanding interests in the effect of tax 
administration, and given my participation in crafting the 
Restructuring Act, I have a special interest in these 
proceedings.
    Now, having said that, I have to apologize to Mr. Everson 
and to the committee members because I am not going to be able 
to be here, for the simple reason that there are negotiations 
going on on the growth and stimulus package, with a commitment 
on the part of leadership of the House and Senate, including 
the Chairman of the Senate Finance Committee, that we would get 
that bill to the President before the end of--or the beginning 
of the recess. So I will leave after making my comments.
    I have three broad concerns. In all candor, none of these 
will surprise anyone who has been listening to me speaking 
about the IRS for a long period of time. First, I would again 
share my strong belief that the IRS must be able to balance 
responsibilities. IRS might be able to balance its enforcement 
activities, which include audit, collection and criminal 
investigation on the one hand, with taxpayers' rights and 
taxpayer service on the other hand. As far as I am concerned, 
achieving that balance is crucial to maintaining public 
confidence in our tax system and the administration that 
carries it out.
    Second, I remain concerned about the timeliness and cost of 
business systems modernization programs at the IRS. The 
successful execution of this program is essential for the 
effective and efficient tax administration and for IRS to 
provide the customer service that taxpayers expect and deserve. 
And in my conversations with Mr. Everson, I have been very 
satisfied that he takes that very seriously as well.
    Third, I would like to state that I am troubled that a 
critical part of the IRS restructuring may be getting short 
shrift. As a result of the National Commission on 
Restructuring, of which I was a member, and the Restructuring 
Act, IRS is required to first redesign its structure, and, 
second, modernize its computer systems.
    IRS's structural redesign is largely in place. IRS created 
a customer-facing organization designed to meet the needs of 
its clients, the American taxpayers. Further, the IRS overhaul 
of its 1960s-based tax return processing and storage system is 
underway. However, in order for the modernized IRS to meet the 
needs of taxpayers, the agency must have the appropriate human 
capital in place. I am concerned that IRS may not have the 
appropriate training, recruitment, and retention programs in 
place.
    Without properly qualified, trained, and motivated 
employees, IRS will be unable to leverage its new computer 
system and organizational structure. In short, it would be 
unable to provide top-notch customer service and ensure across-
the-board compliance with the Nation's tax laws. And I trust 
that Commissioner Everson is going to address this, and, in 
fact, I have been advised that he would address--and am very 
satisfied of his addressing this--and I think he is as 
concerned about it as I am, to make sure that what is in place 
now is moving forward in an appropriate way.
    So, having said all of that, I look forward to continuing a 
working relationship with Commissioner Everson that he has 
already demonstrated that he is willing to put in place, and 
which would be a continuation of what I think Commissioner 
Rossetti did a very good job of.
    I hope at the end of your term we can look back with pride 
at a significantly improved agency, and I hope we see an IRS 
that is effective, efficient, and staffed with motivated people 
able to meet taxpayers' expectations.
    Thank you, Mr. Chairman.
    Representative Houghton. Thanks very much, Senator. Are you 
going to have to leave now?
    Senator Grassley. Yes.
    Representative Houghton. All right. What I would like to do 
is thank you very much for being here. We will give you a full 
report on what has happened.
    And then I would like to ask Mr. Pomeroy, you have no 
comment?
    Senator Grassley. I would have some questions to submit in 
writing.
    Representative Houghton. Fine. They will be submitted for 
the record.
    [The information follows in the submissions for the record 
section]
    Representative Houghton. Mr. Pomeroy, do you have any?

  OPENING STATEMENT OF HON. EARL POMEROY, U.S. REPRESENTATIVE 
                       FROM NORTH DAKOTA

    Representative Pomeroy. On behalf of Ranking Member Rangel, 
Mr. Chairman, I would simply say that I appreciate this 
hearing, this being the fifth of five hearings over the years, 
bringing together all of the committees of jurisdiction to take 
a detailed look at the Service. It is particularly timely now 
under the incoming new leadership of the Service, and I believe 
that the questions teed up by Chairman Grassley will be joined 
with others that I have relative to some internal priorities 
and expenditures, but we will get into that with questions of 
the Commissioner.
    So that would be the end of any opening comments I would 
make, Mr. Chairman. Thank you.
    Representative Houghton. Senator Sununu.

OPENING STATEMENT OF HON. JOHN E. SUNUNU, U.S. SENATOR FROM NEW 
                           HAMPSHIRE

    Senator Sununu. I thank you, Mr. Chairman. And welcome, 
Commissioner. I would simply underscore two points that were 
made by Senator Grassley in his opening remarks. First, with 
respect to technology. I would be very interested to hear more 
about the opportunities that are being created through the 
electronic filing process. I know the growth has been strong 
and consistent, maybe not what you would like to see, but I 
think there is tremendous potential there.
    And I would be interested to hear what opportunities you 
see to further improve the rate of acceptance of electronic 
filing. And also, of course, the use of the Internet to deal 
with customers, to answer questions, to distribute information. 
I think both of these systems and technical systems create an 
opportunity not just to improve the cost structure and to lower 
the costs of delivering service of the IRS, but also to improve 
quality, because there are some factors of reliability and 
consistency that can be provided through these electronic 
means.
    Second, with regard to the balance of taxpayer rights with 
the need to have a strong, motivated effective collection 
system, I know that you are proposing, or the administration 
has proposed, some modifications to some of the ten rules 
dealing with the discipline of IRS employees.
    And I believe the goal there is and should be to strike a 
balance, to make sure that employees are treated fairly and 
justly, that you have a system that can be consistently 
applied, but also a system that will provide for a good 
motivation. We have 100,000 employees that are dedicated and 
committed to the work that they do. We obviously want to ensure 
that they are behaving properly with respect to taxpayer 
rights, that they are disciplined when they violate the rules, 
but we also want to make sure that those rules are rooted in 
common sense and that the punishments associated with them are 
appropriate.
    So I look forward to hearing about those changes and the 
way that you believe that they might strengthen the morale and 
enable employees to be even more effective at the work that 
they do in serving the taxpayers, but also ensuring that we 
collect the revenue that is owed to the United States.
    Welcome, and thank you, Mr. Chairman.
    Representative Houghton. Thank you, Senator. Mrs. 
Blackburn.

OPENING STATEMENT OF HON. MARSHA BLACKBURN, U.S. REPRESENTATIVE 
                         FROM TENNESSEE

    Representative Blackburn. Thank you, Mr. Chairman. I 
appreciate the opportunity to serve with you all on this 
committee today. And to Commissioner Everson, I look forward to 
having the opportunity to hear what you have to say. I am the 
freshman in this group. I am new to this body this year and new 
to the Government Reform Committee which I am representing 
today.
    Mr. Everson. We should get along fine, since I am a 
freshman, too.
    Representative Blackburn. Well, that is true. And I will 
assure you I have read through your testimony, and I look 
forward to hearing what you have to say, specifically pointing 
toward the burden reduction and reducing the burden of costs on 
our citizens who are working to come into compliance and meet 
the rules and regulations and the pattern that is set forth by 
the IRS. Also, looking at the reduction of paperwork and 
reducing that burden, not only on our citizens but on your 
employees, and on the changes that that will make in the work 
environment that you have for your employees.
    I think that also looking at technology and how that is 
progressing; the cost, and then the true savings and 
efficiencies that should and could be realized and must be 
realized in a timely manner.
    I thank you all for your time today, Mr. Chairman. Thank 
you for allowing me to serve.
    Representative Houghton. Thank you very much.
    Now I would like to call on Mr. Portman who has had so much 
to do with the Restructuring and Reform Act.

OPENING STATEMENT OF HON. ROB PORTMAN, U.S. REPRESENTATIVE FROM 
                              OHIO

    Representative Portman. Thank you, Mr. Chairman.
    I want to thank you for putting together this joint review 
today. I want to thank Senator Grassley for coming over. This 
is a busy week for him. And he was on the IRS Commission with 
me. Bob Kerrey and I chaired that Commission, but Senator 
Grassley was a valuable and constructive member of that panel.
    Senator Sununu actually took a great interest in this when 
he was in the House, and now he has a bigger megaphone. He will 
also be, I think, a key player in trying to be sure that the 
reforms that we put in place back in 1998 are actually properly 
implemented and that we can make even more progress.
    I am very pleased that we have had these joint reviews. I 
think they are helpful. The panel may look a little sparse up 
here today. I don't think there are any appropriators who are 
here yet. But to my colleagues from the Ways and Means 
Committee, Finance Committee, who are here, and Governmental 
Affairs in the Senate, and the Government Reform Committee, I 
am delighted you are here. And you have to remember that a lot 
of staff work goes into this, both leading up to the hearing, 
which I think is very helpful working with your staff, Mr. 
Commissioner, and also the aftermath of these hearings is also 
significant staff work, including by the Joint Tax Committee.
    And so I think these reviews are very helpful and focus us 
on not only the particular issues that you are going to deal 
with day to day, but on the big picture. After all, the goal of 
the joint review and really the Restructuring Act, was to 
change the general direction of the IRS. I think again we have 
made a lot of progress, but we have a ways to go.
    Representative Houghton. Thank you very much.
    Mr. Tierney.

OPENING STATEMENT OF HON. JOHN F. TIERNEY, U.S. REPRESENTATIVE 
                       FROM MASSACHUSETTS

    Representative Tierney. Well, thank you, Mr. Chairman. I 
too will be brief. I thank you for conducting this hearing this 
morning and for the ability to participate in it.
    Mr. Everson, I simply will adopt the comments of my other 
colleagues and add to it that I hope to hear from you a little 
bit about the targeting or the allocation of resources towards 
auditing and collection to make sure that we are, in fact, 
going where the money is or hasn't been paid, actually, and 
make sure that we do that in a fair and equitable manner, and 
also maybe some comments about the morale of the people that 
work with the Internal Revenue Service and how they are being 
treated and how we can expect them to be treated in the future.
    But in addition to these comments and the others of my 
colleagues, I think we would like to hear from you now. So I 
would will yield back to the Chair.
    Representative Houghton. Thanks so much. Senator Bennett 
has just arrived. Senator Bennett, would you like to make an 
opening statement?

OPENING STATEMENT OF HON. ROBERT F. BENNETT, U.S. SENATOR FROM 
                              UTAH

    Senator Bennett. Only that I am here to learn and I am 
grateful to you for allowing Members of the other body to come 
over here where all of the work is done.
    Representative Houghton. Well, thank you very much.
    Okay. Mr. Lewis.
    Representative Lewis of Kentucky. No.
    Representative Houghton. All right. Good. Well, now what we 
are going to do is call on the Commissioner. Commissioner, you 
are on.

 STATEMENT OF MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE 
                            SERVICE

    Mr. Everson. Mr. Chairman and Members of the joint review, 
thank you for this opportunity to testify. It is true that I 
have only been Commissioner a relatively short time, but I 
would like to put this into perspective. I am sorry that 
Senator Baucus is not here, because at my confirmation hearing 
he observed that of the five New Yorkers who previously served 
as Commissioner, one, Justin Winkle, served just 14 days. Mr. 
Chairman, I am pleased to report this is my 15th day on the 
job, and I am still here.
    As I testified at my confirmation hearing and more recently 
before the House Appropriations Subcommittee and the Ways and 
Means Oversight Subcommittee, I expect to focus on three areas 
during my tenure as Commissioner:
    One, I will reinforce and build upon the reorganization 
begun by Commissioner Rossetti to improve customer service.
    Two, I will continue to drive the information technology 
modernization program. Its success is critical to establishing 
a more efficient and effective IRS and one which is more 
accessible to taxpayers.
    Three, I will strengthen the integrity of our Nation's tax 
system through enhanced enforcement activity.
    Let me expand on each of these themes. The reorganization 
of the Service based on customer segments is working. These 
reforms are sound and need not be revisited. To change now 
would be disruptive. In fact, I recently received a memo from 
the American Institute of Certified Public Accountants, asking 
that I not engage in any significant reworking of the structure 
as it, quote, would only unnecessarily confuse the taxpayers 
and practitioners who have begun to get comfortable with the 
new IRS.
    I agree. Indeed, I give the IRS good marks for its 
improvements in key service areas. Progress has been achieved 
in many areas such as telephone service and electronic tax 
administration. For example, taxpayers were met with 19.4 
million busy signals in 1999. This filing season the number 
dropped to less than 250,000.
    Call abandons also fell over the same period from 8.4 
million to 1.1 million. And level of service increased from 51 
to 83 percent.
    E-file has also shown impressive gains. A little more than 
29 million taxpayers E-filed in 1999. Almost 52 million did 
this year. And compared to last year, E-file grew by over 12 
percent, and filing from home computers by almost 27 percent. 
The service is doing a better job.
    But of course much remains to be done. For example, we must 
improve our accuracy rates in responding to taxpayer questions.
    Let me now turn to the second theme: information technology 
modernization. As compared to the gains in service, the results 
are mixed. As the members of the joint review are well aware, 
business systems modernization had a number of false starts. 
Nevertheless, there are a number of important accomplishments 
to date. The IRS has deployed the customer communications 
project that better routes taxpayer phone calls, and helped the 
Service cope with millions of additional phone calls resulting 
from last year's tax rebate.
    We also expect 15 million users this fiscal year of the 
Internet-based Where is My Refund Application. And in the next 
few weeks, taxpayers, practitioners, and financial institutions 
will be able to apply for an employee identification number on 
line.
    While these programs are important, the centerpiece of the 
modernization effort is the replacement of the decades-old 
master files that begins this summer. In the next few months, 
we are scheduled to move 6 million 1040-EZ filers to a modern, 
reliable database called the Customer Account Data Engine, or 
CADE. CADE's benefits to taxpayers are clear, such as faster 
refunds and daily posting of transactions and updating of 
accounts.
    The modernization effort is a major challenge. As the GAO 
noted in its January assessment, modernization remains a high-
risk area. It stated, quote, the scope and complexity of the 
program are growing. The challenge for the IRS is to make sure 
that the pace of systems acquisitions projects does not exceed 
the agency's ability to manage them effectively.
    Given this assessment, with which I agree, and the 
important juncture we have reached with the first important 
deliverable for CADE, I have decided to have an outside group 
of experts take an independent look at the program and report 
back to me by the end of this summer. I haven't yet identified 
who will conduct this study, but I expect to do so in the next 
few weeks.
    I want to stress that no work will stop while this review 
is underway. But this is a good time to assess progress, 
project risk, and decide whether any mid-course corrections are 
needed.
    Before leaving IT, I want to point out that while the IRS 
spends nearly $2 billion each year for information technology, 
the modernization program itself makes up less than one quarter 
of that total.
    Through the careful examination of our base IT activities, 
the remaining 1.6 billion not devoted to modernization per se, 
I believe we can both increase productivity and deliver 
meaningful service improvements to taxpayers. I will challenge 
the organization to do exactly this, and to act with a sense of 
urgency.
    Our third area of focus is enforcement. It is as simple as 
this. People should pay what they owe. In an important 
recognition of the need to do more in enforcement, the 
President's budget requests a real increase in resources 
targeted towards enforcement, new money to expand enforcement 
efforts with a sharper focus on high-income, high-risk 
taxpayers and businesses. I believe this can and must be done 
without compromising taxpayer rights. The IRS has already 
launched a number of new enforcement initiatives, such as the 
Offshore Voluntary Compliance Initiative and identifying tax 
scams and schemes promoters in a limited issue-focused 
examination. I will be looking at each of these initiatives to 
see where we can do more.
    One thing is already clear to me. The IRS must bring the 
same focus and energy to improving enforcement's business 
processes as we are to improving the service side of the IRS. 
It is unacceptable that a corporate audit takes 5 years on 
average from the date of filing to complete, and 2 years is too 
long just to get ready to present a criminal case to the 
Department of Justice.
    In order to clarify reporting relationships in the Service 
and to support these three themes--reinforcement of the 
reorganization to improve service to taxpayers, continuation of 
modernization efforts, and strengthening of enforcement--later 
this week I will name a new Deputy Commissioner for Services 
and Enforcement, and a Deputy Commissioner for Operations 
Support.
    The Deputy Commissioner for Services and Enforcement will 
supervise the four business units' criminal investigations and 
the Office of Professional Responsibility.
    The Deputy Commissioner for Operations Support will 
supervise the CFO, CIO, the chief human capital officer, 
agency-wide shared services, and the Service's IR and physical 
security operations. There are two advantages to be gained from 
this approach. The Deputy Commissioner for Services and 
Enforcement will continue to drive for better service and be 
able to focus on prioritization of multiple enforcement 
initiatives and reduce unnecessary delays in enforcement 
processes while continuing to respect taxpayer rights.
    The Deputy Commissioner for operations support will own the 
modernization program and drive productivity across the 
organization in order to improve service to taxpayers.
    Mr. Chairman, as we approach the fifth anniversary of the 
enactment of this landmark legislation, the transformation of 
the IRS is still very much a work in progress and one that will 
require a great deal of effort if we are able to realize the 
full potential of RRA 98.
    I am committed, as are the men and women of the IRS, to 
seeing this through to a successful conclusion. I would be 
happy to answer your questions.
    [The statement of Mr. Everson follows:]

  Prepared Testimony of Mark W. Everson Commissioner, Internal Revenue

                        introduction and summary
    Mr. Chairman and distinguished Members of the Joint Review, thank 
you for this opportunity to provide an update of the IRS' progress in 
meeting the mandates set forth by the IRS Restructuring and Reform Act 
of 1998 (RRA 98).
    I want to express my appreciation for your continued support of the 
IRS' efforts to carry out both the spirit and letter of RRA 98. As I 
begin my tenure as IRS Commissioner, I look forward to a productive 
relationship with you. I will certainly seek your counsel as to how we 
can improve both the management and processes that guide systems 
modernization and the critical services we provide to America's 
taxpayers.
    Although I have been officially on the job as Commissioner for two 
weeks, I have some initial views about where the Agency stands today 
and what it must do in the future to succeed.
    We are rapidly approaching the fifth anniversary of the enactment 
of this landmark legislation. But we are nowhere near realizing the 
full benefits of RRA 98. The modernization of the IRS is still very 
much a work in progress--and one that will require a great deal of hard 
work if we're to continue that progress.
    In its January 2003 Performance and Accountability Report on the 
IRS, the GAO acknowledged that the IRS made progress laying the 
foundation for a modern agency that can respond to taxpayer needs in a 
more timely, accurate and cost efficient manner.
    However, the GAO also warned that the ``IRS must successfully 
manage several significant challenges that threaten continued 
modernization. Challenges include reversing the decline in compliance 
and collection programs, managing the deployment of several large 
business systems and implementing new performance measures and 
management processes.''
    The IRS has yet to provide the level of service that taxpayers, 
Congress and the IRS agree is necessary; however, progress was made 
this filing season, particularly in electronic tax administration. 
Electronic filing, while still short of the 80% RRA 98 goal, showed 
impressive gains. The IRS cracked the 51 million individual taxpayer 
mark, thanks in part to the new, innovative Free File program which 
attracted 2.7 million e-filers. Filing from home computers rose by 27%. 
IRS web site hits increased by another 25 percent. Telephone service 
also improved, with assistor level of service up 20% over the previous 
filing season.
    The GAO also cited the collection of unpaid taxes as a major 
management challenge, and ``because of the potential revenue losses and 
threat to voluntary compliance this is also a high-risk area.'' It is 
no secret that the IRS poached from enforcement to improve customer 
service and we are paying the price today with unacceptable enforcement 
levels that erode taxpayer confidence, and corporate audits that can 
take on average 5 years to complete. We must dig ourselves out of a 
very deep ditch.
    As we work to improve taxpayer confidence in the fairness of our 
tax administration system, we must continue to respect taxpayer rights 
and work to improve the administration of RRA 98's taxpayer rights 
provisions. The IRS made progress on the Innocent Spouse program where 
centralization of receipts and better administration reduced case 
backlogs and processing time. Other programs, such as Offers in 
Compromise, are far more difficult to administer.
    Business Systems Modernization (BSM) also presents many challenges. 
On the plus side, the IRS addressed a number of high-risk areas 
previously identified by GAO. First, it established the infrastructure 
systems on which future applications will run. Second, it began to 
deliver applications with tangible benefits to taxpayers, such as the 
``Where's My Refund'' Internet-based service. Third, progress was made 
in establishing the modernization management controls needed to 
effectively acquire and implement information technology systems.
    However, we are entering a critical phase of BSM and the program 
remains at high risk for two reasons. First, the program's scope and 
complexity continue to grow. Second IRS' modernization management 
capacity is still maturing.
    Mr. Chairman, I believe the IRS is making progress implementing the 
letter and spirit of RRA 98, particularly on the customer service side. 
But we are certainly not out of the woods. There is still an enormous 
amount of work ahead to complete the job of modernization.
    To meet these challenges and fully realize the benefits of the RRA 
98, we must focus on three key areas.
    One, we must continue the reorganization begun by Commissioner 
Rossotti to improve customer service. We must stay the course. 
Employees and managers at all levels of the organization must fully 
embrace and be engaged in the changes he launched.
    Two, we must continue the information technology modernization 
program. Its success is critical to establishing a more efficient and 
effective IRS.
    Three, we must strengthen the integrity of our Nation's tax system 
through enhanced enforcement activities. The IRS must deter those who 
might be inclined to evade their legal tax obligations and 
appropriately pursue those who actually do. I want to be clear that 
enforcement will be a principal responsibility of the IRS and we must 
bring a laser like focus to it.
    Let me now describe in greater detail the progress IRS has made 
since the 2002 Joint Review hearing and the challenges that remain in 
the key areas of customer service, burden reduction, enforcement, 
taxpayer rights and business systems modernization. I also want to 
comment on the proposed modifications to RRA 98 contained in the 
President's FY 2004 budget.
                       improved customer service
    Mr. Chairman, I am pleased to report that service to taxpayers 
continues to improve. As demonstrated by the 2003 filing season 
results, key customer service indicators, such as e-filing and 
telephone assistor level of service went up. However, there is still a 
gap between the service the IRS delivers to taxpayers and what they 
expect and deserve. Clearly, the IRS has not met RRA 98's mandates if 
almost 20 percent of callers are not getting the correct answer to 
their tax law questions. As GAO recommended, the IRS has taken steps to 
improve management of the customer service functions, including 
improved performance measures, more program evaluation and the 
establishment of explicit goals.
    I want to stress that top quality customer service also serves to 
improve voluntary compliance. In fact, the entire modernization program 
is premised in part on the principle that helping taxpayers to 
understand and meet their obligations under the law will improve 
compliance and result in fewer and less costly enforcement actions.
Electronic Tax Administration (ETA)
    The President's Management Agenda states that ``E-government 
initiatives will make it simpler for citizens to receive high quality 
service from the federal government, while reducing the cost of 
delivering those services.'' Electronic tax administration is an 
excellent example of this approach. E-file's benefits are clear and 
compelling. Taxpayers and the IRS find it more convenient and 
economical and less time consuming to do business electronically rather 
than sending paper through the mail. Moreover, the government saves 
money, but the real benefits are conveyed to the taxpayer. They include 
reduced preparation time, faster refunds, accuracy of returns and 
acknowledgment of return receipt.
    Indeed, the American Customer Satisfaction Index shows a very high 
satisfaction rate among electronic filers. For 2002, it was 78 points 
(out of 100), compared with a mark of 53 for individual paper tax 
filers.
    In 2002, more than 46.7 million taxpayers (36%) filed 
electronically--a 16.4% rise over the previous year. This filing 
season, all individual e-file is up by 12.4% and e-filing online has 
grown by 27%. It is projected that when all is said and done for this 
filing season that e-filing will constitute approximately 41% of 
individual returns filed. Part of the recent surge can be attributed to 
the Free File program, which clearly has been a success story.
    As of April 18, Free File Alliance members have processed and 
transmitted more than 2.7 million tax returns. This represents 
approximately 22% of the total 9.2 million online e-filed returns. I do 
recognize some concerns about pop-up ads and we will work with the 
Alliance to address them.
    The following key 2003 filing season e-file statistics through May 
2, 2003 provide greater detail about individual e-file components and 
programs.
     Over 36 million taxpayers have e-filed their tax returns 
through an IRS-authorized Electronic Return Originator (ERO), a 10.4% 
increase over the same period last year.
     More than 11.7 million taxpayers have filed their tax 
returns on-line via their home computer through a third party 
transmitter. Online filing is running 26.8 percent ahead of last year 
and exceeds by 2.5 million the 2002 total volume of 9.4 million.
     Over 32 million individual taxpayers have chosen to use 
the Personal Identification Numbers (PINS) in lieu of a written 
statement when e-filing on-line.
     Over 4 million taxpayers have filed their returns over the 
telephone using the TeleFile system.
     Over 42 million taxpayers have chosen direct deposit of 
their federal tax refund, an 11% increase from the year before.
     Over 22 million taxpayers have chosen to file both their 
federal and state tax returns simultaneously in a single electronic 
transmission, up 16% from last year's 16.2 million.
    The popularity of e-file and its continued growth can be attributed 
to both its value to taxpayers and efforts to make it simpler, more 
attractive and available to more taxpayers. Since its modest beginnings 
as a pilot in 1986, more options were added each year, ranging from 
payment by credit card, direct deposit of refunds, self-select PINs, 
more forms and the joint filing of federal and state returns.
    In addition, a group of employees within the IRS identify 
regulatory and administrative impediments to electronic filing and then 
systematically work to remove those impediments through changes to 
regulations, forms, etc.
    For the 2003 filing season, new options, in addition to Free File 
were offered. This year, taxpayers were able to electronically file 
seven new forms related to their Individual Income Tax Returns. They 
also had several options for checking on the status of a refund, 
including the aforementioned ``Where's My Refund?'' service. Taxpayers 
can get the information they need quickly, efficiently and safely. For 
FY 2003, we expect 15 million uses of ``Where's My Refund?''
    The IRS web site at www.irs.gov also continues to be extremely 
popular with taxpayers. For the week ending March 15, 2003, it was 
listed as Number 2 in the Lycos Top 50 searches. In FY 2002, it posted 
3.11 billion hits with more than 437 million forms and publications 
downloaded. For FY 2003 through April 25, there were 2.55 billion web 
site hits, up 25.59% over the same period last year.
    A strong ETA program may be even more important for reducing burden 
for businesses than for individual taxpayers. In addition to their 
annual income tax returns, businesses also have to file various 
employment tax returns and information returns. Businesses also make 
many payments to the federal government, such as withholding and 
unemployment taxes. In fact, payments are a business's most frequent 
transaction with the IRS.
    We want to convert all of these transactions to fast, accurate, 
paper-free electronic methods. And the IRS is making progress on a 
number of fronts.
    During FY 2002, over 3.2 million taxpayers made $1.5 trillion in 
electronic tax payments through the Electronic Federal Tax Payment 
System (EFTPS), which now includes an online option. For 2003, IRS 
expects more than 4 million taxpayers to pay their taxes using the 
EFTPS System.
    In FY 2002, the IRS also received more than 2.5 million 941 e-file 
program returns (Employer's Quarterly Federal Tax Return) and 855,000 
returns for 941 TeleFile and On-Line Filing Programs. In CY 2002, over 
320,000 businesses used the 940 e-file Program (Employers Annual 
Federal Unemployment Tax Return), and more than 24,000 partnerships 
chose 1065 e-file (U.S. Return of Partnership Income) in FY 2002.
    In 2003, the IRS plans to better serve business's electronic tax 
administration needs. For example, tax professionals are able to file 
employment taxes for business clients for the first time as part of a 
new Employment Tax e-filing System. The IRS also expects that coming e-
file upgrades will continue to reduce the paperwork burden on small 
businesses. The enhanced e-file system is part of an ongoing effort to 
reduce small business burden and barriers to electronic filing. This e-
file option will replace outdated technology that was a burden to both 
businesses and the IRS. Key benefits of the new system include:
         More flexible filing--Forms 941 and 940 can be filed 
        in a single transmission;
         Faster acknowledgements--Transmissions are now 
        processed upon receipt and acknowledgments are returned in near 
        real-time; and
         Integrated payment options--Eligible filers may submit 
        a required payment along with their return, subject to 
        limitations imposed by the Federal Tax Deposit Rules.
    Businesses will also soon be able to apply for an employer 
identification number (EIN) by using the IRS's new on-line EIN 
Application at irs.gov. When a business applies, its EIN will display 
on the SS-4 for printing and record keeping and each applicant will 
receive their formal validation letter.
    Mr. Chairman, to build practitioner interest, the IRS will offer 
later this year a suite of electronic services, such as disclosure 
authorization, transcript delivery and account resolution, to tax 
practitioners who file a certain number of returns electronically.
    E-Services are web-based products for third parties to use over the 
Internet. Third parties include electronic return originators, software 
developers, transmitters, reporting agents, service providers, tax 
practitioners, payers, and states. There are two releases related to e-
Services.
     Release 1 includes Registration, Preparer Tax 
Identification Number (PTIN) Application and Interactive Taxpayer 
Identification Number (TIN) Matching. (Scheduled to be released the 
last week of June 2003.)
     Release 2 includes e-file Application, Disclosure 
Authorization, Electronic Account Resolution, Transcript Delivery 
System and Bulk TIN Matching. Disclosure Authorization, Electronic 
Account Resolution and Transcript Delivery System are incentives 
available for authorized e-file providers who e-filed 100 or more 
individual returns. (Scheduled to be released in late August 2003.)
Telephone assistance
    The IRS continues to provide various services through its toll-free 
telephone lines and service is improving. Through April 26, 2003 
approximately 83.1 % of taxpayers who wanted to talk to a customer 
service representative got through, compared to 69.7% percent last 
year. The IRS set a goal of 72% for FY 2003.
    The IRS is better identifying taxpayers' needs through tax law 
screening and then getting them to the right person to answer their 
question. This process has reduced the abandoned rate from 15.3% to 
7.5%. In addition, the transfer rate was reduced from 22.1% to 17.2%. 
These two indicators illustrate that a higher percentage of taxpayers 
are reaching the right Customer Service Representative (CSR) without 
being transferred and/or having to call back while waiting to speak to 
a CSR.
    Once connected, taxpayers must get prompt, accurate and courteous 
answers to their account and tax questions. The telephone correct 
response rates for tax law and tax account questions are about even 
with last year--82.5% and 87.7% respectively--as compared to 83.4% and 
89.4% over the same period last year.
Taxpayer assistance centers
    Taxpayers needing face-to-face help solving individual or business 
tax problems can get it every business day at every IRS Taxpayer 
Assistance Center (TAC). For the fiscal period beginning October 01, 
2002 through April 26, 2003, the IRS served 5.92 million taxpayers at 
all TACs. For the 2003 filing season beginning January 01, 2003 through 
April 26, 2003 we served over 4.48 million taxpayers in all TACs. The 
customer satisfaction rate is 88% satisfied and 7% dissatisfied, which 
is on target for the FY 2003 performance plan.
    Individual taxpayers with incomes of $35,000 or less can also 
receive free income tax return preparation and e-file help at TACs. The 
IRS extends this courtesy return preparation service to all taxpayers 
qualifying for the Earned Income Tax Credit, without placing the 
government in competition with private industry. All of these returns 
are e-filed.
    Free tax preparation and e-file are also available in many 
communities through the Volunteer Income Tax Assistance (VITA) and Tax 
Counseling for the Elderly (TCE) programs. To better serve low-income 
taxpayers, the IRS's Stakeholder Partnership, Education and 
Communication (SPEC) organization is establishing extensive 
partnerships with external groups such as local governments, non-profit 
organizations, private for-profit businesses, and others to create 
community coalitions. The IRS is also focusing its limited resources on 
providing technical expertise and training while encouraging the 
community partners to supply resources such as volunteers, space and 
computer equipment.
    The IRS wants to make its partners as self-sufficient as possible 
and to identify those organizations that could make available needed 
resources. This new approach allows the IRS to expand access to low-
income taxpayers, provide greater free tax return preparation and 
filing, and sustain these services over time.
                            burden reduction
    Mr. Chairman, our goal is to create the least amount of burden for 
taxpayers to meet their responsibilities under the tax law. That is a 
guiding principle for the IRS's Office of Taxpayer Burden Reduction, 
which is the lead organization for our efforts in this critical area. I 
think we have made some progress, but more remains to be done.
    Since last year's hearing, the IRS made progress on a number of 
fronts. For example, by raising the threshold for separately reporting 
interest and dividend income, an estimated 15 million taxpayers no 
longer have to file a Schedule B. In addition, because of our Industry 
Issue Resolution Program, family day care providers no longer have to 
keep detailed records and receipts of food purchased for use in their 
businesses. They may now choose instead to use a standardized rate to 
claim the deduction for meals provided to children in their care. These 
small businesses will save an estimated 10 million hours a year.
    In addition, over 2.7 million taxpayers enjoyed the benefits of the 
innovative Free File initiative discussed previously in my testimony. 
Businesses are also finding that they can unburden themselves of even 
more paper and perform more of their reporting and payment transactions 
on line. Soon, they will even be able to apply for an Employer 
Identification Number by going to www.irs.gov. The IRS is also 
simplifying forms and notices to make them clearer and more easily 
understood. And the agency is tackling the major redesign of those 
schedules and forms with a huge impact on individual and business 
taxpayers, such as Schedule K-1 and Form 941.
    Mr. Chairman, for many taxpayers, particularly business taxpayers, 
burden takes the classic form of time and money--the time and expense 
it takes to resolve an issue or problem that may affect one business or 
even, an entire industry. Ideally, we want to shift from addressing 
taxpayer problems well after returns are filed to addressing them as 
early as possible in the process, and in fact preventing problems 
wherever possible. To this end, the IRS created a number of programs in 
its operating and functional divisions to address issue management and 
problem resolution.
    The Industry Issue Resolution (IIR) program began more than two 
years ago as an initiative under the Large and Mid-Size Business (LMSB) 
Operating Division's Issue Management Strategy. The IIR program 
provides guidance on frequently disputed or burdensome business tax 
issues. Benefits of the program include reduced costs and burden, and 
eliminating uncertainty regarding proper tax treatment, for both 
taxpayers and the IRS. The IRS estimates that it has provided millions 
of hours in taxpayer burden reduction.
    The pilot program was evaluated and determined to be successful. In 
2002, Notice 2002-20 was issued to announce the decision to make IIR a 
permanent program, expand the program to include SB/SE business issues, 
establish burden reduction as an issue criterion and invite issue 
submissions. For 2002, 38 issues were submitted from businesses, tax 
practitioners and associations and seven were accepted for the IIR 
program.
    Fast Track Mediation (FTM) evolved from the Modernization/Re-
Engineering process. It is designed to help SB/SE taxpayers resolve 
disputes resulting from examinations and collection (offer in 
compromise, trust fund recovery penalty, and certain collection due 
process) actions. FTM reduces taxpayer burden by resolving disputes in 
a fair and impartial manner, as well as on a timely basis. Disputes 
will be resolved within 30 to 40 days compared to several months 
through the regular appeals process.
    FTM began as a pilot program in June 2000, in four cities. Based on 
the success of the pilot, on June 1, 2002, FTM was rolled out 
nationwide. A revenue procedure on FTM is being finalized by Chief 
Counsel and Treasury to expand this program. Publication 3605, Fast 
Track Mediation-A Process for Prompt Resolution of Tax Issues, lists 
cases excluded from the program.
    The LMSB Fast Track Settlement (FTS) Program has reduced taxpayer 
burden in important ways. A recent survey of taxpayers who completed 
the process asked them to identify what they expected to gain from the 
Fast Track process. The three top expectations (in order of number of 
responses) were: (1) quicker resolution of their cases, (2) lower non-
tax costs, and (3) reduction in staffing demands. When asked if their 
expectations had been substantially met, the average agreement rate was 
4.21 on a five-point scale where five is ``strongly agree.''
    The IRS estimates that the overall case resolution cycle time is 
reduced by approximately 920 days for cases participating in the Fast 
Track process. A revenue procedure on FTS is being finalized by Chief 
Counsel and Treasury to expand this program.
    The LMSB Division is implementing a new streamlined examination 
process called the Limited Issue Focused Examination, or LIFE. This 
initiative will involve a formal agreement, a Memorandum of 
Understanding (MOU), between the IRS and taxpayer served by LMSB to 
govern key aspects of the examination. The MOU will contain dollar-
limit thresholds, established on a case-by-case basis, below which the 
IRS will agree not to raise issues and the taxpayer will agree not to 
file claims. Our goal is to create an atmosphere where the examination 
process is less difficult, less time-consuming, less expensive and less 
contentious for all involved.
    Clearly, the IRS has made some progress, but clearly too, reducing 
unnecessary taxpayer burden in all its many shapes and forms is an 
enormous challenge, especially when seen within the context of an 
extremely complex and ever changing Tax Code.
    Indeed, even as the IRS seeks to cut lines, simplify or eliminate 
forms altogether, and reduce the number of taxpayers having to file 
forms and schedules, it often must add lines to other tax forms to 
reflect new changes in the Tax Code that may benefit millions of 
taxpayers. For example, the IRS added three lines to the Form 1040 for 
tax year 2002 to accommodate statutory tax law changes relating to 
retirement, deductions for educators' supplies, and tuition and fees.
    Frequent changes to the tax code and tax law complexity are perhaps 
the greatest hurdles to overcome as the IRS works to reduce unnecessary 
taxpayer burden. There is even anecdotal evidence that tax law 
complexity may be a cause of non-compliance, and even non-filing. 
Confounded and confused by the complexity, some taxpayers just give up. 
Moreover, the IRS estimates the cost to taxpayers for complying with 
the Code to exceed $80 billion--8 times the cost of the IRS budget.
    In a speech delivered in March 2003 to the Federal Bar Association, 
Assistant Treasury Secretary for Tax Policy, Pam Olson, pointed to the 
fundamental problem that we as tax administrators and a nation of 
taxpayers face:

          A key way that companies have raised productivity is by 
        simplifying. Take every process down to its constituent parts, 
        and cut out the inefficiencies, the points of friction, the 
        drags that prevent the most streamlined operation and the 
        standardization of transactions. Instead of simplifying to 
        increase productivity in tax compliance and administration, we 
        keep adding complexity--more rules, more limitations, more 
        terms, more conditions, more qualifiers, more provisos, more 
        exceptions. The result is that our system gets slower and 
        slower and more inefficient. We burn more fuel, and emit ever 
        more heat and smoke, and yet with all that burning, there's 
        less and less light to show for it.

    That is a fair and correct assessment of our present situation. Our 
myriad efforts to reduce unnecessary taxpayer burden are producing 
tangible benefits to taxpayers, but we must still address tax law 
complexity in a meaningful way. If we fail to, we will have failed in 
our mission to reduce taxpayer burden. Most importantly, we will have 
failed America's taxpayers.
                              enforcement
    Mr. Chairman, the IRS is committed to ensuring everyone pays his or 
her fair share, including those who have the resources to move money 
offshore or engage in abusive schemes or shelters. We must focus our 
efforts on achieving greater corporate accountability and ensure that 
high-end taxpayers fulfill their responsibilities. Honest taxpayers 
should not bear the burden of others who skirt their responsibility. 
It's as simple as this. Taxpayers should pay what they owe.
    However, the poaching of enforcement personnel to bolster customer 
service contributed to a steady and disturbing decline in enforcement. 
As I stated in my introduction, the GAO identified the collection of 
unpaid taxes as a major and growing management challenge as reflected 
in the ``large and pervasive declines in IRS's compliance and 
collection programs.'' Moreover, ``because of the potential revenue 
loss and the threat to voluntary compliance this is also a high-risk 
area.''
    Although there have been improvements in some enforcement numbers; 
they are modest and spotty across the broad spectrum of enforcement 
activities. It is unacceptable that a corporate audit still takes on 
average 5 years to complete. The Service must examine its enforcement 
priorities and reduce the cycle time in its enforcement processes, 
albeit without compromising taxpayer rights. We must bring the same 
commitment and focus to improving and administering our enforcement 
programs as the IRS has in improving customer service.
    The IRS is now working to identify and refocus its resources on the 
biggest areas of risk to the tax system. Toward the end of FY 2002, the 
IRS began realigning its resources to concentrate on key areas of non-
compliance with the tax law, primarily among higher-income taxpayers 
and businesses. These include:
           The promotion of abusive tax schemes.
           The misuse of devices such as offshore accounts to 
        hide or improperly reduce income.
           The use of abusive tax avoidance transactions.
           The underreporting of income by higher-income 
        individuals.
           Non-filing by higher-income individuals.
           Earned Income Tax Credit program.
           The National Research Program.
    Indeed, the principal focus of the President's proposed FY 2004 
budget is strengthening enforcement in these and related areas. We are 
most encouraged by the new money requested to help us address these 
difficult issues.
    The IRS Small Business/Self-Employed (SB/SE) Division is leading 
the new civil enforcement effort on issues affecting individuals and 
businesses. However, enforcement efforts will continue in other parts 
of the agency, such as the abusive tax avoidance transaction initiative 
in the Large and Mid-Sized Business (LMSB) Division. IRS Criminal 
Investigation also continues its investigative efforts regarding 
abusive schemes and promoters.
    Key to the fight against abusive tax scams and schemes is better 
identifying their promoters; we must go the source and cut off the 
supply. In April 2002, SB/SE established a Lead Development Center 
(LDC) with the following purposes:
           To centralize the receipt and development of leads 
        on promoters of abusive tax schemes;
           To authorize and monitor on a national level abusive 
        tax promoter investigations (also called 6700 investigations) 
        assigned to the field; and
           To promote and effect the coordination of parallel 
        investigations with IRS Criminal Investigation.
    Because of the LDC, the IRS has a better handle on the universe of 
the problem. The current receipt of new leads is averaging 
approximately 82 per month. As of May 2, 2003, 372 civil promoter 
investigations are being worked in the field, and 491 are being 
evaluated for further action. The leads can also be broken down into 
promoter brackets or ``buckets,'' with domestic trusts, offshore 
transactions and frivolous constitutional arguments being the largest.
    Since October 2000, the IRS has also issued a series of summonses 
to a variety of financial and commercial businesses to obtain 
information on U.S. residents who held credit, debit, or other payment 
cards issued by offshore banks.
    And in January 2003, the IRS launched an initiative aimed at 
bringing taxpayers who used ``offshore'' payment cards or other 
offshore financial arrangements to hide their income back into 
compliance with tax law. The Offshore Voluntary Compliance Initiative 
led to more than 1,200 people stepping forward to participate. A 
partial analysis of some of the cases has already identified more than 
$50 million in uncollected taxes and 80 new offshore promoters.
    Mr. Chairman, critical to the agency's efforts are new expedited 
procedures developed with the Justice Department to obtain timely 
injunctions. In the past, many of the scams and schemes continued to 
operate even when the IRS had identified them as being abusive. 
However, with these new procedures in place, the agency and its 
partners at the Justice Department are in a better position to shut 
these scams down before they can do any more harm.
    As of May 2, 2003, the IRS had 27 promoter injunctions granted, 6 
promoter injunctions pending in District Court and 24 pending at the 
Department of Justice, 372 civil promoter investigations in the field, 
and 464 ongoing criminal investigations of promoters of various tax 
schemes.
    The IRS also emphasized abusive shelters and transactions. The 
Office of Tax Shelter Analysis (OTSA) provides centralized data 
collection and analysis on all aspects of the tax shelter program, 
including information required to be disclosed by regulation, developed 
by field agents and obtained during the course of our disclosure and 
settlement initiatives.
    LMSB currently has 89 promoters under investigation; 245 summonses 
have been issued to obtain relevant information from promoters 
(including investor lists), of which 77 have been referred to the 
Justice Department for enforcement. IRS has obtained investor lists 
from 25 promoters covering multiple transactions. DOJ on behalf of the 
IRS has filed summons enforcement actions against four promoters to 
obtain information to which the IRS is entitled.
    When a transaction is determined to be abusive, IRS and Treasury 
publish legal guidance as early as possible. This process is designed 
to deter subsequent promotion and investment in abusive transactions 
and to facilitate identification of investors and promoters. It also 
ensures consistent treatment of such transactions by IRS agents in the 
field. The IRS and Treasury have identified 25 abusive transactions 
through formal guidance.
    The IRS Disclosure Initiative also brought many taxpayers into 
compliance and provided leads on promoters and emerging abusive 
transactions. Conducted from December 2001 to April 2002, it resulted 
in 1,664 disclosures from 1,206 taxpayers. Taxpayers have disclosed 
transactions in which they claimed deductions or losses amounting to 
billions of dollars. The IRS is analyzing the new transactions to 
determine whether they are abusive and warrant published guidance or 
other administrative response.
Reduce inappropriate payments in the EITC Program
    The EITC program benefits millions of low-income workers. It lifts 
nearly 4 million people, especially single mothers, out of poverty each 
year. However, the current error rate for the EITC program is too high. 
In 1999, between 27 and 32 percent of EITC claims--or between $8.5 
billion and $9.9 billion--were paid in error.
    Again this January, the GAO included the EITC as one of two dozen 
``high-risk'' areas across the federal government. The GAO stated, 
``The IRS has to balance its efforts to combat non-compliance with its 
efforts to help ensure that qualified persons claim the credit.'' I 
fully agree with GAO's assessment.
    Some have also claimed that the audit rate for the EITC is 
disproportionately high. However, a better comparison would be to other 
benefits programs which verify a significantly higher percentage of 
claimants for eligibility.
    The FY 2004 Budget requests an additional $100 million to begin a 
new strategy for improving the EITC program. Mr. Chairman, the 
Administration's EITC proposal became an issue during my confirmation 
process. I want to stress that in the coming weeks, I intend to closely 
review the proposed program. I pledge to work with all interested 
parties to ensure that any new controls put in place do not 
unnecessarily discourage participation in this important program.
Use of private sector contractors for collection of taxes due
    There is a significant and growing backlog of cases involving 
individual taxpayers who are aware of their tax liabilities but are not 
paying them. In this regard, the budget contains an important 
legislative proposal that would authorize the IRS to contract with 
private-sector collection agencies--or PCAs--to supplement current tax 
collection efforts for a targeted category of debt. I would like to 
emphasize that this proposal is totally distinct from competitive 
sourcing and will not result in the loss of a single job at the IRS. 
While federal employees could do this work, as you know, appropriated 
resources are scarce. And I would like to point out that for 8 out of 
the last 10 fiscal years, the IRS has actually received less than its 
full budget request. The proposed use of PCAs is a realistic approach. 
As the National Taxpayer Advocate states, ``PCAs appear a limited but 
reasonable option.''
    For the purposes of this initiative, the Treasury Department and 
the IRS identified over $13 billion in individual tax debt designated 
as currently ``non-collectible.'' The cases the IRS would refer to PCAs 
are those where the taxpayer would likely pay the outstanding tax 
liability if contacted by telephone. These include situations where a 
taxpayer filed a return indicating an amount of tax due but did not 
also send in payment for that full amount. These cases also would 
include situations where the taxpayer has made three or more voluntary 
payments of tax that was assessed by the IRS.
    The IRS would not refer to PCAs cases for which there is any 
indication that enforcement action would be required to collect the tax 
liabilities. The IRS will avoid referring cases that would require IRS 
expertise or the exercise of discretion.
    I want to stress in the strongest possible terms that PCAs would be 
prohibited from threatening or intimidating taxpayers. Indeed, the PCAs 
would be governed by all of the same rules by which IRS employees are 
held accountable. The taxpayer protections woven throughout this 
proposal have also been thoroughly reviewed by the National Taxpayer 
Advocate who will be testifying this afternoon.
    From my previous perch as Deputy Director for Management at OMB, I 
am also acutely sensitive to the need for proper supervision of outside 
contractors. I want to assure the Subcommittee that PCAs and PCA 
employees will receive close supervision by the IRS to insure 
compliance with taxpayer protections and applicable policies and 
procedures. The National Taxpayer Advocate will continue to be involved 
in this process.
    Mr. Chairman, I want to make one final point. The President's 
initiative builds on a record of success at both the state and federal 
level. PCAs are common across more than 40 states, including those 
represented on the Subcommittee. We will work to take the best from 
these different approaches and we will also benefit from their lessons 
learned.
    In the federal arena, I would like to point out that PCAs are being 
successfully used by both the Financial Management Service within the 
Treasury Department and the Department of Education. Under the Debt 
Collection Improvement Act of 1996, nontax debts of a certain age owed 
to federal agencies, such as defaulted loans, must be referred to FMS. 
The collection of the debt is the responsibility of PCAs and this 
system is working very well. In addition, I have confirmed with the 
Deputy Secretary of Education that the Department's experience with 
PCAs is also very positive.
National Research Program
    Mr. Chairman, also key to successfully executing an enforcement 
program is better data. The IRS failed to detect new areas of non-
compliance in part because of a reliance on increasingly obsolete data 
from the old Taxpayer Compliance Measurement Program. (TCMP was last 
conducted in 1988.) The agency designed and is implementing a National 
Research Program that will obtain the essential information with far 
less burden on the taxpayer. New scoring models are being developed 
using 21st century techniques, with interim models already deployed.
                 administering rra 98's taxpayer rights
    Mr. Chairman, the IRS continues to work to administer more 
efficiently and effectively RRA 98's 71 taxpayer rights provisions. We 
clearly made progress in the Innocent Spouse program where greater 
efficiencies have dramatically reduced case backlogs. However, the 
Offers in Compromise (OIC) Program and Collection Due Process have 
proved to be the two most difficult RRA 98 expanded taxpayer rights to 
administer. Nonetheless, we believe that we are now making real 
progress addressing these challenges. In addition, the proposed changes 
to RRA 98 contained in the President's budget would go a long way to 
helping us ensure that these important programs work in the manner 
Congress intended.
Innocent spouse
    The Innocent Spouse provisions implemented as part of RRA 98 were 
in response to concerns that the former law was not providing proper 
relief to innocent spouses. The new provision affords four types of 
relief:
           Innocent Spouse Relief--IRC section 6015(b)
           Separation of Liability--IRC section 6015(c)
           Equitable Relief--IRC section 6015(f)
           Equitable Relief for Community Property Issues--IRC 
        section 66(c)
    Each category of relief has different requirements. IRS employees 
processing the claims initially had difficulty reaching a 
determination--whether to fully grant, partially grant, or fully deny 
the requested relief. To address these concerns, we developed training 
courses and a computer-based application that took employees through a 
series of questions to aid them in making an accurate determination.
    In addition, because of the legislation's complexity, requisite 
administrative procedures and the enormous number of claims initially 
received, the IRS could not respond to the claimants in a timely 
manner. To be more accurate, timely, and consistent, a centralized site 
was established at the Cincinnati Campus to process the claims. As a 
result, inventory levels have steadily decreased from FY 2000 when they 
stood at over 40,000 to approximately 20,000 in FY 2002.
    Innocent spouse claims are determined to be ``merit'' or ``non-
merit.'' A claim is determined to be non-merit if it does not meet the 
basic eligibility requirements, such as no return filed or the claim is 
not signed. To date, 35.5% of innocent spouse claims were determined to 
be non-merit. Of the merit claims, 29.3% were allowed; 10.6% were 
partially allowed and 60.1% were disallowed.
Offers in compromise
    Taxpayers who do not pay their full tax liability are subject to 
the IRS' collection process. It begins when we send the taxpayer a bill 
demanding full payment. For those unable to pay, or when payment would 
create a hardship, we defer payment of their liability by placing the 
account in an ``uncollectible'' status. While these debts are 
classified as ``uncollectible,'' the debt is not written off until the 
statute of limitations expires.
    For taxpayers who are unwilling to pay, the IRS may take 
enforcement action, such as a lien, levy, or seizure of property. 
Taxpayers who are willing to pay may qualify for an installment 
agreement that allows for full payment to be made over time. The vast 
majority of accounts are resolved through one of these methods.
    Taxpayers who cannot afford to pay their full liability may be 
eligible for an offer in compromise. An offer in compromise is an 
agreement between a taxpayer and the IRS to settle or ``compromise'' 
the taxpayer's tax liability for less than the full amount owed. Upon 
acceptance of an offer, the remainder of the debt is forgiven. 
Approximately one percent of accounts are resolved through an OIC.
    Section 7122 of the Internal Revenue Code gives the agency 
authority to settle tax debts through compromises. However, compromise 
authority was historically limited to cases where there was doubt about 
liability or whether the debt could be collected. Provisions in RRA 98 
modified the OIC program so that the IRS could not reject an offer from 
a low-income taxpayer based solely on the amount offered.
    In July 2002, IRS issued final regulations adopting the temporary 
regulations of 1999 with only minor changes. The final regulations 
established a third type of compromise--one that promotes effective tax 
administration. IRS can now accept the following types of compromises:
         Doubt as to Liability--Doubt exists that the assessed 
        tax is correct.
         Doubt as to Collectibility--Doubt exists that the 
        taxpayer could ever pay the full amount of tax owed.
         Effective Tax Administration--There is no doubt the 
        tax is correct and no doubt that the amount owed could be 
        collected, but an exceptional circumstance exists that allows 
        the IRS to consider the taxpayer's offer. To be eligible for a 
        compromise on this basis, the taxpayer must demonstrate that 
        collection of the tax would create an economic hardship or 
        would be unfair and inequitable.
    However, the following major problems placed the OIC program at 
risk:
         A large case inventory of about 125,000 receipts-per-
        year with a projected 10 percent annual growth.
         Processing time/delays.
         High cost of the program relative to the number of 
        taxpayers served.
         Critics have also called into question the high 
        rejection rate of offers. The National Taxpayer Advocate stated 
        that the IRS ``needs to better train its employees to make 
        correct determinations of who is submitting a viable offer.''
         External perceptions and opinions about the viability 
        of processing offers in a centralized environment. Many 
        practitioners prefer to deal with their local offer specialist 
        rather than deal by telephone or correspondence with a 
        centralized bulk processing operation.
    Case inventory levels and processing delays increased for a number 
of reasons. In a March 2002 report, GAO observed that the IRS was 
unable to keep pace with program changes even with increased staff:

          Program changes, some initiated by IRS and some mandated by 
        the Restructuring Act, increased the demand for offers, the 
        number of processing steps, and the number of staff hours 
        needed to process a case. During the same period, staff hours 
        charged to the OIC Program more than doubled, growing to 18 
        percent of total staff hours charged to all of IRS's programs 
        for collecting tax debts. Yet, the demand for offers exceeded 
        staff's capacity to process them.

    There are other reasons for the large case inventory. The 
proliferation of electronic media marketing by firms promising 
settlement of IRS taxes for ``pennies on the dollar'' give taxpayers 
unrealistic expectations about the OIC program. A large number of 
taxpayers also seek refuge in the program to circumvent imminent or 
ongoing collection action. Under current policy, the mere act of 
submitting a processable offer (without any supporting financial 
documentation) is sufficient to stay collection.
    Despite the fact that the latest revision (5-2001) of the Offer in 
Compromise package, Form 656, includes specific instructions to attach 
certain financial documentation when submitting an offer, we receive 
relatively few complete submissions. Furthermore, a large number of 
taxpayers lose interest when they realize that they must submit 
substantiation of their finances to enable the IRS to evaluate their 
offers.
    In this regard, we believe that the OIC program will benefit from 
some proposed legislative changes. In its FY 2004 Budget, the 
Administration offered legislative proposals that would: (1) address 
frivolous OIC filers by establishing a $5,000 penalty for a frivolous 
submission, and (2) remove the barriers to granting installment 
agreements for less than full payment. These legislative proposals can 
assist the IRS in reducing inappropriate OIC receipts and contribute to 
our overall goal of eliminating backlogs and meeting our processing 
time goals.
    The number of days to close an offer case also reached unacceptable 
levels, but we have made improvements in this area. In addition, OIC 
program staffing costs grew. On top of the sheer number of offers 
received, some program changes increased the complexity of the offer 
process, resulting in more processing steps and staff hours to process 
a case. Between FY 1997 and 2001, the number of direct collection field 
hours charged to the OIC program more than doubled.
    To address the growing workload issue, the IRS centralized the 
receipt and processing of offers into two locations--Brookhaven, New 
York and Memphis, Tennessee. It allowed for efficiencies of scale as 
well as the opportunity to better focus training efforts and 
standardize procedures. We project that about 70 percent of all offers 
can be worked to completion in the centralized sites. Only the most 
complex cases involving business taxpayers are assigned to local field 
offices.
    Other program enhancements enabled us to concentrate resources on 
those taxpayer accounts where the offer is the most appropriate 
collection method to resolve a longstanding liability. We accelerated 
the identification and resolution of inappropriate offers--those where 
the taxpayer has a clear ability to pay fully the liability, and/or 
submits an offer solely to delay the collection process. The more 
complex cases--those requiring assignment to field collection 
personnel--are now screened much earlier in the process and transferred 
out to field specialists. We are also automating labor intensive 
procedures.
    These process changes improved productivity at the centralized 
sites and the field offices, with a corresponding positive impact on 
customer service. The inventory is becoming more current and the number 
of aged cases--those more than six months old--has decreased. The move 
toward centralization has allowed us to return a significant number of 
field employees to other collection priorities.
    While productivity gains have contributed to the declining 
inventory, we have also seen a significant increase in the number of 
cases that must be closed as ``not processable'' or ``return.'' We have 
begun an educational effort with taxpayers and tax practitioners to 
draw attention to the qualifications that appear in the OIC application 
package. The IRS Office of Performance Evaluation Research and Analysis 
will also conduct a study of offers that were closed (regardless of 
disposition), to identify areas for improvement.
    Processing time has declined from an average of 317 days during FY 
2002 to an average of 272 days for the first 6 months of FY 2003. In 
addition, the average age of open inventory dropped from 265 days at 
the end of FY 2002 to 240 at the end of March 2003. This is due in part 
to the continuing maturation of the Centralized Offer in Compromise 
(COIC) sites. These numbers are still too high but we are heading in 
the right direction.
    Mr. Chairman, we continue to view the Offer in Compromise program 
as an effective tool to resolve tax liabilities for those taxpayers who 
qualify. While we have taken steps to reduce taxpayer burden and 
improve customer service through work process standardization and 
reducing the level of financial documentation required from taxpayers, 
we continue to seek the cooperation of tax practitioners and the 
general public to ensure that offers are submitted only in appropriate 
circumstances.
Collection due process
    The collection due process (CDP) provisions require that taxpayers 
be given an opportunity to request a hearing with Appeals after the 
filing of a Notice of Federal Tax Lien and prior to proposed levy 
action. Some taxpayers use the hearing process to delay collection 
action by filing hearing requests that raise frivolous issues.
    There are approximately 17,500 CDP cases currently in inventory in 
Appeals. About 5% or 896 cases, involve frivolous issue taxpayers. The 
Area Appeals Office with the most cases has about 25% of non-filer/
frivolous taxpayers. Sub-offices within that area have even more 
substantial percentages of taxpayers with frivolous claims.
    However, the actual number alone does not account for the amount of 
time it takes for such cases. Frivolous claims occupy a 
disproportionate share of time over claims from taxpayers having 
substantive issues. In addition, some of the representatives of these 
claims also file Section 1203 actions against IRS employees. These 
section 1203 actions are very rarely sustained but can be resource 
intensive to respond to.
    Time spent on these frivolous claims is time spent away from 
taxpayers who raise legitimate issues. Collection action is also 
suspended on these accounts while the case is pending in Appeals. The 
proposed legislative change which would permit the IRS to dismiss 
frivolous claims, would allow us to proceed with collection on these 
cases and enable Appeals to focus full efforts on taxpayers with 
legitimate claims.
                     business systems modernization
    Critical to IRS' success in meeting all of RRA 98's goals is better 
managing our massive technology and Business Systems Modernization 
program. BSM has finally begun to deliver the first projects with 
tangible benefits to taxpayers, such as the new Internet Refund/Fact of 
Filing (IR/FoF) application that allowed them to check on the status of 
their return and refund 24 hours a day, 7 days a week. Of paramount 
importance, IRS implemented the first project on its new security 
system, which provides one standard for ensuring the security of all 
IRS data and systems.
    However, this is not the time for complacency; the stakes are too 
high. I want to bring a strong management focus and accountability to 
the BSM program to ensure its success.
    Chairman Houghton recently commented: ``This year and next will be 
critical to determining whether the modernization effort will succeed. 
Many systems that have been under development for years--such as the 
new IRS database of tax records--are entering the final stages of 
development.''
    As previously noted, the GAO continues to characterize the BSM 
program as ``challenged'' and at high risk for two reasons:

          First, the scope and complexity of the program are growing. 
        Specifically, the number of projects underway continues to 
        expand and the tasks associated with those projects that are 
        moving beyond design and into development are by their nature 
        more complex and risky. Second, IRS's modernization capacity is 
        still maturing.

    Strategically, the most important objective over the next year is 
to increase the overall confidence in the modernization program by 
meeting most of the delivery goals: the initial CADE release; a new 
core accounting system; the first part of a new custodial accounting 
system; a new e-filing system for large business; and a number of 
electronic enhancements for third party providers. In other words, we 
must focus on meeting the commitments that we have in front of us for 
the next year.
    Once that confidence is restored, we will then be able to move 
ahead with the broader agenda, hopefully, with the increased funding 
level requested in the President's FY 2004 budget and doing a better 
job of meeting cost and schedule targets.
    It is also critical that the entire IRS leadership team works 
together to ensure the modernization program's success. The Business 
Systems Modernization Office, Modernization, Information Technology and 
Security Services (MITS) and the business units, must partner 
cohesively in planning, building and implementing modernized systems. 
As an organization, we must cooperate to reduce and eliminate internal 
impediments that could inhibit the success of the PRIME. I will also 
make sure that the PRIME contractor is clear on its commitments and my 
expectations for improvements in its track record to date.
    Mr. Chairman, I want to stress that modernization does not have a 
clear end point that we can call completion. At some point, 
modernization will no longer be a specialized, separately funded 
program. Rather, as new business processes and enabling information 
technology are deployed, systems modernization planning and 
implementation will become a routine IRS business practice. Indications 
that we have done most of the heavy lifting will be when:
          The Master Files have been replaced by the Customer 
        Accounts Data Engine (CADE) project;
          New internal management systems have been deployed 
        and all financial material weaknesses closed;
          E-filing is pervasive for both individuals and 
        businesses;
          New customer service and collections capabilities are 
        in place; and
          Better systems are available to support compliance.
    The FY 2003 delivery plan will move the BSM Program into a wide 
spectrum of critical new areas:
          Customer Account Data Engine (CADE) R1. In July 2003, 
        CADE will begin processing single 1040EZ filers (both 
        electronic and paper). Taxpayers covered under CADE will 
        receive their refunds about 40% faster than under Master File 
        processing, if they use direct deposit. More importantly, we 
        will have taken the first of many steps to replace the 40-year 
        old Master Files.
          Custodial Accounting Project (CAP). We will continue 
        development and testing of CAP Release 1 scheduled for 
        deployment in the first quarter of FY 2004. CAP will create a 
        repository for modernized Individual Master File data and will 
        address documented financial material weaknesses.
          Enterprise Architecture (EA) and Tax Administration 
        Vision and Strategy (TAVS). TAVS focuses on creating a long-
        term vision of how the agency should work in the future. 
        Delivery and acceptance of EA Release 2.0 was a significant 
        achievement. We also conducted a planning effort called ``TAVS 
        Refresh'' to identify gaps and outdated information in TAVS 
        which we plan to address in FY 2003.
          e-Services. e-Services sub-releases will provide: 
        registration of electronic return originators, Taxpayer 
        Identification Number (TIN) matching, initial partner 
        relationship management capabilities, electronic account 
        resolution, transcript delivery, secure e-mail, and bulk TIN 
        matching.
          Infrastructure (STIR and Infrastructure Shared 
        Services [ISS]). This project provides the basic secure 
        infrastructure necessary to support the modernization effort 
        including e-Services R1, IR/FoF, Internet Employer 
        Identification Number (EIN), and subsequent FY 2003 releases.
          Integrated Tax Administration Business Solutions 
        (ITABS). Projects to ensure we understand requirements and 
        select COTS (commercial off-the-shelf) solutions that can 
        effectively integrate business processes in IRS functions.
          Internet EIN. This application will automate Employer 
        Identification Number (EIN) requests over the Internet. 
        Currently, the EIN request process is cumbersome and people-
        intensive, often resulting in unacceptable delays for those 
        starting new businesses.
          Integrated Financial System (IFS). Although the first 
        release of the new financial system will not go live until 
        October 1, 2003 (therefore, an FY 2004 delivery project), it is 
        likely to be our most work-intensive project during FY 2003.
          Modernized e-file. The Modernized e-file project will 
        be in pre-deployment testing for all of FY 2003, with initial 
        deployment in early CY 2004, with Forms 1120 and 990 e-file 
        capabilities.
    I feel fortunate to have major deliverables in the coming months, 
rather than a year from now. This timetable affords me the opportunity 
to assess whether real progress is being made.
                        modifications to rra 98
    Mr. Chairman, in the FY 2004 budget submission, the Administration 
again proposed modifications to RRA 98. Last year, the House passed 
legislation that contained five of these proposals; the Senate did not 
act before adjourning. We commend the House for its actions and believe 
that these modifications preserve the intent of the Act while allowing 
us to administer it more efficiently and effectively. We urge the 
Congress to take similar action this year.
    There are six parts to the Administration's proposed modifications. 
The first modifies infractions subject to Section 1203 of RRA 98 and 
permits a broader range of available penalties. Our ability to 
efficiently administer the tax code is currently hampered by a strong 
fear among our employees that they will be subject to unfounded 1203 
allegations, and perhaps lose their jobs as a result. This proposal 
will reduce employee anxiety resulting from unduly harsh discipline or 
unfounded allegations, while still subjecting violations to appropriate 
sanctions that may include termination.
    The second part mentioned above adopts measures to curb the large 
number of frivolous submissions and filings that are made to impede or 
delay tax administration.
    The third, as is mentioned above, permits the IRS to enter into 
installment agreements with taxpayers that do not guarantee full 
payment of liability over the life of the agreement. It allows the IRS 
to enter agreements with taxpayers who desire to resolve their tax 
obligations but cannot make payments large enough to satisfy their 
entire liability and for whom an offer in compromise is not a viable 
alternative.
    The fourth allows the IRS to terminate installment agreements when 
taxpayers fail to make timely tax deposits and file tax returns on 
current liabilities.
    The fifth streamlines jurisdiction over collection due process 
cases in the Tax Court, thereby reducing the cycle time for certain 
collection due process cases.
    The sixth and last provision would eliminate the monetary threshold 
for IRS Chief Counsel reviews of offers in compromise.
    The Administration also has two proposals to improve IRS efficiency 
and performance from current resources. The first would modify the way 
that Financial Management Services (FMS) recovers its transaction fees 
for processing IRS levies by permitting FMS to retain a portion of the 
amount collected before transmitting the balance to the IRS, thereby 
reducing government transaction costs. The offset amount would be 
included as part of the 15-percent limit on levies against income and 
would also be credited against the taxpayer's liability.
    The second proposal would encourage growth in electronic filing by 
extending from April 15 to April 30 the return filing and payment date 
for the filing of individual income tax returns, if the return is filed 
electronically and any balance due is paid electronically.
    All of the proposals discussed above, with the exception of the 
fourth concerning installment agreements, have been included in the 
Taxpayer Protection and IRS Accountability Act of 2003, which was 
reported by the Ways and Means Committee in April. We appreciate the 
Committee's attention to these proposals.
    Let me mention two provisions that have Treasury support, but were 
raised too late to be considered in the Taxpayer Protection and IRS 
Accountability Act of 2003.
    The first is a proposal to modify the interest and penalty 
notification requirements such that the interest and penalty 
notification requirements would apply only to the first notice sent to 
the taxpayer. Subsequent notices would include a general description of 
how interest and penalties are computed, as well as a telephone number 
that taxpayers can call to obtain detailed account information. This 
proposal would appropriately balance the benefits of providing 
taxpayers with a full explanation of how any interest and penalties due 
were computed, with the burden and cost to the IRS of providing this 
information with each notice.
    The second provision would permit the IRS to send a portion (up to 
50 percent) of its notices by first class mail, instead of registered 
or certified mail, for a one-year test period. This would allow the IRS 
to determine whether it could save money on its mailings while still 
assuring that taxpayers receive adequate notice.
    We would appreciate consideration of these proposals at some point 
during Congressional consideration of the Taxpayer Protection and IRS 
Accountability Act of 2003.
                               conclusion
    Mr. Chairman, in conclusion I believe that the IRS has made 
progress achieving the goals and intent of the Restructuring Act, but 
there is a lot more to do. One the service side, things are getting 
better, but much more must be accomplished. And it is not totally clear 
that modernization is reaching its promised results. We need and must 
vigorously pursue a renewed focus on enforcement but I expect the 
Service will make progress in all three key areas: customer service, 
enforcement and information technology.

    Representative Houghton. Thank you very much. I just have 
one question. We have all been involved in the different series 
of organizations over the years. The first question I am always 
interested in is tell me about your people.
    In other words, you have had quite a few people recently 
leave the IRS. And how are your people? Are you going to be 
able to replace those people that have left? What are the 
quality of replacements? What are you doing about this?
    Mr. Everson. Mr. Chairman, I have been very impressed with 
the caliber of the leadership that I have met. The confirmation 
process was a relatively long one. I had an opportunity during 
that period to meet with and be briefed by the top two or three 
levels of leadership within the Service. In each in instance, I 
was tremendously impressed by the dedication they bring to the 
work that they undertake, and also by the desire to get on with 
the reorganization of the Service to finish the job that was 
begun by Commissioner Rossetti.
    That having been said, I do believe that what the RRA 98 
achieved, by the critical pay positions, was the ability of the 
Service to bring in outsiders to supplement these high-caliber 
career individuals. Critical pay is a good innovation and one 
on which I will rely. I will expect, for instance, when Deputy 
Commissioner Wenzel, who I will name to be the first Deputy 
Commissioner for Service and Support, retires later this year 
at the end of September--I am trying to negotiate a longer 
departure date but he is not buying it so far--we will go 
outside for that position. I expect that to happen, so we get a 
nice blending of the inside and the outside. But I am happy 
with the caliber of leadership.
    Representative Houghton. Now, Senator Sununu.
    Senator Sununu. Thank you, Mr. Chairman.
    Commissioner, can you talk about the E-filing rate? Your 
testimony says that 41 percent of individuals filed 
electronically this year. It is obviously up quite a bit from 
last year.
    What is your performance metric for this benchmark and your 
performance goal over the next 2 to 5 years? What do you hope 
to get this level up to? And how do you propose to do it?
    Mr. Everson. The RRA 98 does state a statutory objective--
at the end of the fifth filing system from now, that will be 
2007, that the Service get to 80 percent. My understanding is 
that the goal was, I don't want to say arbitrary, but it was 
very difficult at that stage, 5 years ago, to project just how 
far you could or should take that.
    Some have asked whether that should be revisited. I think 
it is too early to consider whether that needs to be revisited. 
I certainly, as I look at the Service's activities in this 
area, am pleased with what I have seen thus far. As you know, 
we added a Free File Initiative this year, that actually picked 
up 2.7, 2.8 million taxpayers. There is a little bit of hair on 
this, concerns on pop-ups that came up that some of your 
colleagues have raised questions about.
    We are going to look at efile, and try to make it an even 
better program. I honestly can't tell you whether 80 percent is 
the right long-term number. My concern in this area is there 
are sectors of the taxpaying population, new-immigrant 
communities, others that are just coming into the system, it is 
probably unrealistic to think that we are going to capture 100 
percent.
    Whether it should be 80 percent or 75 or 85 is a little too 
soon to tell. We are going to continue on this path, learn as 
we go, and reinforce it with better technology.
    Senator Sununu. Are there any specific technical barriers 
to improving that number, the 41 percent number, that you see? 
And, are there any particularly strong opportunities that you 
see that current initiatives may be able to exploit in the 
coming 1 to 2 years?
    Mr. Everson. I am less concerned, frankly, Senator, on the 
individual taxpayer side than I am on the corporate side, which 
is obviously a much smaller group of taxpayers, but the 
opportunity of being able to pull in information electronically 
and then immediately have it available for analysis, that would 
be a very significant opportunity.
    As I understand it, when other countries, Canada and others 
have done this, they haven't been entirely successful in some 
of these endeavors because of the complexity, unless it is done 
on a voluntary basis. So there are some tough issues here if 
you want to tap into the full realization of the efficiencies 
when you get to the more sophisticated taxpayers.
    Senator Sununu. Is there anything that Congress can do or 
should do to make it easier to increase the opportunity to 
bring more filers on electronically?
    Mr. Everson. I don't know yet. I will be looking at that 
and come back to you, of course, if there are opportunities.
    Senator Sununu. In your opening testimony, did I hear you 
correctly? You said, I think, that there were 19 million busy 
signals during last year's filing season, and that was reduced 
to 200,000 this year?
    Mr. Everson. Well, thankfully that was in 1999. That is the 
impact of the reform efforts and to one of the first 
significant achievements of the modernization. People think of 
the modernization only as this revision of the master files. It 
has got many components.
    I have been down and visited Atlanta where the telephone 
operation is controlled. We really made a huge leap forward in 
routing calls, 1999 to this year.
    Senator Sununu. And the single biggest reason for that 
dramatic improvement was the call routing system?
    Mr. Everson. I will tell you, it is the harnessing of that 
technology, that helps drive up the accuracy rate. If you go 
down to Atlanta and you see this, I really would recommend you 
do this if you get a chance, there is a whole scheme, a grid of 
where the experts are who can take the calls; then the call is 
routed to the right person at the right place, and--there is a 
sophisticated queuing system so that the person who knows about 
depreciation of home offices gets the call that deals with the 
subject.
    Senator Sununu. What about the total number of calls during 
that period? Has the total number of calls increased, or has it 
been steady, or has it decreased because more people are using 
technology?
    Mr. Everson. I don't recall, Senator. I would have to check 
the data on all of that. I think in some areas you see more 
calls coming in. You get spikes, like the refunds that came in 
2 years ago. People call a lot on where is my refund? Now we 
are addressing that through this new program. So there are 
peaks and valleys, depending on what is happening in the Code 
as well.
    Senator Sununu. I see that my time is expiring. But I did 
want to ask one more question about the 1203 violations. I 
mentioned it in my opening statement. Could you talk about the 
two proposed changes and what you hope the benefits of those 
changes to be?
    Mr. Everson. Yes. I think that your remarks and Senator 
Grassley's remarks, among others, are exactly correct here. The 
Service has to have a balance in what it does. And if anything, 
1203, set a very high standard; one I suggest that is a little 
too rigid because of the automatic termination in a number of 
areas. What has been suggested in the last year, and I concur, 
is there ought to be a little more discretion reserved to the 
Commissioner to make the appropriate disciplinary decision in 
certain situations, like an employee who is late filing a tax 
return, but in actual fact knew that they were due a refund. 
Should that person be automatically fired, which is the 
standard that is in the law right now, or should the 
Commissioner be able to have some discretion?
    I think that the Service would be very judicious with the 
use of that discretion. I would make that commitment to you.
    Senator Sununu. Thank you very much. Thank you, Mr. 
Chairman.
    Representative Houghton. Mr. Pomeroy.
    Representative Pomeroy. Mr. Commissioner, consultants can 
be extremely valuable in terms of trying to bring along the 
modernization of such an incredible complex system. On the 
other hand, consultants can turn into individual billing 
machines that drive you absolutely crazy with out-of-control 
consulting costs. I am especially concerned, in light of the 
efforts we make to get adequate funding for the Service to 
build its internal strong, professional, continuing 
capabilities, to see the kind of money we are spending with 
outsourcing.
    You mentioned today another new initiative, a new contract 
on taking a look at how the business modernization systems have 
come along. As I look at, over the last few years, back to 1999 
through 2002, it appears that we have spent about $760 million 
on outside consultants. And I am asking if this strikes you as 
high, and do you have, as the new leadership at IRS, a plan to 
get a handle on those consulting costs, and to try to, whenever 
possible, build in-house capacity so that less reliance on 
consultants going forward might be obtained?
    Mr. Everson. I think that is a very important question, and 
one which I expect to address through the realignment of my 
office. With the appointment of a Deputy for Operations 
Support, that individual will own all of those entities, the 
CFO, the CIO, all of those entities within the Service that 
support the operations and that typically will generate those 
consulting contracts that you mentioned.
    I think that what has happened over the last 5 years was 
entirely appropriate, given the magnitude of the change that 
Charles Rossetti had to address coming off of RRA 98. He turned 
to outside consultants to help him build the entity.
    What has to happen now is that the senior and middle 
managers of the agency have to own it, and that will change the 
relationships with the vendors and the consultants. I expect 
that through the creation of this second deputy, we will get a 
lot more focus, we will get a lot more ability to drive the 
process. And, frankly, the individual I expect to name in that 
position is one of our most seasoned, knows the business 
processes the best, and I believe will be able to contain those 
costs, make sure that, if anything, we get a lot more value 
added out of those dollars.
    Representative Pomeroy. I appreciate that answer. I do 
think this is something I am going to keep an eye on 
personally. I don't dispute your comment that we have had to 
expend this money in light of the renovations we were making to 
the system, although, you know, three-quarters of a billion 
dollars is an awful lot of money to spend in this area. And I 
do think there can be a tendency for your consultants to be 
habit-forming, and consultants can be very good about finding 
the next project that has to be done by their firm.
    And so I think your fresh look at all of this is going to 
be very helpful. And I can just think of the frustration of, 
you know, permanent IRS staff, people that have devoted their 
lives to public service, accepted lower pay scales as a result 
seeing high-flying 25-year-old consultants come in and, you 
know, without a lot of background, devise new systems and this 
sort of thing. I am worried about what that might do in terms 
of internal morale.
    Mr. Everson. I am with you 100 percent. I am always 
disturbed when you turn to somebody and they say, I can't give 
you that answer, I have to talk to someone outside of the 
organization. That is not the right model. We are going to make 
sure that our people are driving this vehicle.
    Representative Pomeroy. That is an excellent answer.
    Finally, we have asked, we have expressed some concern to 
you about the EITC precertification process. It seems to be 
coming on very fast, without a lot of public input and review.
    Secretary Snow indicated last week that he was looking at 
precertification measures for other high-risk taxpayer areas, 
certainly including the more--the upper-end taxpayer with some 
of the more elaborate tax shelter schemes that have been used 
to inappropriately avoid taxation.
    Are you considering--are you aware of this, that there is 
precertification being considered for groups other than the 
EITC group?
    Mr. Everson. I haven't seen the specific remarks to which 
you refer. But, I would make two points.
    First, wherever possible, I know that the chief counsel's 
office is very much trying to work to increase the level of 
published guidance that is out there, so that when people are 
looking at sophisticated issues they have a better road map to 
begin with. The start of compliance can be important 
educational efforts.
    On top of that, the Service, LMSB, has been moving toward 
negotiating at the beginning of these limited issue focused 
examinations what they are going to look at. That is a form of 
precertification, I would suggest, where you are looking at 
things up front and getting agreement on some of these areas. 
So I think that what you are suggesting is consistent with what 
we are trying to do.
    You mentioned the EITC. As you know, I am committed to 
taking a fresh look at that. I am glad you have raised it. I 
will be in Atlanta on Friday to spend the day going through 
some cases, including talking with some representatives of the 
Taxpayer Advocate's Office, so that I understand all of the 
issues here. And as we develop our proposal, which we will put 
out for public comment in early June for a 30-day period of 
public comment, we are going to do everything we committed to 
do there.
    Representative Pomeroy. Thank you. Thank you, Mr. Chairman.
    Representative Houghton. Thank you.
    Senator Bennett.
    Senator Bennett. Thank you very much, Mr. Chairman. And Mr. 
Everson, thank you for your willingness to serve. Welcome 
aboard. I hope you stay a whole lot longer than just 15 days.
    Mr. Everson. Thank you, sir.
    Senator Bennett. I am impressed with the progress that has 
been made in the IRS. The incredible mess that your predecessor 
found when he went in there kind of defied logic, but also 
defied solutions. And the fact that he made all of the 
solutions and got as far as he did is an incredible testimony 
to his ability. And you have big shoes to fill.
    But I think from the things that have you said here this 
morning, you have an understanding of what needs to be done, 
and you are moving in the right direction to see to it that the 
momentum that was created continues here.
    Now, let me pursue two of my areas of interest, the first 
one having to do with cyber crime. As you have gone through 
this tremendous upheaval in the IRS of finally getting 
computers that work, after spending billions of dollars on 
computers that didn't, have you addressed the question of 
hackers trying to get into the database either for identity 
theft or some other kind of criminal activity, stealing 
refunds, scrambling records, whatever?
    Is any of that activity going on? Do you find attacks at 
your database? And are you looking at whether or not your 
firewalls are adequate to deal with it?
    Mr. Everson. We do have a group, Senator, Mission Assurance 
that handles both the cyber elements of the Service's 
operations as well as the physical security. And there is an 
active program of monitoring those attempted intrusions. My 
understanding from my discussions with the leader of that 
organization is that we are comfortable that we are moving 
forward.
    Now, that having been said, there is a lot of vulnerability 
in this area, a lot more needs to be done. GAO and others have 
highlighted this as an area of vulnerability. So am I 
representing to you that all is as it should be? No. Am I 
representing to you that this is an area of priority? Yes, I 
can say that absolutely.
    I believe again, that by putting the CFO, the CIO, the 
shared services area where a lot of transaction processing 
takes place, the HR and this unit, right on the org chart, we 
have drawn Mission Assurance--that is cyber and physical 
security--putting that all together, I think we are going to be 
able to bring more, not less attention to this important issue.
    Senator Bennett. I have stood in the room in the Pentagon 
where they monitor the attacks on the Defense Department 
computers in real-time, and it is kind of a surreal experience. 
You almost think you are in a movie, it is so weird.
    Does your CIO talk to the Defense Department CIO, and do 
they share experiences and share progress? Is there any cross-
fertilization of experience, not just with the Defense 
Department, but with others in the Intelligence Community and 
the other parts of the government that are the targets of these 
kind of attacks?
    Mr. Everson. I know there are ongoing conversations that 
take place from the Treasury Department and outwards. I can't 
tell you how regular those communications are. In my previous 
position as deputy director at OMB on the management side, I 
was a big believer in the sharing of--across government--of 
experiences and best practices.
    I will certainly encourage my people to communicate with 
other agencies. I will also look into this specifically to make 
sure that we are reaching out as much as we can.
    Senator Bennett. One last question on an unrelated topic. 
As you go through this description of all of the streamlining 
that has occurred, do you have any sense of the financial 
impact on the economy as a whole, in the area of the cost of 
compliance with the IRS Code?
    We hear numbers that suggest that the mere process of 
preparing returns and complying with the Code is in the 
hundreds of billions of dollars every year. And that is one of 
the arguments in favor of revising the Code, moving towards a 
flat tax for individuals or some other form of dramatic 
simplification, because they are saying the kick for the 
economy, in terms of cutting down the costs of compliance would 
be greater than the amount of money that we are talking about 
in the President's growth package by several times.
    Do you have any sense as to how much the cost of compliance 
has come down as these reforms that you have described to us 
here this morning have taken place, and any prospects as to how 
much more it might come down as you continue to be successful, 
or is that a number that people are really just pulling out of 
the air?
    Mr. Everson. I am skeptical about the number. I have seen 
an overall number somewhere around $80 billion that has been 
cited from time to time as the cost of compliance. I am not 
sure adequate attention and the proper methodologies are always 
placed on developing each and every number that goes into that 
kind of a calculation. I do believe that there have been these 
interventions, if you will, where we made progress. It comes to 
the question of burden reduction. But those are isolated areas.
    At the same time, as you know, each time you add a new 
section of the Code, you add and you take away at the same 
time, so it is a complicated subject. I don't think that I 
would argue that there has been significant change in that 
overall figure in recent years.
    What we have done is made isolated areas of progress 
through the call centers and other areas.
    Senator Bennett. Thank you very much.
    Representative Houghton. Thank you, Senator. Mr. Portman.
    Representative Portman. Thank you, Mr. Chairman. And 
Commissioner Everson, welcome for the second time in this 
committee room, and to your first joint review. And we are 
delighted that you have lasted 2 weeks, and we look forward to 
you serving out your term.
    As you know, thanks to the Restructuring and Reform Act, we 
now have a term of office to encourage continuity. And you have 
gotten a good start. And your management expertise that you 
have developed over the years in the private sector and in the 
public sector, most recently as deputy of OMB, is exactly what 
we need. And this has been one of the consensus opinions coming 
out of the Commission's work in 1996 and 1997, and then with 
the Restructuring and Reform Act, that the focus is not so much 
on tax policy but on administering one of the largest agencies 
in government, second really only to DOD in terms of size. With 
such an enormous responsibility, it is the single most 
important leadership characteristic.
    So we are delighted with your focus on management, and you 
have demonstrated today that you are going to be continually 
focused on that which is very important to us.
    You named three areas: customer service, technology 
modernization, and enhanced enforcement. I would just make a 
couple of comments. One is that we get a lot of good 
information from the Joint Committee on Taxation, from the 
taxpayer advocates, from the Government Accounting Office, and 
also from the Oversight Board.
    And I would encourage you to continue to work with those 
groups and pay heed to their concerns and their 
recommendations, because they have been at this a long time. 
And although they don't always come out of the same place, they 
have a lot of good input.
    With regard to your second area of technology 
modernization, you did talk about the establishment of a new 
advisory group, to consult on the modernization program. I 
don't think that is a bad idea. But for Mr. Pomeroy's comments, 
I do think it is important that you talk to some of these other 
stakeholders as well as the private sector to be sure that 
there is buy-in into the group, so that its work and its 
recommendation to you have more credibility.
    And I do think there are a lot of people, including staff 
here on the oversight committees, that can help you with that 
because this has been an ongoing concern. Really it was the 
start of the Commission itself, the technology concern, the $3 
billion dollars that was mostly unaccounted for.
    With regard to customer service, I agree with you that 
reforms are sound. There is no need to change them. But that 
doesn't mean that we don't have to continue to work very hard 
at pushing those reforms. My view is as soon as you stop 
pushing them, the pendulum is going to swing back.
    I look at some of the data that we have got; 83 percent 
telephone service--now 83 percent of taxpayers are getting 
through to a customer rep. That was 69 percent as recently as 
last year. And the number was far lower back in 1997 and 1998 
when we started. So we have seen, as you say, some improvement 
in some of the basic ways in which people interact with the 
Agency, the telephone being primary still, and now, with your 
Website and through electronic means.
    I will also say, though, that if we don't keep pushing, we 
are not going to be able to even maintain the progress that we 
have. That is my strong view; 250,000 busy signals are still 
too many. So we still don't have the acceptable levels of 
service we would like to see.
    With regard to your third one, enhanced enforcement, the 
goal that people should pay what they owe, is absolutely the 
right mission for the IRS. I do think that your focus on 
enforcement and collections is very appropriate right now for a 
couple of reasons. One, we obviously have some issues with 
regard to audit rates, although audit rates are up this year, I 
note, from last year. So we are moving in the right direction. 
But second is just the credibility of the tax system and those 
85 percent of taxpayers who like to comply and want to comply 
on a voluntary basis. We need to be sure there is a sense that 
everybody else is doing it too.
    With regard to your new position as Deputy Commissioner for 
Services Enforcement, I'm glad that you are willing to take 
that task, at least at the outset. And for operations and 
really owning the modernization, I think it is a good reform. I 
know that you have consulted with your upper management and 
others with regard to that decision, and I commend you for it. 
I think to the extent we can find more accountability in those 
two areas, that will be very helpful.
    Overall, again, I just want to say that I think this 
process of having a joint review is very valuable. This is our 
fifth year, and under the statute, it expires this year, I 
would hope that we could, as a Congress, continue this process.
    Again, we don't necessarily get all the members showing up 
here from the seven different committees that are involved with 
the IRS Oversight, but we do force our staffs to work together 
in ways they never did prior to 1998, and we also have, as I 
said, a good relationship with some of these other groups, the 
Joint Tax Committee, Taxpayer Advocate, GAO and the Oversight 
Board. And it is very important to bring everybody together at 
least once a year. So I would hope we could continue this 
process, and I would be happy to work with you and with the 
chairman and others to provide a legislative initiative to do 
that; or if that is not necessary, perhaps we could just have 
an agreement to continue the joint review.
    The final comment is about the Oversight Board. You didn't 
mention it in your testimony. The Oversight Board took a few 
years to get up and going, because the prior Administration 
really wasn't all that enthusiastic about it. I continue to 
believe that the Oversight Board can play an extremely 
important role in providing you some counsel, expertise from 
the outside world, particularly on modernization, but also on 
change management, generally, and organizational management 
challenges you are facing.
    Second is it provides continuity, and by this staggered 
five-year terms on the Oversight Board, you have expertise you 
can draw on now from that Oversight Board that otherwise would 
not be there. And I know the previous chairman is going to 
testify this morning, and, you know, he has been through it all 
and has a lot of expertise and continuity to provide for it.
    Finally, there is accountability. We want to have a group 
out there that we could also look to from Congress and say, why 
aren't things going as they could from a big picture 
perspective? So I hope you will utilize that Board, and I hope 
the Board will continue to be progressive in providing us 
direct information on what it thinks the right direction is on 
some of these tough issues we face.
    With that, Mr. Chairman, thank you for holding this hearing 
and for your continued personal interest in this issue.
    Mr. Houghton. Thanks, Mr. Portman.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. Mr. Everson, you were 
kind enough to make some comments in your opening remarks about 
the points I raised earlier on. With respect to the EITC and 
the high rate of erroneous payments that you mentioned, can you 
tell me approximately what the amount would be if we corrected 
that situation, how much would be recaptured?
    Mr. Everson. It is hard to know until we go through a pilot 
project. What we are looking at doing is starting with some 
45,000 applications for precertification. Right now, EITC does 
have the highest error rate in government. It is an error rate 
of somewhere around 30 percent, which equates to almost $10 
billion a year. If you contrast to that----
    Mr. Tierney. $10 billion?
    Mr. Everson. $10 billion, yes. If you contrast that, 
something like the Food Stamp Program where there is a seven or 
eight percent error rate, you just have a very different 
performance level. The issue here--and we had a good discussion 
on this two weeks ago when we were talking about this and, 
again, last week, is that it is really a benefits program that 
is embedded in the tax code and embedded in the tax 
administration system of the IRS. We are a hundred percent 
committed to not deterring people from using that program, but 
we have got to have a balance here so we can bring the error 
rate down significantly.
    Mr. Tierney. Well, I know that you are hiring another 650 
employees to work on that and asking for another hundred 
million dollars.
    Mr. Everson. That is correct.
    Mr. Tierney. So the question that I really want to ask, if 
I were to look at each of the other areas of interest, the tax 
shelter promotion, the abuse of trust in offshore accounts, the 
abuse of corporate tax shelters, the underpaying by high-income 
individuals and the accumulation and failure to pay larger 
amounts of employment taxes by some employers, what is the 
approximate amount that we could expect to recapture if we had 
total enforcement in all those areas?
    Mr. Everson. I don't have a dollar figure for you, sir.
    Mr. Tierney. If you give it to me in relation to the EITC, 
it would be substantially----
    Mr. Everson. I think those relationships are at least as 
favorable as the EITC numbers would be, my recollection is you 
collect at a minimum three or four dollars for every dollar you 
spend. What we are doing in some of these other areas you 
mentioned, where we will be adding a couple thousand employees, 
we are building back the infrastructure----
    Mr. Tierney. Building back some employees----
    Mr. Everson. Yeah. What happened in this area is 
Commissioner Rossotti has very clearly documented, the Service 
has to poach from the enforcement side over a period of time as 
it built up the service side. So the first thing we are doing 
is adding some of the revenue agents and and officers who 
hadn't been hired in recent years, and we are going to devote 
them to things like the tax-shelter schemes, getting up the 
audit rates on the high-income people. There is some additional 
hiring in the terrorism area, because the criminal 
investigations people are working these areas, even within 
TEGE, the group that works with charities, because, as you 
know, there are vulnerabilities in terms of some of the----
    Mr. Tierney. I think my point being, is there is at least 
as much, and I expect far more, to be recaptured in those areas 
collectively, and I'm glad to see you are putting resources 
there, not just on the EITC side.
    Mr. Everson. And I would say to you, sir, that I am 
committed to looking at not just what we are doing this year in 
the President's Budget Request, but to look at the overall 
enforcement posture, and this is--it is the top line of the 
government. There is the issue of confidence of the taxpayer, 
willingness to comply voluntarily. We are going to get to--if 
we need more, we'll come back for more.
    Mr. Tierney. I took Mr. Portman's comments on, this is a 
voluntary system and the fact that it has to be, in all 
fairness--because as I hear far more people complaining about 
what they think of the abuses by tax shelters and by large 
taxpayers who are not paying than I do about people who worry 
about people avoiding the EITC payment. And so I wanted to make 
sure that we had the right focus on each of those.
    Let me just ask you briefly about the private collection 
agency concept. What studies have been done or what evidence do 
you have that hiring people or hiring on those firms and 
training those people with respect to all the requirements that 
we have for taxpayer protections and everything else is going 
to be, in fact, more efficient and more successful than just 
having employees of the Internal Revenue Service do that work?
    Mr. Everson. I don't have any evidence that it will be more 
efficient than having employees. That is not the premise of the 
proposal. The proposal is based on the success of private 
collection agencies in 42 States around the country and on the 
success of the private collection agencies at the Department of 
Education that collects student loans and the success at the 
Department of Treasury where all debts referred to the 
Financial Management Service are collected by private 
collection agencies.
    The issue here is to supplement IRS resources. Appropriated 
resources are limited. This is an additional tool that will 
help us get to some of these targeted simpler areas. We are 
convinced that in working with the Taxpayer Advocate that we 
can structure this with full taxpayer rights protections and 
that it can be done in a responsible way to help people clear 
up those outstanding debts.
    Mr. Tierney. And a net result of more money to the 
government than if we kept it in-house?
    Mr. Everson. Right now, unfortunately, sorry to say this, 
but there is $13 billion that is clearly due the government 
that is just not being pursued by us at all right now. These 
organizations would go after those monies and bring in a pretty 
good chunk of change.
    Mr. Tierney. And is it not being pursued because we don't 
have the manpower?
    Mr. Everson. That is correct.
    Mr. Tierney. I don't want to monopolize time, but it brings 
me back full cycle to the question, why not put up more 
manpower as opposed to go outside, and how do we know which is 
going to be more effective on that?
    Mr. Everson. We are going to look at all of it. We are 
bringing up some more manpower, but we are asking for this tool 
to get to this specific targeted area.
    Mr. Tierney. Thank you.
    Mr. Everson. Thank you.
    Mr. Houghton. Thanks very much.
    Ms. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman, and thank you, 
Commissioner Everson, for your remarks.
    Mr. Houghton. Do you want to put the mike on?
    Mrs. Blackburn. I've got it on. Let me just move a little 
closer to it. How is that? All righty. That is great.
    Continuing along that line of questioning, we had the 
opportunity to hear from Commissioner Rossotti in the 
Government Reform Committee, and it sounds like he has done a 
commendable job with moving mountains and moving everything 
into having a technology officer and being able to centralize 
some of your operations.
    With that said, over the past few years and looking at the 
business system's modernization, why do you think the IRS has 
not been able to realize enough savings and efficiencies so 
that human capital could be moved to some of your high-priority 
areas, and what do you plan to do to address that? I mean, do 
you have any quick steps that you are going to move along that 
course?
    Mr. Everson. I guess there are two points. First, this is a 
huge endeavor, because you've got an awful lot of data here and 
unfortunately, it is not as simple as putting a new computer 
system in your 50 or 100 retail stores around the country, 
where you are just worried about future sales. You've got to be 
able to access this data that is in these old systems that go 
back four or five decades. So the new program will be able to 
provide new methodologies, but it will link back into those old 
master files. This is a complex endeavor, given the complexity 
of the code and all of the different kinds of forms and 
different kinds of data that is collected.
    So this is a big challenge. What I think we can do here is 
get more business ownership of the process. A lot of what 
Charles did was very centralized, and it was necessarily so 
because of the magnitude of the change that he was attempting 
to effect, but we are now at a different stage where the 
organization has to own the change, and I'm going to be looking 
to the business managers to be more actively engaged in 
piloting these projects so that they own it, going back to Mr. 
Pomeroy's point, and not the consultants. The Service has to 
own these changes. If we can get our arms wrapped around that 
concept, that will force the pacing and that will bring the 
savings that you are talking about.
    The second point is--goes back to the remark I made in my 
opening statement. We spend $1.6 billion a year in base IT 
activities that don't have anything to do with modernization of 
the master files. We are looking at those areas. For example, I 
was in Cincinnati last week and saw some image-scanning 
technologies where you can scan in an application for an 
employee plan determination, and then instead of having to go 
find it someplace, you can be in Denver or in Newark and you 
can pull it up and read it. There are lots of things like this 
that the Service can tap into that is in that base funding. 
Hopefully we can free up some of it by getting more of the 
economies and efficiencies you are talking about.
    Mrs. Blackburn. In the Inspector General's remarks that we 
will hear later, she mentions that Release 1 for the CADE 
system has experienced significant delays and significant cost 
overruns, and I think is about 20 months off schedule, if I'm 
correct there. And you have an outside contractor, PRIME, that 
is being paid for that delivery. Is that correct? And how long 
do you think that it is going to take to get that up, to get it 
operational, to be workable, and how much do you think it is 
going to end up costing?
    Mr. Everson. You are entirely correct in your 
understanding. This CADE project has been delayed several 
times, and the costs have escalated. The scheduled rollout of 
this first piece that I referred to, where we'll have the 
1040EZ filers, a simple application, will test this concept. It 
is a very real moment of truth for the modernization effort.
    Frankly, I am hopeful that this is happening so early on my 
watch, this August, so that we'll be able to see, if we have we 
turned the corner, has the Service done a good job, has the 
PRIME done a good job? Commissioner Rossotti renegotiated the 
relationship with the PRIME as to the delivery of this one 
application, but we still don't know a hundred percent yet. 
We'll see this summer. I will ask for another view of CADE to 
make sure that if there is anything else out there along the 
lines that you are talking about, that we get on it now.
    Mrs. Blackburn. Okay. Thank you.
    Mr. Chairman, I have one other question. Do you mind?
    Mr. Houghton. Go ahead, please.
    Mrs. Blackburn. Okay. Thank you. In talk about moving so 
many of the filers to the Internet and having them do the e-
file and using your CADE system as your basis for moving those 
filers into doing that, one of the things that I had a question 
about--I know the Tax Code is incredibly complex, and that 
going through all this testimony, you realize the complexity 
does hinder the compliance efforts many times. Now, you have 
about an 85 percent correct answer rate over the telephone. 
With those who are asking questions over your Website, what is 
your correct answer rate, and what kind of response are you 
getting from the filers as they are asking questions over the 
Internet?
    Mr. Everson. I'm sorry. I don't have the data on that. I'll 
have to get that back to you.
    Mrs. Blackburn. If you don't mind, I would appreciate 
having that and knowing that. I think that as we are looking at 
moving millions of Americans to the e-file process, having a 
site that is easily navigated is incredibly important, and when 
you go to your site and you read through the list of forms and 
start looking for the form that you want to pull down, and then 
go over to your sidebar to look at where you can ask questions, 
I think that we need to look at that and think that through, so 
that we are certain that, hopefully, we have a greater accuracy 
rate over the Internet than we have had with our telephone.
    Mr. Everson. I agree with you, and we'll follow up.
    Mrs. Blackburn. Thank you.
    Mr. Houghton. All right.
    Mr. Pomeroy. Mr. Chairman.
    Mr. Houghton. Yes.
    Mr. Pomeroy. Senator Max Baucus as ranking member of the 
Finance Committee would normally have participated in this 
hearing. He has informed me that he is not available in light 
of the circumstances regarding the Senate at the moment, and he 
has submitted questions for the Commissioner. I would like to 
make these questions part of the record and, as well, get 
copies to the Commissioner for answering.
    Mr. Houghton. Thank you. Certainly. Well now, thank you 
very much, Commissioner. Great to have you with us. We'll be in 
touch with you.
    [The information follows in the submissions for the record 
section]
    Mr. Houghton. And now, I would like to ask the next panel 
to come on. Ms. Nina Olson, National Taxpayer Advocate; Ms. 
Pamela Gardiner, Acting Treasury Inspector General for Tax 
Administration; the Honorable Larry Levitan, Member of the IRS 
Oversight Board; and Mr. James White, Director of Tax Issues, 
U.S. general Accounting Office.
    All right. Well, thank you very much for being with us.
    Ms. Olson.

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

    Ms. Olson. Mr. Chairman, thank you for inviting me here 
today. Five years after its enactment, RRA 98 still ranks as 
one of the most important pieces of legislation protecting 
taxpayers within the federal tax system. The act enhanced the 
independence of the Office of the Taxpayer Advocate. It 
established funding for low-income taxpayer clinics on the 
premise that access to tax education and representation for 
these taxpayers would improve the fairness of the tax system 
for all taxpayers.
    Before the 98 Act, it seemed that the IRS expected 
taxpayers to be noncompliant. Today the Service's culture is 
beginning to change. It is acknowledging that the vast majority 
of taxpayers are compliant or sincerely trying to resolve their 
tax problems. With that acknowledgment as a starting point, the 
Service can vigorously seek out those taxpayers who are 
deliberately not in compliance with their tax obligations.
    An effective tax administration system requires a balance 
between enforcement, taxpayer rights and customer service. 
These aspects of tax administration are not mutually exclusive, 
although they may generate tension at different times. Even 
when the taxpayer is out of compliance with his or her tax 
obligations, he or she should be treated courteously and 
professionally. Compliance personnel should place themselves in 
the taxpayer's shoes and acknowledge how powerful and 
intimidating the IRS can be. This acknowledgment does not 
diminish the Service's tax assessment or collection authority. 
In fact, for many taxpayers, this acknowledgment is the basis 
for true customer service, for it creates an opportunity for 
the taxpayer to enter into the system in compliance.
    IRS employee performance is now evaluated by balanced 
measures--employee satisfaction, customer satisfaction and 
business results--a balance that may be tested by the Service's 
increased focus on compliance activities. We can learn 
something about how to achieve that balance by looking at two 
RRA 98 programs which to date have eluded success: the offer in 
compromise and collection due process hearings.
    The IRS projects 130,000 offers in fiscal year 2003 and 
will use about 1,200 full-time equivalents on this program. 
Despite these resources, both taxpayers and practitioners are 
dissatisfied with the program. The source of the 
dissatisfaction may be twofold. First, the IRS is still not 
successfully implementing the policy statement on offers that 
it adopted in 1992. Second, taxpayers and practitioners often 
have unrealistic expectations of what they can achieve through 
an offer. The offer program is not an amnesty. It is a viable 
collection alternative.
    To achieve success in the offer program, the IRS need not 
start all over again. Indeed, it needs to review all of its 
current processes, guidance, training and quality measures as 
well as data tracking, looking at it from the point of view of 
the taxpayer's needs and expectations as well as IRS processing 
requirements.
    We need to encourage our employees to use national and 
local allowances as Congress directed in 1998, as true 
guidelines, not rigid requirements. We need to let our 
employees talk with the taxpayer, and we need to know exactly 
what kind of collections we achieve on accounts after offers 
are rejected.
    The Collection Due Process procedure is another important 
program, one of the act's most significant improvements in 
collection procedures. An independent appeals officer review of 
these cases provides a much-needed safety valve in the 
collection process, as does the Court's jurisdiction over 
collection matters.
    To date, the IRS has approached CDP as an inventory 
problem, not as a vitally important taxpayer protection. It has 
structured the program to deal with the influx of cases from 
taxpayers raising frivolous arguments or from taxpayers who 
have ignored the IRS until we issued a notice. Currently, the 
IRS collection function holds on to the case after the CDP 
hearing request is filed for up to 90 days before sending the 
case to appeals. Taxpayers must continue to work with the 
revenue officer and, later, his or her manager. Taxpayers who 
have been working with the IRS all along are disadvantaged by 
this procedure. They have nothing more to negotiate with 
collections; yet, their appeals hearing is delayed. This is a 
pre-98 approach to program design.
    A post-98 customer oriented approach to this program would 
recognize that CDP is important and essential work for an 
independent appeals function and that appeals jurisdiction over 
the case is paramount. Thus, immediately upon the receipt of a 
CDP hearing request, the case should be transferred to appeals 
and a hearing date set. If the taxpayer is not yet attempting 
to resolve the case with the collection function, the case can 
be temporarily transferred back to collection to see if it can 
be resolved before the hearing. This procedure is similar to 
the treatment of cases docketed in the United States Tax Court.
    These two programs demonstrate how far the IRS has come 
since 1998, and yet how much further it must go to achieve true 
customer service. IRS employees are among the most dedicated 
and professional in the federal government today, and I have no 
doubt that with the proper tools, training and support, they 
will rise to the challenge of providing excellent customer 
service, respecting and protecting taxpayer rights and 
enforcing the Federal tax laws.
    Thank you for the opportunity to address you today.
    Mr. Houghton. Thank you very much, Ms. Olson.
    [The statement of Ms. Olson follows:]

   Prepared Statement of Nina E. Olson, National Taxpayer Advocate, 
                        Internal Revenue Service

    Mr. Chairman, a little over five years ago I testified before the 
House Ways and Means Subcommittee on Oversight and the Senate Finance 
Committee, in my capacity as a tax attorney representing low- and 
middle-income taxpayers, on the subject of taxpayer rights and the 
provisions in bills that were later enacted as the Internal Revenue 
Service Restructuring and Reform Act of 1998 (RRA 98).\1\ For many of 
us who worked in the area of tax controversy, this landmark legislation 
was a formal acknowledgement of what we had known for a long time--that 
the IRS had become inflexible and moribund in its approach to many 
taxpayer problems, and that creative problem-solving was not only not 
encouraged, but actively discouraged within the IRS. Despite the 
accusatory nature of many of the proceedings surrounding RRA 98, we 
felt that positive changes would emerge. In my testimony today, I will 
discuss how far the IRS has come since RRA 98 and what challenges we 
still must meet.
---------------------------------------------------------------------------
    \1\ Pub. L. No. 105-206 (1998).
---------------------------------------------------------------------------
                  irs reorganization and modernization
    Looking at where we are today, I do not think that our hopes for 
improvement were misplaced. However, we did expect change to occur 
faster than it could. There is a danger, today, in wanting to revert to 
the old way of doing things, when we have not given the new approach 
half of a chance. From my vantage point of having worked most of my 
professional life outside of the IRS, in an adversarial position, and 
having served the past two years inside the IRS in a central position, 
I can honestly say that we have only begun to change the organization's 
culture. True change takes time, and there will be (and should be) many 
alterations in course as unforeseen issues arise.
    The concept of organizing the Internal Revenue Service around 
categories of taxpayers is fundamentally sound. Individual, small 
business, large and midsize business, and tax-exempt and governmental 
entity taxpayers each have distinct characteristics and tax issues. Yet 
there are many areas of tax administration in which two or more of 
these taxpayer categories share common issues. Moreover, from one year 
to the next, many taxpayers migrate from one taxpayer category into 
another, and then back again. The IRS reorganization has not yet proved 
itself adept at handling these ``cross-functional'' issues.
    The IRS reorganization has been justified on the ground that under 
the previous national-regional-district structure, continuity and 
accountability were impeded.\2\ Taxpayer accounts moved from one 
district to another when a taxpayer relocated, and taxpayers were often 
required to deal with both a local district office and a service center 
in order to resolve one issue, or several related issues.
---------------------------------------------------------------------------
    \2\ See S. Rep. No. 105-174, Sec. 1001.
---------------------------------------------------------------------------
    It is hard to see how things have improved since 1998 in this 
regard. A self-employed taxpayer may have to deal with one ``campus'' 
(formerly known as a service center) regarding his income tax return, 
another campus regarding his federal employment tax return, and either 
another campus or a local IRS office regarding his offer-in-
compromise.\3\ While this division of work may be perfectly justified 
from the point of view of IRS work processes under a business case 
analysis, the ``business case'' is meaningless for the taxpayer who is 
trying to find his way through the IRS to speak to someone about his 
account.\4\
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    \3\ A recent Taxpayer Advocate Service case involving a non-filer 
is instructive. The taxpayer wanted to file six years of returns, for 
four of which the IRS had filed substitute-for-returns (SFRs) under IRC 
Sec. 6020(b). Three returns had to be filed with the campus that 
processes corrective SFR returns for individual taxpayers; one had to 
be filed in a different campus that processes corrective SFR returns 
for sole proprietor taxpayers; and two, for which no SFR returns were 
prepared, had to be filed at an entirely different campus. The returns 
were shipped back and forth between campuses several times, leading to 
processing delays and a delay in making payment arrangements for the 
overall liability.
    \4\ See Fiscal Year 2002 National Taxpayer Advocate Annual Report 
to Congress, at 7, for a more detailed discussion of ``Navigating the 
IRS.''
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    As programs move to campuses and are addressed from a nation-wide 
perspective, the IRS will face a significant challenge in becoming 
flexible enough to understand and take into consideration regional and 
local circumstances. The Service's leadership recognizes that we are 
also beginning to see stove-pipes of command re-emerging, albeit now 
along the lines of type of taxpayer rather than geography. The Service 
is taking steps to address this problem in several areas. For example, 
the Service is now developing a Service-wide examination plan to ensure 
that the separate operating divisions are (i) operating with a 
coordinated strategy where that is appropriate and (ii) not duplicating 
efforts or working at cross-purposes. Similarly, the Service is 
coordinating a national as well as divisional non-filer strategy. The 
Service's Strategic Planning and Budget process affords the leadership 
of each functional division the opportunity to justify its strategies, 
operational priorities, and proposed improvement projects to the rest 
of the senior leadership team. These sessions can involve probing 
questions and disagreements, but they invariably improve IRS operations 
and taxpayer service.
    The Service, as with many large organizations, is still struggling 
with inspiring its employees to exercise common sense, good judgment, 
and creative problem-solving while requiring them to follow specific 
guidelines and procedures. The sheer size of the IRS workforce, and the 
enormity and complexity of the task of administering the tax system, 
create pressure on management and the workforce to conform and adopt a 
narrow approach to resolving disputes: ``If I can solve my little piece 
of the puzzle, I don't have to worry about the rest of the problem.''
    Thus the IRS must continue with its reorganization efforts, by 
retaining the ``flattened'' management structure so that good ideas are 
not stifled by too many managerial reviews; by providing its employees 
with ongoing training, not just about each employee's specific work but 
also about how that employee's work fits into the larger scheme of tax 
enforcement; and by encouraging innovation as well as consistency. The 
IRS reorganization is just beginning.
           enforcement, taxpayer rights, and customer service
    An effective tax administration system requires a balance between 
enforcement, taxpayer rights, and customer service. These aspects of 
tax administration are not mutually exclusive, although they may 
generate tension at different times. Even when the taxpayer is out of 
compliance with his or her tax obligations, he or she should be treated 
courteously and professionally. Compliance personnel should place 
themselves in the taxpayer's shoes and acknowledge how powerful and 
intimidating the IRS can be. This acknowledgement does not diminish the 
Service's tax assessment or collection authority. In fact, for many 
taxpayers, this acknowledgement is the basis for true customer service, 
for it creates an opportunity for the taxpayer to enter into 
compliance.\5\
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    \5\ The Finance Committee report stated: ``The Committee believes 
that a key reason for taxpayer frustration with the IRS is the lack of 
appropriate attention to taxpayer needs. . . . For example, taxpayer 
inquiries should be answered promptly and accurately; taxpayers should 
be able to obtain timely resolutions of problems and information 
regarding activity on their accounts; and taxpayers should be treated 
fairly and courteously at all times.'' S. Rep. No. 105-174, Sec. 1001.
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    The IRS Restructuring and Reform Act of 1998 required the IRS to 
realign its method of measuring its employees' performance so that an 
even-handed approach to tax administration is encouraged and achieved. 
Thus, IRS employee performance is now evaluated by ``balanced 
measures''--employee satisfaction, customer satisfaction, and business 
results. This balance between customer service, taxpayer rights, and 
enforcement will be tested with the Service's increased focus on 
compliance activities. We can learn something about how to achieve that 
balance by looking at two RRA 98 programs which to date have eluded 
success.
    Offer-in-Compromise. The offer-in-compromise program is still 
problematical after many IRS efforts to make the program work. Although 
the offer inventory is declining and cases are moving, which the 
Service views as a success, many practitioners and taxpayers express 
frustration and dissatisfaction with this program.\6\ One reason for 
this difference in perception is that the IRS has never fully embraced 
its policy statement on offers that it issued in 1992.\7\
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    \6\ The RRA conferees explicitly envisioned an expansion of the 
offer program.
    ``[T]he conferees expect that the present regulations will be 
expanded so as to permit the IRS, in certain circumstances, to consider 
additional factors . . . in determining whether to compromise the 
income tax liabilities of individual taxpayers. . . . [T]he conferees 
believe that the IRS should be flexible in finding ways to work with 
taxpayers who are sincerely trying to meet their obligations and remain 
in the tax system. Accordingly, the conferees believe that the IRS 
should make it easier for taxpayers to enter into offer-in-compromise 
agreements, and should do more to educate the taxpaying public about 
the availability of such agreements.'' H.R. Conf. Rep. No. 105-599, 
Sec. 3462.
    \7\ Policy Statement P-5-100 (1992) provides:
    ``The Service will accept an offer in compromise when it is 
unlikely that the tax liability can be collected in full and the amount 
offered reasonably reflects collection potential. An offer in 
compromise is a legitimate alternative to declaring a case currently 
not collectible or to a protracted installment agreement. The goal is 
to achieve collection of what is potentially collectible at the 
earliest possible time and at the least cost to the Government. In 
cases where an offer in compromise appears to be a viable solution to a 
tax delinquency, the Service employee assigned the case will discuss 
the compromise alternative with the taxpayer and, when necessary, 
assist in preparing the required forms. The taxpayer will be 
responsible for initiating the first specific proposal for compromise. 
The success of the compromise program will be assured only if taxpayers 
make adequate compromise proposals consistent with their ability to pay 
and the Service makes prompt and reasonable decisions. Taxpayers are 
expected to provide reasonable documentation to verify their ability to 
pay. The ultimate goal is a compromise which is in the best interest of 
both the taxpayer and the Service. Acceptance of an adequate offer will 
also result in creating for the taxpayer an expectation of and a fresh 
start toward compliance with all future filing and payment 
requirements.''
---------------------------------------------------------------------------
    There is a natural tension between the requirement to determine and 
collect the correct amount of tax, and the opportunity to compromise 
that amount. The IRS Restructuring and Reform Act of 1998 attempted to 
make clear that the offer program is a viable collection alternative--
an alternative that certainly should not be abused, but one that is 
perfectly valid, nonetheless.
    The Service projects that it will receive approximately 130,000 
offers and will expend approximately 1,200 full time equivalents on the 
offer program in fiscal year 2003. Yet complaints come in from all over 
the nation. If offers are legitimately being returned or rejected, with 
proper customer service, taxpayers might not like the answer but at 
least they would understand the reason. The consistent customer 
dissatisfaction with this program indicates that there is a disconnect 
between what taxpayers and practitioners expect and what the Service 
delivers. I suspect that the proper design for an offer program lies 
somewhere in between these two positions.
    For example, RRA 98 directed the Service to establish guidelines 
for national and local allowances for use in determining whether the 
taxpayer has an ``adequate means to provide for basic living 
expenses.'' \8\ The statute further directs that these guidelines shall 
provide that IRS employees must determine, under a ``facts and 
circumstances'' test, whether the use of such schedules is appropriate 
and shall not use such schedules where their use would result in the 
taxpayer's not having adequate means to provide for basic living 
expenses.\9\
---------------------------------------------------------------------------
    \8\ IRC Sec. 7122(c); RRA 98 Sec. 3462(a).
    \9\ Id. The Finance Committee report stated:
    The IRS also will be required to consider the facts and 
circumstances of a particular taxpayer's case in determining whether 
the national and local schedules are adequate for that particular 
taxpayer. If the facts indicate that use of scheduled allowances would 
be inadequate under the circumstances, the taxpayer would not be 
limited by the national or local allowances.'' S. Rep. No. 105-174, 
Sec. 3462.
---------------------------------------------------------------------------
    With respect to both offers and installment agreements, however, 
IRS employees do not believe that they can deviate from these 
schedules. While some taxpayers may make unreasonable requests, other 
taxpayers, whose facts and circumstances warrant deviation from the 
schedules, are denied relief. Many IRS employees, from Automated 
Collection System to Appeals, apply the schedules as fixed rules. In 
these areas, the IRS has not successfully implemented the directives of 
RRA 98.
    To achieve success in the offer program, the IRS does not need to 
start all over again. Instead, it needs to take its current offer 
processes--in the campus and in the field--and review all of its 
guidance, training and quality measures as well as data tracking, 
looking at it from the point of view of taxpayer need and expectations 
as well as IRS processing requirements. Do we know what happens to 
offers that we reject? How old are the debts that taxpayers are 
attempting to compromise? Are they in year one of the statutory 
collection period, or year nine? Will the IRS likely collect another 
dollar on this debt? Was the account in ``inactive status'' before the 
taxpayer submitted an offer?
    How is the IRS measuring the quality of work done on offer cases? 
Are these quality measures encouraging employees to speak with 
taxpayers and to determine whether the use of national or local 
schedules is appropriate, given the facts and circumstances of that 
particular taxpayer's situation? Or is the IRS only looking at the 
completion of mechanical or procedural steps? Are cases involving 
``grey'' issues being successfully resolved at the first point of 
contact, or are these cases rejected and passed on to Appeals? Is 
Appeals treating these cases in accordance with the changes made by RRA 
98? \10\
---------------------------------------------------------------------------
    \10\ At the end of February, 2003, Appeals had 6,133 assigned 
offer-in-compromise receipts. Two months later, on April 30, 2003, 
Appeals had 9,096 assigned offer receipts, almost a 50 percent 
increase. One must wonder whether these new cases involve issues that 
could not be resolved by offer examiners in the collection function if 
they had appropriate guidance, training and encouragement in accordance 
with the approach described in RRA 98 and Policy Statement P-5-100.
---------------------------------------------------------------------------
    Congress also directed the Secretary to accept offers for the 
purpose of promoting effective tax administration (ETA) on the basis of 
hardship, equity, and public policy.\11\ The Service has struggled to 
develop guidance and processes that respond to Congress' and taxpayers' 
concerns as well as the Service's own processing and resource 
considerations. At the request of my office, the Service is 
establishing a group of revenue officers who will handle all non-
hardship ETA offers--those involving equitable and public policy 
concerns. In turn, the work of this group will be reviewed by a cross-
functional team to ensure consistency and appropriateness of the 
decisions and to develop future guidance for IRS employees and 
taxpayers.
---------------------------------------------------------------------------
    \11\ H.R. Conf. Rep. No. 105-599, Sec. 3462.
---------------------------------------------------------------------------
    Last year, Treasury issued a final regulation that set forth a 
simple construct for a viable non-hardship ETA offer.\12\ First, the 
taxpayer cannot qualify for an offer on any other ground--doubt as to 
collectibility, doubt as to liability, or hardship. Second, the 
taxpayer must adequately explain to the IRS what is so special about 
the taxpayer's circumstances that the taxpayer should have its taxes 
reduced when all other taxpayers are assumed to pay their taxes in 
full. In essence, the taxpayer must be able to look his or her next-
door neighbor in the eye and say, ``You have to pay your taxes in full, 
but I should be cut a break.''
---------------------------------------------------------------------------
    \12\ Treas. Reg. 301.7122-1.
---------------------------------------------------------------------------
    This approach is consistent with the policy statement's requirement 
that taxpayers must bring in reasonable offers. The IRS, while 
recognizing that nonhardship ETA offers will be granted only in 
exceptional circumstances, is committed to considering those offers 
that come in and to learning from those that taxpayers submit. The 
flexibility and fundamental fairness built into this new non-hardship 
ETA procedure aligns with the approach Congress described in RRA 98 as 
well as with the IRS policy statement. We have not yet achieved this 
flexibility and fairness with regard to other offer processing.
Collection due process hearings
    As a practitioner in controversy practice, including collections, I 
thought that the right to a Collection Due Process (CDP) hearing was 
one of RRA 98's most significant improvements to IRS collection 
procedures. Prior to the existence of CDP hearings, there were just too 
many cases where I couldn't obtain a consideration of the underlying 
liability, which would have eliminated the collection problem. Or I 
couldn't get the revenue officer to listen to my points about 
collection alternatives. The opportunity to have an independent Appeals 
Officer review these cases provides a much-needed safety valve in the 
collection process, as does the courts' review of the aftermath of tax 
determinations and assessments.
    It should be no surprise to anyone that many of the first CDP cases 
in the IRS and the courts involved constitutional challenges to the 
Internal Revenue Code and arguments that can best be classified as 
``frivolous.'' Many practitioners have cases that never made it to 
court because they used the system appropriately, actually trying to 
resolve the collection issues. Even the cases advancing frivolous 
theories raised significant procedural issues.
    It is true that many taxpayers do not respond to IRS collection 
letters. The CDP notice, arriving by certified mail, often is the first 
contact that gets the taxpayer's undivided attention. In these 
instances, the taxpayer may not have discussed any issues with a 
revenue officer or Automated Collection System (ACS) employee. Thus, in 
some cases, it may be appropriate to provide the taxpayer with a brief 
period to discuss collection alternatives with collection personnel 
before transferring the file to Appeals.
    However, the Service recently directed its revenue officers to 
continue to work a collection case after the CDP hearing request is 
filed. If the revenue officer and the taxpayer cannot resolve the 
issue, then the group manager will contact the taxpayer and attempt to 
resolve the collection matter. Only if the group manager and the 
taxpayer cannot agree, will the case be referred to Appeals for the 
independent review that is required by RRA 98. Appeals has acknowledged 
that in many instances it takes up to 90 days for a case to be sent to 
Appeals.\13\ During this retention period, the statutory collection 
period is tolled; had the negotiations occurred before the issuance of 
a CDP notice (which is solely at the discretion of the IRS), the 
statutory collection period would continue to run.\14\
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    \13\ Statement of Felice Izen, Supervisory Program Analyst, Office 
of Appeals, before the American Bar Association Low Income Taxpayers 
Committee, May 10, 2003.
    \14\IRC Sec. 6330(e)(1).
---------------------------------------------------------------------------
    In many cases the taxpayer has already attempted to resolve the 
collection matter with collection personnel, and the CDP notice is 
issued because the matter is not being resolved to the Service's 
satisfaction. In this context, the retention of the case by collection 
personnel for further ``negotiations'' can constitute undue pressure on 
the taxpayer, who has elected to have an independent party--an Appeals 
Officer--look at the case and consider all collection alternatives 
offered by the taxpayer, not just the ones the collection employee is 
willing to accept. In fact, this independent review was the underlying 
premise for the statute's enactment. The Appeals Officer should bring 
something more to the discussion than just providing the 
``opportunity'' for the taxpayer to have more dealings with the 
collection employee, who is the very person who filed the lien or is 
proposing the collection action that triggered the right to a CDP 
hearing. \15\
---------------------------------------------------------------------------
    \15\ The legislative history to RRA 98 clearly demonstrates the 
importance Congress placed on the independent hearing.
    The Congress believed that the IRS should afford taxpayers adequate 
notice of collection activity and a meaningful hearing before the IRS 
deprives them of their property. . . . The determination of the appeals 
officer is to address whether the proposed collection action balances 
the need for the efficient collection of taxes with the legitimate 
concern of the taxpayer that the collection actions be no more 
intrusive than necessary.'' Joint Committee on Taxation, General 
Explanation of Tax Legislation Enacted in 1998 at 81, 83 (JCS-6-98).
    ``A proposed collection action should not be approved solely 
because the IRS shows that it has followed appropriate procedures.'' S. 
Rep. No. 105-174, Sec. 3401.
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    I recognize that since the enactment of RRA 98, the Office of 
Appeals has been struggling with an inventory problem attributable to 
the large number of CDP cases filed.\16\ The Office of Appeals has 
hired new offer specialists to address the inventory of cases. However, 
there are many issues that should be explored to determine why this 
inventory exists. Are revenue officers or ACS employees filing liens at 
appropriate times, which triggers a CDP notice? Are they making 
premature determinations to levy? Where a taxpayer raises a challenge 
to the underlying liability in the context of a collection action, is 
the collection employee directing the taxpayer to the appropriate IRS 
personnel (including Taxpayer Advocate Service employees) for 
resolution of that matter at the earliest opportunity, rather than 
passing that issue on to Appeals? Once a case gets to Appeals, are 
Appeals Officers taking a formulaic approach to these cases, or looking 
for the easiest out (for example, placing the taxpayer in ``currently 
not collectible'' status and encouraging the taxpayer to withdraw the 
CDP hearing request)?
---------------------------------------------------------------------------
    \16\ The IRS had 19,199 CDP receipts in FY01, 26,666 CDP receipts 
in FY02, and 13,073 CDP receipts through March 2003.
---------------------------------------------------------------------------
    The IRS touches more U.S. taxpayers through its collection 
activities than any activity other than the filing requirement. Tax 
collection is the second most important activity of the IRS, 
particularly from the taxpayers'--our customers'--perspective. Thus, 
the Collection Due Process hearing is extremely important and essential 
work for an independent Appeals function and should be treated as such. 
The program should be treated as an important taxpayer right and not as 
an inventory problem.
                      low income taxpayer clinics
    The IRS Restructuring and Reform Act of 1998 ushered in a new era 
for low income taxpayers--one in which Congress recognized the 
importance of representation, education and outreach to low income 
taxpayers and taxpayers who speak English as a second language (ESL). 
In 1998, there were 14 academic and one nonprofit low income taxpayer 
clinics nationwide. Today, as a result of the matching grant program 
under IRC section 7526, there are 136 clinics--one in all but two 
states and Puerto Rico. By next year, there should be clinics in these 
sites.
    Effective May 1st of this year, the clinic program was moved into 
the Office of the Taxpayer Advocate. Over the next year my office will 
be working with the clinics to develop standards of operation and best 
practices. We will be making site assistance visits to various clinics 
and identifying areas of success as well as improvement goals.
    My office is committed to integrating the clinics into many more 
IRS activities and programs. For example, we developed a publication 
listing each clinic grantee. This publication is posted on the irs.gov 
internet site and is included in each audit notice for each face-to-
face exam in the National Research Program (NRP). Thus, low income 
taxpayers who are being audited as part of this program will have 
access to representation.
    The clinics provide the IRS and Congress with much needed insight 
into the problems of low income and ESL taxpayers. Many clinics are 
participating in community-based coalitions whose numbers provide free 
tax preparation, financial literacy education, and access to low-cost 
bank accounts in addition to tax representation, education and 
outreach. These activities increase the fairness of the tax system for 
all taxpayers and enable low income taxpayers to comply with their tax 
obligations.
                      office of taxpayer advocate
    In 1998, the independence, impartiality and confidentiality of the 
Office of the Taxpayer Advocate (OTA) were substantially enhanced.\17\ 
There is a basic tension between the OTA's role as an agent for change 
inside the IRS and maintaining the office's independence within the 
IRS. The statutory revisions increased the effectiveness of the 
National Taxpayer Advocate and her office in helping taxpayers resolve 
their specific problems with the IRS while being a strong voice for 
systemic improvement and change within the IRS.
---------------------------------------------------------------------------
    \17\ See RRA 98 Sec. 1102(a), amending IRC Sec. 7803(c); RRA 98 
Sec. 1102(c), amending IRC Sec. 7811(a).
---------------------------------------------------------------------------
    However, as I have noted in my 2002 Annual Report to Congress, 
there are several areas in which the Office of the Taxpayer Advocate's 
independence should be strengthened and its effectiveness increased. In 
the Report, I discussed revisions to the confidentiality provisions of 
IRC Sec. 7803(c)(4)(A)(iv), the definition of ``significant hardship'' 
under IRC Sec. 7811, and the codification of the Taxpayer Assistance 
Directive.
    The Senate version of RRA 98 provided for an independent counsel to 
the National Taxpayer Advocate.\18\ The IRS Restructuring and Reform 
Act of 1998 ultimately did not include that provision. The National 
Taxpayer Advocate currently receives legal advice from the Counsel to 
the National Taxpayer Advocate, who reports directly to the Chief 
Counsel of the IRS.
---------------------------------------------------------------------------
    \18\ S. Rep. No. 105-174, Sec. 1102.
---------------------------------------------------------------------------
    The National Taxpayer Advocate, who by design and by statute brings 
a unique perspective to the issues and problems facing taxpayers and 
the IRS, must have independent counsel in order to accomplish her 
statutory mission successfully. This counsel should report directly to 
the National Taxpayer Advocate (NTA) in order to avoid any conflict of 
interest where the Counsel's advice might differ from the position 
advocated by the Office of Chief Counsel. The independent counsel to 
the NTA should advise the Advocate on matters pertaining to the 
authority, jurisdiction, and operation of the Office of the Taxpayer 
Advocate, as well as issues relating to taxpayer rights. The counsel 
should also participate in discussions and development of guidance, to 
the same extent that the current Counsel to the NTA participates today.
               regulation of unenrolled return preparers
    The IRS Restructuring and Reform Act of 1998 did not directly 
address one particular aspect of tax administration that I believe 
would provide considerable benefits to taxpayers--the regulation of 
unenrolled return preparers.\19\ Today, more than 50 percent of all 
returns are prepared by paid tax return preparers. Thus, for a majority 
of taxpayers, the tax return preparer is the gateway to the federal tax 
system. Returns prepared by unqualified or unscrupulous preparers have 
a negative impact on taxpayers and the IRS. For taxpayers, inaccurate 
returns mean overclaims as well as underclaims--either they pay more 
taxes than they should or their returns may be examined. For the IRS, 
these returns consume valuable resources, in terms of processing, 
examination, and collection.
---------------------------------------------------------------------------
    \19\ The National Commission on Restructuring the IRS recommended 
that all preparers be made subject to the standards of conduct set 
forth in Circular 230. See Commission Report--A Vision for a New IRS--
at G-5.
---------------------------------------------------------------------------
    Clearly, the federal government has an interest in protecting the 
integrity of the tax administration system and ensuring that products 
and services offered in conjunction with the taxpayer's filing, 
reporting and payment obligations do not operate in such a way as to 
undermine the taxpayer's faith and participation in the system. 
Moreover, taxpayers have the right to expect that the tax administrator 
of a complex tax code will take the appropriate and necessary steps to 
ensure that commercial return preparers possess the requisite skills 
and ethics.
    We propose that unenrolled preparers--preparers who are not 
attorneys, CPAs, or enrolled agents--who prepare more than five returns 
per year for a fee be required to register with the IRS, take an 
initial examination about return preparation and an annual refresher 
examination, and display a current certification card indicating their 
certified status. Our proposal is described in greater detail in my 
2002 Annual Report to Congress.
    The lynchpin of this proposal is a consumer education campaign, 
which utilizes paid advertising, outreach, and partnering with other 
organizations, to deliver two simple messages to tax consumers who will 
enforce the program through their market behavior:
           If you pay for tax preparation, ask to see the 
        preparer's certification.
           If you pay for tax preparation, don't pay until you 
        see the preparer's name, address, and certification on the tax 
        return and on your copy.
    We believe our proposal is administrable and efficient. While it 
will require resources to collect and input data, develop and update 
examinations, and maintain the preparer database, a portion, if not 
all, of these costs can be offset by user fees on the regulated 
population.\20\ Ultimately, more accurate returns will reduce the 
resources the IRS must devote to examining incorrect returns and 
collecting the resulting tax.
---------------------------------------------------------------------------
    \20\ The fee for taking the enrolled agent exam is $55. See IRS 
Form 2587. The fee for applying for enrolled agent status is $80. See 
IRS Form 23.
---------------------------------------------------------------------------
    The requirement that return preparers demonstrate minimum 
competency levels will restore the connection between tax preparers, 
tax expertise, and tax filing. Under our plan, preparers who are 
providing tax preparation and filing primarily because it brings in 
consumers of unrelated products or financial products such as check-
cashing will have to demonstrate knowledge of return preparation. This 
approach will benefit the taxpayer both as a taxpayer and as a 
consumer, and it will benefit the tax system.
                               conclusion
    The IRS has come a long way from where it was in 1998. It is much 
more taxpayer focused, it evaluates its employees based on balanced 
measures, and it has embraced a strategic planning and budgeting 
process that emphasizes cross-functional planning. In key aspects of 
its operations, however, namely those involving flexibility and the 
exercise of discretion, the IRS is struggling. For the IRS to continue 
to improve, Congress must not only continue its oversight but must also 
provide the IRS with appropriate resources to accomplish its 
continually expanding tasks.

    Mr. Houghton. Ms. Gardiner.

  STATEMENT OF PAMELA J. GARDINER, ACTING TREASURY INSPECTOR 
                 GENERAL FOR TAX ADMINISTRATION

    Ms. Gardiner. Mr. Chairman and members of the committees, I 
appreciate the opportunity to appear before you today to 
discuss significant challenges the Internal Revenue Service 
continues to face in improving the overall effectiveness of tax 
administration.
    Over the past few years, the IRS has been in the midst of a 
significant business restructuring. Key business systems 
modernization initiatives are underway to redesign IRS's 
outdated computer systems, and management is improving the 
organization's customer service operations to better serve and 
communicate with taxpayers. While the IRS has revamped some of 
its business processes and practices, much more needs to be 
accomplished to provide top quality service to taxpayers.
    With the appointment of a new IRS Commissioner and the 
expected departures of key executives, the IRS is also 
encountering tremendous leadership changes. The Commissioner is 
challenged with continuing the IRS' reinvention efforts in 
modernizing its computer systems, protecting taxpayer rights 
and privacy, ensuring tax law compliance and providing improved 
customer service.
    To achieve the IRS mission of providing top quality service 
to taxpayers, the IRS must modernize its outdated computer 
systems. The IRS has made progress in modernizing its 
information technology systems and some benefits have been 
delivered. For example, the IRS upgraded its toll-free 
telephone system to route taxpayers' calls to the appropriate 
IRS employee, and deployed an Internet application that allows 
taxpayers to check the status of their refunds. However, the 
most significant and complex projects have yet to be delivered. 
Most modernization projects have experienced costs and schedule 
overruns. Project delays can be attributed to underestimating 
the complexity of the overall modernization effort and 
difficulties in identifying and managing the project 
requirements. These setbacks are magnified by the fact that so 
many other reforms are dependent on modernizing IRS computer 
systems.
    The IRS has developed adequate computer security policies 
and procedures but has not implemented them effectively. As a 
result, sensitive information remains vulnerable to attack by 
hackers, terrorists and disgruntled employees and contractors. 
While recognizing that total security can never be achieved and 
that there are necessary trade-offs between security and 
operational needs, TIGTA continues to identify significant 
weaknesses in infrastructure and applications security. TIGTA 
attributes many of IRS's security problems to misplaced 
accountability. The IRS needs to enhance the security awareness 
of its managers and employees, and provide better training to 
those employees with key security responsibilities.
    Another challenge to IRS management is to establish a tax 
compliance program that identifies those citizens who do not 
meet their tax obligations, either by not paying the correct 
amount of tax or not filing proper tax returns. While the 
decline in enforcement actions has been dramatic since fiscal 
year 1996, there are recent indications that the decline in 
some categories of enforcement actions and results have 
stabilized and, in some cases, shown improvement.
    The IRS Restructuring and Reform Act of 1998 (RRA 98) also 
mandated that the IRS be more responsive to customer needs. The 
IRS has made progress in enhancing its customer service 
activities. For example, taxpayers have several options from 
which to choose when they need assistance from the IRS in 
answering tax law questions. Two of these options, walk-in 
service at nationwide Taxpayer Assistance Centers and toll-free 
telephone assistance, have shown improvement in terms of 
accuracy over the past year. Overall, the IRS has made 
improvements in providing service to the taxpaying public.
    The tax return filing season impacts every American 
taxpayer and is, therefore, always a highly critical program 
for the IRS. In addition to providing customer service to 
taxpayers, the IRS must coordinate tax law changes, programs, 
activities, and resources to effectively plan and manage each 
filing season. Overall, the 2003 filing season has gone well. 
Based on TIGTA's review, it appears that the IRS should 
complete its processing of individual returns and issue all tax 
refunds on time.
    The IRS has accomplished a great deal since the passage of 
RRA 98, though much more remains to be done. TIGTA resources 
are devoted to providing useful, balanced information to IRS 
management and other decision-makers. TIGTA's audit and 
investigative coverage will continue to focus on the management 
and performance challenges facing the IRS as part of our 
overall effort to promote economy, efficiency, and 
effectiveness in the Nation's tax administration system.
    This concludes my statement.
    Mr. Houghton. Thank you very much.
    [The statement of Ms. Gardiner follows:]



    
    Mr. Houghton. Mr. Levitan, nice to have you back.

  STATEMENT OF HON. LARRY LEVITAN, MEMBER, IRS OVERSIGHT BOARD

    Mr. Levitan. Thank you, sir. Mr. Chairman, thank you for 
the opportunity to testify before the annual joint review.
    The IRS has made progress over the past 5 years to achieve 
RRA 98's goals, but the next few years will be difficult and 
challenging. While much has been accomplished to make the IRS a 
more effective organization, modernization of the IRS remains a 
work in progress.
    The IRS, the Administration and Congress must work together 
to close the compliance gap. The IRS must engage its entire 
workforce in its transformation, and it must begin to show real 
progress and benefits from its Business Systems Modernization 
Program.
    Mr. Chairman, despite some recent signs of a turnaround, 
compliance activities have declined dramatically since 1998. 
The American public senses that the IRS is more bark than bite. 
True or not, this perception can undermine confidence in the 
tax system. Commissioner Everson clearly sees this threat and 
rightly intends to enhance enforcement activities.
    Yet, the Board believes that a more robust enforcement 
program is only part of the equation. We believe that making it 
easier, faster and more efficient for Americans to meet their 
tax obligations will also pay off in better compliance. I 
believe we are in agreement that both compliance and customer 
service must improve if we are to meet RRA 98's vision for a 
new IRS.
    In our annual report released earlier this month, the Board 
states that the IRS is both understaffed and outmanned. In the 
past decade, the number of full-time employees has dropped 16 
percent. The number of field-compliance personnel has decreased 
28 percent.
    At the same time, the IRS workload continues to grow 
steadily. To boost enforcement, the IRS is focusing its very 
limited resources on key areas of noncompliance, particularly 
on high-income, high-risk taxpayers. The Board applauds these 
initiatives, and it is also pleased with the Administration's 
request for additional funding in fiscal year 2004 for 
enforcement.
    The Board believes, however, that better compliance begins 
with quality customer service. We must ensure that the IRS is 
able to do a better job serving the vast majority of honest 
taxpayers who face an increasingly complex tax code. That means 
providing the information and support needed so taxpayers are 
able to do the right thing at tax time.
    During fiscal year 2002, only seven out of ten taxpayers 
got the help they sought over the IRS toll-free phone lines. 
Although we do understand that this improved during the 
recently completed tax season, solving a problem quickly with 
the IRS is still the exception, not the rule. It takes on 
average 220 days, that is seven months, for an individual to 
complete an audit at an IRS Tax Assistance Center. Account 
information is rarely current. It still takes days to post 
changes due to their outdated computer systems.
    Customer service must improve. At the same time IRS must 
have the enforcement capabilities to pursue those that ignore 
their tax obligations by underreporting, by participating in 
abusive tax schemes or by simply failing to report or pay their 
taxes. To meet these challenges, the Board calls for additional 
funding to improve both customer service and compliance.
    In addition to recommending an additional $44 million to 
the Administration's $133 million to expand enforcement, the 
Board also recommends an additional $172 million to bolster 
customer service. The Board believes that its budget 
recommendations would result in very specific and very 
quantifiable improvements in both service and enforcement.
    Mr. Chairman, I must also emphasize the importance of 
staying the course in modernizing the IRS computer systems. 
Until its processes and supporting information systems are 
modernized, the IRS cannot become a modern financial services 
institution. The Board supports full funding of the Business 
Systems Modernization Program in fiscal year 2004, and that 
would include $71 million more than the President's budget 
request.
    While results to date for this critical program have been 
mixed, the Board believes that the IRS has improved its 
management of this program and expects to see significant 
progress this year.
    Mr. Chairman, the Board is also very pleased to welcome 
Mark Everson as the new Commissioner of the IRS. We know he 
will do an exceptional job in this very difficult position, and 
we look forward to developing a close working relationship with 
him. We have already discussed the organizational changes that 
Commissioner Everson announced during his testimony and support 
these initiatives.
    Mr. Chairman, thank you, and I would be happy to answer 
your questions.
    Mr. Houghton. Thanks very much.
    [The statement of Mr. Levitan follows:]

 Statement of the Honorable Larry Levitan, Member, IRS Oversight Board

    Mr. Chairman, and members of the Joint Committee, thank you for 
holding this hearing and inviting me to testify. It is an honor for me 
to appear before your committee today on behalf of the Internal Revenue 
Service (IRS) Oversight Board and to discuss the IRS' performance and 
the importance of the IRS Restructuring and Reform Act of 1998 (RRA 
98).
    On July 22nd we will mark the fifth anniversary of the IRS 
Restructuring and Reform Act of 1998. At this five-year point, the 
Board believes it is important to check the true progress of the IRS. 
Where is the IRS in the transformation process? Is the IRS on track? 
What are the greatest challenges the IRS faces, and how can they be 
overcome?
                       progress made since rra 98
    The American tax system is at a crossroads. Following the enactment 
of the IRS Restructuring and Reform Act of 1998, the IRS embarked on a 
ten year modernization program and is now at its mid-point. During the 
past five years, the IRS made enormous progress in setting the stage to 
provide better service and ensure fair treatment under the law for 
taxpayers. The agency has refocused, redefined, and rebuilt itself, 
with dramatic changes in its mission, organization, management 
processes, and governance. In the past five years, the IRS:
           Adopted a new mission statement to ``Provide 
        America's taxpayers top-quality service by helping them 
        understand and meet their tax responsibilities and by applying 
        the tax law with integrity and fairness to all.''
           Emphasized the specific needs of different taxpayer 
        segments by implementing a modern organizational structure with 
        four major customer-focused operating divisions.
           Held senior executives and organizations accountable 
        for performance by developing and implementing a balanced 
        measures program.
           Integrated a performance and budget plan based upon 
        a sound strategic assessment and planning process.
           Began to transform the IRS into a modern financial 
        services institution with redefined business processes and 
        information technology by designing and implementing a vision 
        and new architecture.
           Implemented modern call routing, so taxpayers get to 
        the right person to answer their questions quickly.
           Promoted electronic tax filing, which continues to 
        grow; so much so that one paper processing pipeline was closed.
           Weaved many services into the internet, so taxpayers 
        can check the status of their refunds, download forms, and get 
        information easily over www.irs.gov.
           Hired executives with private sector backgrounds to 
        bring new business knowledge and practices, while setting 
        processes to ensure the effectiveness of its streamlined 
        critical pay authority.
           Implemented a number of new and/or expanded taxpayer 
        rights, such as the Innocent Spouse program.
           Strengthened advocacy for taxpayer rights through 
        the Taxpayer Advocate Service, which is handling a case load 
        far larger than originally anticipated.
           Began to gather and analyze valuable taxpayer 
        information through the National Research Program. The 
        program's data will help the IRS allocate resources more 
        effectively and fairly, resulting in better compliance.
                          strategic challenges
    However, in its 2003 Annual Report to Congress, the Oversight Board 
reported that the American tax system is still plagued with two long-
term conflicting trends: a steady increased demand on tax 
administration services, and a steady decline in IRS resources due to 
budget constraints. In the past decade, the IRS workload has increased 
steadily. The number of tax returns filed continues to grow; 
particularly complex returns, such as those filed by individuals 
earning more than $100,000 each year and small corporations. The tax 
revenue stream is now dominated by sources that provide greater 
opportunities for manipulation and for error.
    At the same time, the number of IRS employees continues to shrink, 
due to budget constraints. From 1992 to 2002, IRS workload increased by 
16 percent, while at the same time, the number of full time equivalent 
employees (FTEs) decreased 16 percent from 115,205 in FY1992 to 96,714 
in FY2002. As more resources were needed for the IRS to provide 
essential services, such as processing returns and answering 
correspondence, resources were shifted from discretionary operations, 
such as compliance activities. These trends are creating a huge gap 
between what taxpayers need and what the IRS can do.
    Before he left office, the Board asked Commissioner Charles O. 
Rossotti to assess the state of the IRS and of the tax system. He 
reported that the effect of these conflicting trends created a huge gap 
between the number of taxpayers who are not filing, not reporting, or 
not paying what they owe, and the IRS' capacity to require them to 
comply. In addition, the tax revenue stream is now dominated by sources 
that provide greater opportunities for manipulation by those who wish 
to take advantage of the decline in IRS compliance resources. According 
to his report:
           60 percent of identified tax debts are not pursued
           75 percent of taxpayers who do not file a tax return 
        are not pursued
           79 percent of identified taxpayers who use abusive 
        devices (e.g., offshore accounts and abusive tax shelters) to 
        evade tax are not pursued
           56 percent of identified taxpayers with incomes of 
        $100,000 or more and underreported tax are not pursued
           78 percent of partnerships and similar document 
        matching are not pursued.
                       irs performance in fy2002
    These long-term trends impact the IRS' ability to meet taxpayers' 
needs. In reviewing the IRS' performance for FY2002, the IRS Oversight 
Board found that:
           Customer service showed some improvement, but not 
        enough. The number of returns filed electronically by 
        individuals rose 16 percent. The IRS also improved its accuracy 
        in correctly answering questions regarding tax law and taxpayer 
        accounts on its toll-free telephone lines. Yet only seven out 
        of ten callers to the IRS toll-free phone line were assisted. 
        This is an improvement from the year before, and may indicate a 
        trend, but this level is not acceptable to the Board. Voluntary 
        compliance is at the heart of the nation's tax system, and the 
        easier it is for taxpayers to meet their tax obligations, the 
        more likely they will be to comply with the law. More resources 
        are needed for the IRS to provide the services taxpayers need.
           Compliance activities increased, but not enough to 
        close the gap. In FY2002, collection activities generated $371 
        million more than the year before--a laudable improvement, but 
        not nearly enough to address the growing compliance gap. The 
        number of levies issued increased nearly 50 percent over the 
        previous year, while the number of liens filed increased by 
        nearly 15 percent. Audits of high-income taxpayers--those 
        earning $100,000 and up--increased by 22 percent from the 
        previous year. The IRS launched a number of initiatives aimed 
        to clamp down on abusive tax shelters and offshore accounts. 
        However, other compliance related measures declined. The gap 
        between new delinquent accounts received and the number closed 
        grew again. The exam coverage rate for large businesses over 
        $10 million declined from 25 percent to 15.5 percent. In areas 
        of high growth in returns filed, such as partnerships and mid-
        sized businesses filing 1120S returns, coverage rates have also 
        declined dramatically.
    While the improvements in both areas are welcome, the Board remains 
concerned with the overall state of customer service and the IRS' 
ability to ensure that the tax law is enforced. The National Taxpayer 
Advocate's 2002 report cited access to the IRS as fundamental to the 
achievement of universal taxpayer rights. The Board agrees that 
taxpayer accessibility to the IRS is imperative. The vast majority of 
taxpayers want to do the right thing in an increasingly complex tax 
system. They must be able to get help from the IRS, whether it is over 
the phone, in person, or over the internet. Resources must be made 
available so the IRS can provide the level of service expected by the 
public.
                      actions required for success
    The IRS Oversight Board's role is to provide long-term guidance and 
direction to the IRS. Given the IRS' present situation, we believe that 
the agency, with the support of the Administration and Congress, must 
take the following actions if it is to succeed:
         Close the compliance gap: The IRS Oversight Board 
        believes that modernizing the IRS and a three percent annual 
        productivity gain alone will not close the compliance gap. In 
        his end-of-term report to the Board, Commissioner Charles O. 
        Rossotti recommended an annual two percent per year staff 
        growth through 2010. The Board fully endorses this approach.
         Boost customer service: Millions of taxpayers are 
        filing electronically. Hundreds of millions of forms and 
        publications are downloaded from the IRS web site. Yet the 
        demand for customer service--over the phone, at walk-in 
        centers, and through the mail--grows each year. So too does the 
        complexity of the tax code. Only seven out of ten taxpayers can 
        get help over the phone at tax time given the IRS resource 
        constraints. The IRS has direct contact with more Americans 
        than any other federal agency; the Board believes its customer 
        service must continue to improve to a long-term level agreed 
        upon by Congress and the Administration, and backed up with the 
        resources needed to meet that level.
         Commit to modernization: Until both its processes and 
        supporting information systems are modernized, the IRS cannot 
        become a modern financial services institution. The Board is 
        deeply concerned with the progress of this program. Results 
        have been delayed and both the PRIME contractor and the IRS 
        need to continue to improve their management's ability to 
        handle a program of this scope. Despite this, the Board remains 
        committed to the modernization program, and believes it should 
        be accomplished as quickly as possible consistent with the IRS' 
        ability to manage and implement it.
         Focus on people resources: As the IRS modernizes, it 
        must recruit, retain and develop employees who have the 
        knowledge and skills needed to do their jobs. The IRS will also 
        face a dramatic loss of institutional knowledge in the next 
        five years when waves of federal employees retire. In the past 
        five years, the IRS has concentrated on business processes and 
        information technology. Now is the time for the IRS to make the 
        most of its people resources by developing a comprehensive, 
        agency-wide strategic human resources initiative.
         Measure long-term goals: The IRS made strides in 
        measuring its progress in the past five years with the 
        implementation of an agency-wide balanced measures approach to 
        performance management. The agency and decision-makers now have 
        a much better sense of the IRS' performance. Yet there is no 
        universal consensus on what constitutes the appropriate level 
        of performance in the long-term, for both compliance and 
        customer service. Two efforts are underway to address this. 
        First, at the Board's recommendation, the IRS Executive 
        Steering Committee will propose and seek consensus among key 
        executive branch agencies, Congress, stakeholders, and the 
        public in determining appropriate levels and strategic goals 
        for IRS long-term performance objectives. The second is the 
        work underway by the National Research Program, which will 
        provide data on taxpayer compliance levels. The Board believes 
        it is necessary for the IRS to set its long-term goals so it 
        can evaluate its progress effectively.
    To accomplish all of these things, the IRS needs stable, additional 
funding. The IRS cannot close the gap or implement a successful 
modernization effort unless it receives additional and sustained 
funding over a long period of time. The Board is well aware of the 
challenges now facing our nation, but believes that short-term 
solutions to reduce spending will result in larger challenges in tax 
administration in the future and endanger the source of revenue 
collection.
                   fy2004 irs budget recommendations
    The IRS Restructuring and Reform Act (RRA 98) gives the Oversight 
Board specific responsibilities to review and approve the budget 
request of the IRS prepared by the Commissioner, and submit this 
request to the Treasury Department. RRA 98 also provides that the 
President shall submit the Oversight Board's budget recommendation to 
the Congress, without revision, together with his own budget request, 
and gives the Oversight Board the responsibility to ensure that the 
budget request supports the annual and long-range strategic plans.
    In developing its recommendations, the Oversight Board is 
evaluating first and foremost the needs of taxpayers. The Board wants 
to ensure that taxpayers get the help they need at both ends of the tax 
administration spectrum. Up front, do taxpayers receive the education 
and service they need to understand and meet their tax obligations? 
Post-filing, do taxpayers believe the tax laws are being enforced 
fairly so that all taxpayers pay their fair share?
    The Oversight Board is cognizant that the present war on terrorism 
and the budget deficit increase the need to ensure that all federal 
spending be thoroughly justified and deliver value to taxpayers. 
Nonetheless, the Oversight Board has statutory responsibilities for IRS 
governance and must ensure that it makes an honest and independent 
assessment of the performance levels the IRS must deliver and the 
budgetary implications of achieving that performance. The Oversight 
Board worked closely with the IRS, as well as with Treasury and the 
Office of Management and Budget (OMB) in producing its budget 
recommendation. The Oversight Board believes that its budget 
recommendation supports the annual and long-range strategic plans of 
the IRS, as required by RRA 98.
    Moreover, especially in this difficult budgetary time, the 
Oversight Board believes that there is great value in having the 
government collect the revenue it is due by ensuring that all taxpayers 
pay what they honestly owe. Taxpayers expect that this be done, and 
fairness dictates it.
    Table 1 shows the Oversight Board's FY2004 budget recommendations 
for each account compared to the FY2003 IRS budget and the 
Administration's budget request.

 TABLE 1.--COMPARISON OF IRS' FY2003 BUDGET WITH ADMINISTRATION REQUEST AND OVERSIGHT BOARD RECOMMENDATIONS FOR
                                                     FY2004
                                                 [All $ in 000s]
----------------------------------------------------------------------------------------------------------------
                                                                                     Oversight      Difference
                                                   FY2003 IRS     Administration   Board FY2004       between
                   Account                     Appropriation \1\   FY2004 Budget      Budget      Administration
                                                                      Request     Recommendation   and Oversight
----------------------------------------------------------------------------------------------------------------
PAM..........................................          $3,930            $4,075          $4,247            $172
TLE..........................................           3,705             3,976           4,021              44
IS...........................................           1,621             1,670           1,670   ..............
BSM..........................................         \2\ 364               429             500              71
EITC.........................................             145               251             251   ..............
HCTC.........................................              70                35              35   ..............
      Total..................................           9,835            10,437          10,724            287
----------------------------------------------------------------------------------------------------------------
\1\ FY2003 actual appropriation. Administration FY2003 request was $9,916 million.
\2\ The original FY2003 budget request was $450 million, which was subsequently reduced to $380 million.

    The Board's recommended budget provides for two percent growth in 
IRS resources. The Oversight Board recommends an additional 2,120 FTEs 
over FY2003 levels compared with the Administration request of 238 
additional FTEs. An additional 650 FTEs are proposed for the EITC 
Reform Initiative, which was proposed by the Administration and added 
by the Board to its budget recommendation.
    The Oversight Board has recommended this budget for several 
reasons. First, and most importantly, it provides the IRS with 
resources to address the five strategic actions I described earlier. 
The proposed budget is also consistent with the Oversight Board's goal 
of achieving two percent in real growth for a five year period, which 
it believes is necessary.
    Secondly, it provides for additional investment in the BSM program, 
which the Oversight Board believes is essential to the transformation 
of the IRS. Unfortunately, the Oversight Board believes the 
Administration request will result in the delay of delivery of 
important benefits to taxpayers.
    Third, it restores resources for customer service and enforcement 
that have been lost in recent years to unexpected costs. Each year, the 
IRS must cover unexpected costs. These costs reduce the IRS' ability to 
hire the number of employees (full-time equivalents, or FTEs) planned 
by both the Administration and the Board in their recommended budgets. 
Examples of unexpected costs that caused this reduction include:
         $43 million to cover the unfunded increase in the 
        FY2002 annual pay raise from the President's request of 3.6 
        percent to the enacted 4.6 percent raise;
         $68 million of unfunded increase in the FY2003 annual 
        pay raise from the President's request of 2.6 percent to the 
        enacted 4.1 percent raise.
         $23 million when legislation was not enacted that 
        would have allowed for savings on postage and the Financial 
        Management System payment levy;
         $22 million in postage costs that increased above 
        initial budget projections; and
         $20 million of unfunded increases in security costs 
        after September 11.
    In FY2002 and FY2003, unfunded costs resulted in decreases in the 
number of FTEs requested in the Administration's budget as shown below:

------------------------------------------------------------------------
                                                    FTEs
                                Administration  Achieved by
          Fiscal Year             FTE request     the IRS     Difference
                                  (less EITC)   (less EITC)
------------------------------------------------------------------------
2002..........................         99,116        96,714       -2,402
2003..........................         98,727        96,802       -1,925
------------------------------------------------------------------------

    The stage has already been set for this to happen again, resulting 
in a lower number of FTEs in FY2004. In the FY2004 budget, the 
Administration proposed a two percent pay raise for civil service 
employees and a 4.1 percent raise for military personnel. Pay parity 
between civilian and military personnel was provided in 15 of the last 
17 Treasury Appropriation bills. Furthermore, both the House and Senate 
versions of the FY2004 budget resolution contain a ``sense of the 
Congress'' provision supporting military-civilian pay parity for 
federal employees. If past years are any indication, Congress will 
again provide pay parity to military and civilian personnel.
    The Board's FY2004 budget proposal, as does the Administration's, 
assumes a two percent pay increase. The Board urges that Congress 
provide the necessary funds for any pay raise it may pass in the coming 
year. Otherwise, as in previous years, the IRS will be forced to freeze 
future hiring initiatives and cut any discretionary spending such as 
employee training programs to absorb the impact of an unfunded pay 
raise.
                               conclusion
    Chairman Thomas, before I conclude I would like to add a personal 
note. Two years ago, on May 8, 2001, GAO, TIGTA, and I testified before 
you at a Joint Tax Committee hearing on the same subject. You 
challenged the three organizations to share information and develop 
common perspectives on the strategic challenges facing the IRS. I'm 
pleased to say that since that hearing we have responded to your 
challenge and meet periodically to do just that. The result has been a 
fruitful and rewarding exchange for all three organizations. I'm 
confident my fellow panelists would agree.
    The Board believes that the IRS has accomplished much, but must do 
more. We have a tough five years ahead of us. Up to this point, the 
agency focused on planning and developing major programs. Those 
programs are now being implemented. The Board intends to work closely 
with the IRS and its new leadership to provide guidance to improve the 
implementation process. The Board also will work with the 
Administration and Congress to do all it can to ensure that the IRS 
gets the resources needed to succeed.
    The future is now. It is time for the IRS to begin to produce the 
tangible benefits for taxpayers envisioned five years ago.

    Mr. Houghton. Mr. White.

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

    Mr. White. Mr. Chairman and members of the committees, we 
are pleased to be here at this Joint IRS Oversight hearing.
    Five years ago Congress passed the IRS Restructuring and 
Reform Act in response to frustration with IRS's performance. 
Now, halfway through the ten years that the then commissioner 
projected modernization would take, is a good time to take 
stock, to look back on what has been accomplished to date and 
to list the challenges the new commissioner will face.
    Both can be understood in terms of the graphic on the 
easel, also on the bottom of the first page of my statement. 
The right side shows IRS's goals, to improve service to 
taxpayers while ensuring compliance with the tax laws. The left 
side shows four key means to achieve these goals. While still 
far from realizing the goals on the right, IRS's modernization 
progress gives it more of the means it needs for reaching the 
goals.
    IRS has increased its capacity to manage. Looking at the 
arrows, IRS has put in place many, but not yet all, of the 
controls needed to effectively acquire new information systems. 
IRS has established, but not yet implemented, a substantial set 
of policy standards and guidelines for computer systems 
security that would protect taxpayer data from many threats. 
IRS put in place a new organizational structure focused on 
taxpayers, not geography, put in place a new management process 
for setting strategic priorities and allocating resources, put 
in place new organizational employee performance measures, and 
has issued reliable annual financial statements.
    These modernization accomplishments on the left side of the 
graphic are beginning to affect the goal of improving service. 
Taxpayers are more likely to get through to IRS's centers when 
they call and now use the Internet to download hundreds of 
millions of tax forms and check the status of their returns. 
Nevertheless, the IRS is still not where taxpayers and Congress 
expect it to be.
    Perhaps IRS's most significant challenge is its compliance 
goal. IRS does not have a reliable measure, the extent to which 
taxpayers are currently complying with the tax laws. This is 
risky, because many, but not all of IRS's compliance and 
collection programs, such as audits, have experienced large and 
pervasive declines in recent years. The declines show up in 
staffing, cases deferred and the inventory of uncollected tax 
debts with some collection potential, which is now at $112 
billion.
    The declines have caused concern that taxpayers may have 
less confidence that their friends, neighbors and business 
competitors are paying their fair share and thus less incentive 
to fully report and pay their own taxes.
    In addition, IRS still faces challenges improving service. 
For example, despite progress, callers get either busy signals 
or a hang-up before receiving service too often. Modernization 
is the means for achieving IRS's goals, but there are 
challenges in each of the areas on the left side of the 
graphic. The scope and complexity of business systems 
modernization projects continue to increase, while IRS's 
systems management capacity is still maturing.
    IRS will be challenged to ensure that the pace of acquiring 
systems does not exceed the agency's ability to manage such 
acquisitions. The policies and guidelines for computer systems 
security are not fully implemented. In managing and judging its 
performance, IRS needs to have objective measures that are 
comparable across time, set goals so the progress can be judged 
against the goals, conduct more program evaluations to learn 
what worked and why and better link budget requests with 
program results.
    Despite clean opinions on its financial statements, the 
information is available only after the year's end. Managers 
need current financial information for day-to-day decision 
making.
    IRS needs to employ a strategic approach for managing human 
capital that includes identifying staffing and training needs. 
Finally, IRS has been challenged to increase staff in priority 
areas, especially compliance, as called for in recent budget 
requests. The number of staff who conduct audits and collect 
delinquent taxes is lower in 2002 than in 2000. Reasons for 
this include unbudgeted costs and an inability to fully realize 
internal savings intended to allow staff reallocations.
    Also, the growth in electronic filing is slowing. Based on 
current growth rates, IRS will not achieve its goal of having 
80 percent of returns electronically filed by 2007. Slower 
growth in electronic files will reduce IRS's ability to shift 
resources out of paper return processing.
    In conclusion, IRS has come a long way from where it was in 
the mid-1990s. Taxpayers and Congress are beginning to see some 
payoff from the oversight and money invested in IRS. However, 
the challenges facing the new Commissioner are significant. The 
same focus on management fundamentals, the means to the end 
that proved successful over the past 5 years should help deal 
with those challenges.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions.
    Mr. Houghton. Thanks very much.
    [The statement of Mr. White follows:]



    
    Mr. Houghton. I just really have a general question on 
compliance, and anybody who wants to sort of chime in, I would 
appreciate it.
    We have had the commissioner here, and we have talked about 
compliance, and we know there's a problem, and we have got to 
do something about it, but, you know, I look, Mr. White, at 
those key modernization challenges as you spell out in your 
testimony. First is delivering modernized business systems. 
Second is ensuring computer systems security. The third is 
improving performance, financial and so on and so forth. And 
way down at the end is compliance. It always seems that 
compliance comes at the end. We have given the IRS quite a bit 
of money over the years, but we haven't really touched the 
compliance area now. So now, Mr. Levitan, I think that you've 
mentioned something like--I haven't got it right here in front 
of me--$172 million more for the compliance issue. Is that it? 
Why will that go into compliance? Why won't it go into the 
business systems or the computer systems? Why is it always get 
short thrift here?
    Mr. Levitan. Mr. Chairman, our budget recommendation 
includes additional money over and above the President's 
recommendation for both service, compliance and business 
systems modernization. We think each of these areas deserve 
additional funding, and we can get specific payback in each of 
these areas. We are very concerned about compliance.
    We have seen some very positive steps, in that the IRS is 
trying to use the resources it has more efficiently and more 
effectively than they have in the past. We applaud that. They 
should continue to do that.
    The President has recommended increased resources for 
compliance, and we recommend additional resources over and 
above that. We think that that will pay back well above the 
investment made.
    Mr. Houghton. Well, I can't disagree with you at all, but 
we have heard this before. I'm not trying to pick on you, but 
we have heard this before, and we know there has been a steady 
deterioration in number of the compliance people. And trying to 
pick it up from the bottom now is going to take a human task.
    But my question is, with all these other objectives out 
here whether the money is ever going to filter down to the 
compliance area. Maybe others would have a comment here.
    Mr. White. Mr. Chairman, the four key modernization 
challenges there are all meant to improve management in IRS and 
improve the efficiency with which it uses resources, and in 
that sense, they all--they would all contribute to achieving 
IRS's goals, both the service goal and the compliance goal.
    I would also note that IRS has been challenged in the last 
several budgets when they have requested additional compliance 
resources. Those budgets were generally fully funded, but 
they've been unable to actually realize the increased 
resources. Unbudgeted costs and so on have eaten up the 
resources that were intended to go into compliance.
    Mr. Houghton. Why won't that happen again?
    Mr. White. That is a real concern.
    Ms. Olson. Mr. Chairman, I can only say that in our 
internal conversations among the senior leadership of the 
Internal Revenue Service, that daily and weekly we discuss that 
very issue, and it is our commitment--and I can say even as the 
National Taxpayer Advocate, it is my commitment--that funding 
for compliance is used for compliance, and we are all taking a 
hard look at our individual entities and organizations' 
priorities to make sure that we are protecting the compliance 
monies.
    I think we all feel that it is a fundamental need for the 
IRS to be out there with a presence. Some of the modernization 
is keyed tightly to better enforcement activity. The ability to 
select appropriate cases for audit or the appropriate cases for 
collection and the right kind of collection effort, whether it 
is a letter or a human contact or a phone contact or a face-to-
face contact--all of that depends on modernization.
    Mr. Houghton. Well, unless the Lord thinks otherwise, we'll 
all be here next year, and we'll remember your words.
    Have you got any comments, Ms. Gardiner?
    Ms. Gardiner. Well, actually, in my testimony I also 
alluded to the fact that modernization--one of the reasons that 
it is so key is because it impacts almost every other aspect of 
the IRS, and that would be customer service as well as 
compliance. And I will say, though, that it does appear that 
things are getting a little better than they were in '96. All 
of the things--like leins, levies, seizures, those numbers are 
going up. The compliance activities have improved. It is 
accounts receivable and nonfiled returns that seem to be the 
one thing that really hasn't turned around as quickly as folks 
would like to see that change.
    Mr. Levitan. Mr. Chairman, we can't hide from the fact that 
over the past ten years the head count at the IRS is down 16 
percent. The workload is up dramatically. Those are facts. We 
have to process the tax returns. We have to answer the 
telephone. Something is going to get squeezed out.
    Ms. Gardiner. If I may add also, the National Research 
Program is--you don't want to use your compliance resources 
ineffectively, obviously, so getting more to do the same thing 
isn't a great solution either. The National Research Program, 
hopefully, will provide information that will allow them to use 
their resources in the best possible way to not look at people 
and do examinations on taxpayers where there is no change. So 
they don't go through all the effort and burden without any 
outcome.
    Mr. Houghton. Well, just a final--and going back to Mr. 
Levitan's comments, something is going to get squeezed out, but 
it has always gotten squeezed out, and it has all been in terms 
of compliance. And there are always going to be dollar 
pressures here. I guess the thing that we have all worried 
about is the whole concept of the trust that people have in the 
IRS system. That is the thing we can't erode any further.
    Mr. Pomeroy.
    Mr. Pomeroy. Thank you, Mr. Chairman. Continuing on in your 
theme, I'm going to direct my comments to the testimony of Mr. 
Levitan. And I do think it is striking, from 1992 to 2002, IRS 
workload increased by 16 percent, while at the same time the 
number of full-time equivalent employees decreased 16 percent. 
As more resources were needed for IRS to provide essential 
services such as processing returns and answering 
correspondence, resources were shifted from discretionary 
operations such as compliance activities.
    Now, North Dakota, where I come from, we would call that 
eating your seed corn. You diminish compliance, you diminish 
revenue collected, and, indeed, you can get to the point where 
the integrity of enforcement itself is broadly called into 
question or worse yet, disrepute.
    Mr. Levitan, as long as I'm working with your testimony 
here, you indicate a number of actions that you recommend as 
part of the Oversight Board. Close the compliance gap, focus on 
people resources. You talk about a pending crisis with 
departure of seasoned personnel that have put their career at 
the IRS, retiring in large numbers in the next 5 years, don't 
see people come along in the pipeline to do it? In your 
opinion, is developing this professional capacity within the 
Service one of its greatest imperatives at this time?
    Mr. Levitan. I think that this is one of the greatest 
challenges that the IRS has now. It is not that dissimilar from 
many government agencies today. We have an aging workforce. We 
have much of that workforce either at or approaching retirement 
age. It is going to be a real challenge to rebuild that 
workforce.
    In addition to that, if you look at the history over the 
past decade, the IRS has been out of the recruiting market. 
They have not been recruiting new people for the past ten 
years. So that makes the problem even more serious. We have 
recommended to the IRS that they take a very hard and strategic 
look at their entire human resources programs and make sure 
that there is a program in place to handle this as this 
eventuality comes to play.
    Mr. Pomeroy. I think that is something we'll want to keep a 
very close eye on, whether or not they are getting plans in 
place to build that professional capacity. I see something 
quite different. I see a reliance on outside consultants. You 
know, three quarters of a billion dollars spent so far on the 
business systems modernization and the Inspector General's 
office telling us the heavy lifting is still to come.
    Ms. Gardiner, do you have any evaluation at all in terms of 
the reasonableness of these costs and whether or not we are 
becoming too dependent on consultants versus in-house----
    Ms. Gardiner. Well, if I comment only on modernization. I 
think IRS, because of the prior problems with modernization and 
the fact that they spent $3 billion and didn't get much, 
recognized that they really didn't have the expertise in-house. 
And I think it was very legitimate for them to turn to 
consultants to help them, but that has been, probably, the 
biggest problem, that they recognize. IRS didn't even know the 
right questions to ask in many cases, and they thought that the 
PRIME would provide that kind of expertise. You know, think 
about doing it this way or do it that way, or here is the 
latest technology. And that really hasn't come to bear as much 
as one had hoped, and that has caused some of the problems, 
that they don't understand the IRS processes as well as they 
should, and sometimes they aren't asking the right questions. 
It really has required IRS to ask the questions of themselves, 
and they knew that they really weren't that good at that.
    Mr. Pomeroy. I am struck by the fact under the law the 
Oversight Committee prepares a budget and Congress gets to see 
the budget, even though the Administration recommends a 
different figure, and that the difference between what the 
Oversight Committee believes a service needs, and what has been 
recommended, is $287 million, with a big bite of it coming out 
of the processing, administration and management function and 
another out of tax law enforcement and business systems 
modernization.
    These I think are very seriously disturbing developments 
which raise a question in terms of whether we are on track to 
build back this in-house capacity.
    Ms. Olson, I think for a taxpayer, what does this mean to 
them, do you have an evaluation in terms of what is in the 
taxpayers' interest, a strong professionally-staffed IRS versus 
an understaffed IRS, dependent upon outside consultants here, 
private bill collectors there, and this kind of jerry-rigged 
system we seem to be launching into?
    Ms. Olson. Well, I have a concern about the use of outside 
consultants, particularly, as Ms. Gardiner addressed, with 
regard to the work processes of the IRS. And what I have 
witnessed coming into the IRS the last two years is some of the 
most knowledgeable employees of the IRS deferring to outside 
consultants on process issues, on structural issues, on 
redesign issues. I've not had as much experience with the 
actual information technology side, and I have expressed my 
concern about that. We actually had an experience of having the 
benefit of some consultants in reviewing the vision of the 
Taxpayer Advocate Service, where it should be in 5 years. It 
was an interesting education, I think, for the consultants, 
because you had an informed business owner who was saying, 
excuse us, we'll tell you where we are going to be in 5 years, 
and you will help us design what that is going to--you know, 
how we are going to get there, but we have our vision, thank 
you very much.
    I think that arrangement was very successful, but I do not 
see that being reproduced in the rest of the IRS. So weaning us 
off consultants would be a very good thing.
    And once you wean them you have to have a trained 
workforce, and the IRS really is trying but is very much behind 
in training its employees and putting its resources into 
training. If you don't train your employees, they don't feel 
professional, they don't feel on top of the job, and in 
customer service jobs, they feel threatened by the taxpayer who 
may know more than they do. It is a very difficult situation, 
and a serious one.
    Mr. Pomeroy. I used to run an agency, an insurance 
department, and I think the concerns you have go to just 
general management issues, public or private sector. We have 
got to give our people the training they need to feel 
professional, and they can professionally and competently 
perform their responsibilities.
    I thank the panel for their response to my questions.
    Thank you very much, Mr. Chairman.
    Mr. Houghton. Thank you very much.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman, and I thank the 
panelists for not just being here today, but for what they are 
doing as they are stakeholders in this system along with the 
taxpayers in being watchdogs and making sure that the IRS 
continues to try to meet--as Commissioner Everson said, the 
promise of the 1998 reforms which are not fully realized.
    I'm glad to see some IRS folks are still here to listen to 
this testimony, and I am sure they will be reviewing what you 
are saying.
    Five years out and we have made progress, but we haven't 
achieved what we had hoped to. I would say, although this is 
dangerous to apply a grade to it, being a father of three 
children who get report cards on a quarterly basis, I guess I 
have some basis, but I would say about a B minus. You can't 
ignore the fact that we have made progress in almost every 
category, and that includes electronic filing which was about 
16 percent when we started this enterprise, now it's about 41 
percent. That is a huge advantage to the IRS and to the 
taxpayer, because about half of the 22 percent error is caused 
by the IRS, which then comes back to the taxpayer and all the 
hassles downstream.
    So the 16 percent reduction in employment doesn't worry me 
as much as we have these sorts of things happening. 
Modernization will require fewer people to do the same job 
better.
    The opinion surveys conclude the American customer 
satisfaction index survey shows that we are doing better. The 
IRS was at the bottom of the pile. Now, they are partway up in 
terms of the way people view the Service. So customer 
satisfaction or taxpayer satisfaction has increased. Still it 
is not what it should be, but it has increased. Phone service 
is now better. We talked earlier about the fact that we have 
gone from millions of busy signals to 250,000 busy signals. 
Eighty-four percent of taxpayers got through instead of 69 
percent just last year, so we are doing better. Still not where 
we should be in terms of modern service institutions around the 
country providing better and better service, and the IRS hasn't 
caught up, but we are doing better. The walk-in centers are 
working well. The assistance is better according to GAO, Mr. 
White. The Oversight Board makes the point continually, which 
it should, that Congress keeps complicating the tax code. We 
talk about simplification, and we are constantly changing the 
law. Even if it is not making it more complicated, just a 
change sometimes causes enormous disruption at the IRS. So that 
is an additional burden you have on you.
    The 16 percent, again, increase in workload is not too 
troubling to me over the last decade. I think--I'm surprised it 
is not higher. I guess it depends what you consider to be 
workload. But it is that change in the tax code and the 
continual challenge to keep up with that and be able to provide 
information to taxpayers that I find interesting.
    I think it was GAO that studied whether people were getting 
the correct answer or not. I think that is now up to 70 to 80 
percent where people are getting the correct answer when they 
ask the IRS a question based on your listening in on phone 
calls, and that is a vast improvement from when we started this 
process, where I believe it was under 50 percent. But I wonder 
how your people know it is the right answer. If you put eight 
accountants in a room, they will give you eight different 
answers to some of these complicated questions, and the IRS 
will give you a ninth and tenth answer. I don't know much about 
your methodology, but the point is it is better, but we still 
have some challenges, some of which you state right here. I 
think there are two challenges you all have identified that are 
obvious ones, and otherwise the grade would be even higher, and 
one is that even though we have made the point continually, and 
I to ask the panel whether they agree with it still, that 
better service is not inconsistent with more and better and 
more efficient enforcement compliance. Certainly the private 
sector has found that, whether it is a credit card company or 
an airline or anybody else in the service business. As they 
improve their service to the customer, they actually improve 
their compliance, and that was the goal with regard to the 
Commission and the reform legislation.
    I would just ask that general question, do you all still 
believe that? Were we wrong? Have we improved service, and yet 
compliance has gone down? The notion was to improve service and 
compliance would increase. I guess without prejudging your 
answers to that, one issue obviously is that modernization has 
not caught up yet to where we want it to be, and, modernization 
meaning just better service through better technology, will 
help on compliance once we turn the corner, which, hopefully, 
will start happening here in the next 12 months as we begin to 
get our systems even further in place.
    And second is the question of, I guess, the natural thing 
here in Washington, which is the pendulum tends to swing when 
you focus on customer service in terms of the fiscal side. In 
other words, the budget gets increased there, you have less 
resources on the other side. But do you all still think that by 
focusing on service, we can improve compliance? Maybe Mr. White 
could begin, then Mr. Levitan, Ms. Gardiner.
    Mr. White. Mr. Portman, you are right that there needs to 
be a balance. There's no doubt that better service will help 
compliance to some extent. There are also a group of taxpayers, 
however, that will not comply because of better service. So you 
need both enforcement efforts and service.
    One of the fundamental problems here is the lack of basic 
management information, because IRS does not have a current 
measure of the--of voluntary compliance. It is difficult to 
know what the impact of service is on compliance right now.
    Mr. Portman. Do we expect to have that with the new 
compliance program? While the national research program, if 
they implement it as planned, should provide them much better 
management information than they have now about voluntary 
compliance, and should help them better make decisions about 
the most effective way to increase compliance.
    Not just measure it, but be able to target it more 
efficiently?
    Mr. White. Yes.
    Mr. Portman. Good point.
    Larry.
    Mr. Levitan. The Board absolutely believes that customer 
service, that is service to taxpayer, and compliance 
enforcement are two absolutely necessary roles and 
responsibilities of the IRS.
    They cannot be separated. You should not have a pendulum 
swinging back and forth, although clearly what we have seen is, 
from a noise level, that pendulum has swung.
    Back in the time of the restructuring commission, there was 
a tremendous concern about service. Now, there is a much 
greater concern about enforcement. But we need to have a steady 
course. One of the major recommendations that the board has 
made is that the IRS establish long-term goals in both of these 
areas: Where do we want to be in service in the long-term? We 
talk about improvement from 50 percent to 70 percent. But is 
that enough? We need to have a long-term goal that all of our 
programs are focused on in both the enforcement and compliance 
area as well as the service area.
    We did establish a long-term goal for electronic filing. 
That has been a useful tool because the entire--the programs 
have been focused on trying to attain these goals. So we would 
hope to see that the IRS would, working with Congress and with 
the administration, establish those kinds of goals.
    Representative Portman. It is extremely important. I know 
the goal of 80 percent electronic filing by 2007 was criticized 
a little earlier this morning, and I understand that may be 
unrealistic. We won't know, as the Commissioner said, until a 
couple of years, because we are seeing some improvements in the 
technology side, particularly with regard to outreach.
    And he did mention that the more complicated returns and 
business returns is where we ought to focus, not just on a 
percentage. But I think that is very helpful to have that goal 
out there. To go from 16 to 41 percent in electronic filing 
only happened because we put a lot of pressure on the system.
    Ms. Gardiner.
    Ms. Gardiner. Yes, I certainly believe that the customer 
service improvements help compliance. The examples in our 
testimony were toll-free and walk-in. It actually was my office 
that did the monitoring of the telephone calls. We monitored 
them with an IRS employee, and we worked with them to ensure 
that we both agreed that it is correct or incorrect. So we are 
somewhat relying on their opinion as well as ours.
    For customer service in terms of walk-in, at one point in 
time it literally was a flip of the coin. If a taxpayer came in 
and asked a question it was, like as you had indicated, about 
50 percent. I think it was actually 52 percent. But now, it is 
a little closer to 70 percent.
    But another feature that is very important to us that has 
improved dramatically over the past year is that about a year 
ago when we sent our auditors in anonymously and they posed 
questions, basic tax law questions to IRS employees, in many 
cases the IRS employees said, Oh, it is in this publication, 
and just handed to it our folks. We didn't consider that 
customer service. And yet the IRS considered that a correct 
answer if the publication had an answer in it.
    That has changed dramatically. They now will either not 
refer to the publication and just give the answer, which is, of 
course, the best scenario. But in other cases, they will turn 
to the page in the publication, explain where it is. So those 
kinds of things help people comply with the tax law, obviously.
    Representative Portman. Ms. Olson.
    Ms. Olson. I do not think that you can have enforcement 
without customer service. I am concerned about the day-to-day 
experiences of taxpayers, and our employees not feeling like 
they have permission to treat taxpayers in the appropriate way, 
or the tools to treat them. That is one of the reasons why I 
covered CDP in my testimony, because what you see there are the 
day-to-day experiences of IRS employees viewing these taxpayer 
protections as nuisances because they can't get their job done, 
which is enforcement.
    The quality measures, the way that you measure IRS 
employees and what you measure them on, is vitally important to 
getting the message across that customer service counts as much 
as the business results. And if you just measure them on did 
they hand them the Publication 1, and you don't measure them on 
did you discuss what were the issues that are covered by 
Publication 1, then you are going to get results that are just 
lip service to customer service and not meaningful.
    I think it has to start at the top. And I don't think it 
has entirely filtered down in our management processes that 
these are equal measures. I am concerned about that.
    Representative Portman. Well, Mr. Chairman, my time is way 
over, and I appreciate your indulgence. Can I just throw one 
other out there?
    I said that there were two issues where there seems to be 
some consensus that we have existing challenges in order to get 
that grade a little higher.
    One is obviously the whole issue we have talked about of 
compliance enforcement. The other is personnel generally. And, 
Larry, you have talked a lot about this over the years in terms 
of the concern in government generally about retirements and 
not having the workforce.
    The other is morale. And I think morale at the IRS is much 
higher than it was in 1998; certainly it is. But still we have 
issues. The ``deadly sins'' are something that this Congress is 
trying to legislate on, working with the IRS to try to come up 
with more reasonable ways in which to deal with the issue you 
raised, Nina, which is what tools do they have; what can IRS 
employees on the line do or not do?
    And the other is just implementing these changes in a 
cultural way through a huge institution. And you talked about, 
I think early on, this notion of measuring someone's progress 
as an employee at the IRS, not based on how much money they get 
out of the taxpayer, but how professional they are in terms of 
providing good service. And that includes training, courtesy, 
the right answer, and so on. That is a cultural shift that, 
moving from the enforcement mentality more to the service 
mentality, that probably is going to take a while longer.
    Thank you, Mr. Chairman.
    Representative Houghton. Thank you. Mrs. Blackburn.
    Representative Blackburn. Thank you, Mr. Chairman.
    I have a constituent who likes to say that he thinks the 
two most frustrating acronyms in the English language are the 
HMO and the IRS.
    And listening to all of you all today, I think that 
probably you find our very complex Tax Code very frustrating, 
not only for yourself and your employees but also for the 
taxpayers.
    I do have a couple of questions. Mrs. Olson, going back to 
your testimony, and addressing the complexity of the Tax Code 
and doing taxpayer clinics, would you please speak briefly to 
what you plan to do for our electronic filers as we are moving 
these through the process and to the E-file?
    Ms. Olson. I think particularly for low-income taxpayers 
who may not have computers with which to file, or may not be 
computer literate, some of the things the IRS is doing that we 
are certainly working with the IRS about are building 
coalitions with community groups where taxpayers can come in 
and receive free access to electronic filing--they may be able 
to do it themselves, they may have someone else do it--and move 
them away from going to those sites that I have a lot of 
concerns about: check cashing places, pawn shops, gun stores; 
you know, folks who are offering electronic filing in order to 
get access to the refunds.
    Representative Blackburn. A follow-up to that, then. If you 
are going to do this--and in someone's testimony I read about 
doing some training--you were looking at implementing a program 
for training some of those who would be tax preparers, and 
maybe even a certification process. Would you involve these 
individuals in that process?
    Ms. Olson. Absolutely. Those would actually--the unenrolled 
preparers are definitely the target, in fact, of those 
requirements, to make sure that taxpayers know when they go to 
get their returns prepared, and they are paying a fee for it, 
that the folks who are doing it are competent in tax, not just 
opening a storefront.
    Representative Blackburn. Excellent. Thank you.
    Mr. White, going to your testimony, the top paragraph on 
page 8 says: In 2000 the IRS implemented a new strategic 
planning and budgeting process that provides the framework for 
developing goals, objectives, and measures at the operating 
division level, although we have not evaluated the effect of 
the process on IRS performance, the operating divisions, or 
identifying strategic goals.
    Now, we have talked a lot, going back to the Chairman's 
first question, we have talked about morale, human capital, 
process and priorities, and the importance of that, and how 
there is, you know, it is kind of like the big elusive ``they'' 
that is out there.
    We are talking all around it but not talking about setting 
down some solid priorities, some solid benchmarks, the goals, 
how they will be met. Why have you all chosen not to evaluate 
the strategic planning and budgeting process?
    Mr. White. That is a good question. And the Restructuring 
Act, I think, did a very good job of setting some very high-
level strategic goals for IRS to improve customer service while 
ensuring compliance.
    IRS has put in place this process for trying to set 
priorities internally. And I think the fundamental answer to 
your question is the lack of management information inside IRS; 
that without better data about compliance, for example, it is 
very difficult to evaluate the impact this new process has had.
    IRS managers get together with the Commissioner to allocate 
resources internally, to decide whether to put more resources 
into up-front education programs, for example, or more 
resources into compliance efforts.
    All of those programs are intended to have an impact on 
compliance. But without a measure of compliance, IRS and 
outside observers are unable to determine the effectiveness of 
it. And so it shows the importance of investing and collecting 
better information about compliance.
    So you have got this kind of fundamental management 
information. And the NRP program that we have discussed a 
couple of times here is intended to do that. They have started 
implementing that. It is going to be a couple of more years, 
though, before they have the data available for that, so they 
have got a more data-based basis for making these kinds of 
decisions.
    Mr. Levitan. Mrs. Blackburn, if you don't mind, we have--
while I absolutely agree with what Mr. White is saying about 
the need for better data, particularly about enforcement and 
compliance, one of the areas that I think the IRS has done 
quite a good job on is strategic planning and laying out a 
plan, objectives, setting goals, where they do have good data 
for their organizational units, and then integrating that 
planning process into their budgeting process.
    We have been intimately involved in reviewing that and 
discussing that with IRS, and think that they do quite a good 
job of that. We think the primary challenge that they have is 
not so much the planning and defining what they need to do, but 
the executing of that and making it happen.
    Representative Blackburn. Thank you. I see my time has 
expired.
    Representative Houghton. Thank you very much.
    Well, Ms. Olson, Ms. Gardiner, Mr. Levitan, Mr. White, 
thank you very much for being with us today.
    There being no further business before the joint review, 
the hearing is adjourned.
    [Whereupon, at 12:10 p.m., the committee was adjourned.]

   Questions for the Record Addressed to IRS Commissioner Everson by 
                      Senator Charles E. Grassley

    1. You testified that you plan to bring in a contractor to review 
Business Systems Modernization, in an effort to determine progress to 
date, risks facing the program, and any potential midcourse 
corrections. I would like to know who will be undertaking this study 
for you, how long you expect it to take, and how much it will cost. I 
would also like to know whether you would be able to brief my staff on 
the results of this study and on the actions you decide to take because 
of it.
    Answer. At this time, we have not yet identified who will be 
conducting this ``health check'' of the Business Systems Modernization 
effort. We are evaluating several independent firms, and hope to have 
an announcement within the next few weeks. We do expect that any review 
will last between four and six weeks, and cost the IRS about $200,000. 
We will be happy to brief you when we have the results of this work.
    2. RRA '98 authorizes the Commissioner of Internal Revenue to hire 
40 ``critical pay'' staff. These people are executive level employees 
who are hired, outside of the conventional Senior Executive Service 
Parameters, for a fixed term. A number of these slots are vacant and a 
number of the filled slots are, quite candidly, devoted to positions 
that RRA '98 writers did not envision. Former Commissioner Rossotti 
indicated to me at the end of his term that he simply could not keep 
the IRS on the right path (i.e., organizational redesign and technology 
modernization) without these critical people. I would like to know how 
you plan to use your critical pay authority. Specifically, do you see 
yourself focusing critical pay employees in a particular area of the 
organization? Do you plan to retain all of the positions that you 
inherited?
    Answer. The streamlined critical pay authority has been a highly 
flexible, indispensable tool to the IRS and has proven enormously 
beneficial as we plan, direct, and implement our extensive 
reorganization and modernization efforts. As I have previously 
testified, there are three areas on which I intend to focus during my 
tenure as Commissioner: (1) continue to build upon the reorganization 
begun by Commissioner Rossotti; (2) continue to drive the information 
technology modernization program, and (3) strengthen the integrity of 
our nation's tax system through enhanced enforcement activities.
    I believe the model of matching experienced IRS executives with 
business executives from outside the Service has been very effective in 
bringing other perspectives and new ideas to tax administration. With 
that in mind, I intend to continue to use the critical pay authority to 
recruit and retain exceptionally well qualified business executives 
from outside the Service to fill positions that are critical to the 
Service's successful accomplishment of its mission, and that require 
expertise of an extremely high level with significant experience 
outside the IRS.
    I will continue to establish streamlined critical pay positions 
based on the needs of the organization. Although I anticipate our 
strongest needs for outside expertise will fall mostly in the areas of 
information technology, enforcement, and customer service, I do not 
plan to focus on a particular area of the organization. Rather, I will 
strive to maintain a balance across the organization of leaders from 
both inside and outside the Service. All positions established to date 
have made significant contributions to the Service; however, positions 
will not automatically be backfilled as they become vacant. In each 
case, we will reassess the need for the position, as well as the need 
for outside expertise and the continued use of critical pay authority.
    3. As I indicated in my opening statement, I am quite concerned 
about human capital issues at the IRS. The agency's senior human 
resources position is vacant. Many of the agency's employees are 
eligible for retirement, or will be eligible within the next five 
years. Steve Nickles, who recently left the IRS Oversight Board, tells 
me of his concern that the agency does not effectively manage its 
training dollars either a) in the sense of having a rational medium-to-
long term training plan for individual employees or b) in the sense of 
being able to track training expenditures to individual employees). I 
suspect that you are in a position in which, if you manage human 
capital issues, you will be able to make a significant difference in 
the satisfaction of the agency's employees and in the medium and long 
term performance of the entire agency. How do you plan to ensure that 
human capitol issues are aggressively managed? What near term goals do 
you have? How will those who oversee IRS be able to tell that the 
agency is moving in the right direction, at an acceptable speed and 
cost?
    Answer. I agree with the observation that IRS needs to do more to 
increase the effectiveness of its training programs. In this regard, we 
are replacing our legacy training management system with a new Learning 
Management System (LMS) that will greatly improve the amount of 
information available to IRS managers about employees regarding 
organizational training needs. The LMS will allow the Service to more 
closely link training to competencies and to employees' career plans by 
allowing them to electronically create and monitor individual 
development plans. Our managers will use competency-based skills 
assessments and ``gap'' analyses to design customized training plans to 
meet their organizational and employee needs. This new capability 
should contribute to increased employee satisfaction and improved 
individual and organizational performance. In addition, we have 
developed an evaluation approach that measures how much time it takes 
to build a critical mass of skills in key occupations. This methodology 
will give our business units the much-needed ability to gauge how 
quickly their key human capital talent needs are being addressed.
    We have also made significant progress in assessing and improving 
the quality, quantity, and effectiveness of leadership training and 
development within the IRS. We continually monitor a comprehensive set 
of performance indicators relating to front-line manager, senior 
manager, and executive leadership development activities to ensure 
their on-going effectiveness and continuous improvement. Some of the 
factors taken into account in the assessment include instructor 
effectiveness, cost, curriculum usefulness, timeliness, student 
satisfaction, and enhanced job proficiency. As a next step, we are 
developing more rigorous performance measures for evaluating our 
development efforts to provide a more systematic, in-depth assessment 
of organizational impact. Finally, we are making a determined effort to 
improve the financial data available to our senior leaders by 
integrating, where possible, our training and development activities 
with our corporate financial systems to improve the tracking of 
expenditures in the core training curricula.
    As we all have learned, changing times demand new thinking and new 
approaches to the way we manage our people. Designing, implementing, 
and maintaining effective human capital strategies are critical to me. 
I intend to be actively engaged in assessing and improving human 
capital management practices as part of my effort to bring more 
accountable, results-oriented management to the IRS. Very shortly, I 
will appoint a Chief Human Capital Officer who will be charged with 
leveraging the Service's human capital policies, programs, and 
practices to more fully integrate and align them with the IRS' overall 
planning and decision-making processes. The ``bottom line'' is that I 
want the IRS' human capital program to be strategically focused and 
demonstrate how and where it adds value to our core mission and 
strategic priorities. Specific initiatives we will undertake include:
           Continuing the effort to streamline, modernize, and 
        automate recruitment, marketing, hiring, and succession 
        planning systems to bring quality people on the job more 
        quickly.
           Continuing the effort to develop an enterprise e-
        learning strategy to shift from a classroom-based to a 
        technology-enabled learning environment by partnering with OPM 
        to leverage the use of the Go Learn initiative to increase the 
        efficiency and effectiveness of our training activities.
           Continuing the refinement of our employee 
        performance management system to strengthen the correlation of 
        individual accomplishments to business results. IRS managers 
        are currently evaluated and rewarded on their individual 
        contribution to specific business results and I would like to 
        provide this opportunity to all employees.
           Expanding broadband pay-for-performance systems to 
        all IRS supervisors and managers with consideration given to 
        applying it to the general workforce. From a business 
        standpoint, pay-for-performance is critical since it provides 
        higher pay for higher performance and gives IRS managers 
        flexibility similar to what exists in private sector knowledge-
        based professional services organizations.
           Reorganizing the Office of Strategic Human Resources 
        to better position this function to where it can best support 
        the core mission and move that office to a more focused, 
        streamlined, integrated, and results-oriented organization. 
        This effort will also include a broader examination of IRS' 
        three-part human capital organizational structure/mission (a 
        strategic component, embedded expertise, and shared services) 
        to ensure that it is best suited to efficiently and effectively 
        lead the transformation of IRS to a true human capital 
        organization.
    The President's Management Agenda initiative for the Strategic 
Management of Human Capital requires the IRS to rigorously assess its 
human capital policies and practices to ensure they are moving in the 
right direction at an acceptable speed and cost. With this impetus, we 
are currently developing a hierarchy of new strategic human capital 
metrics that will provide a more systematic, data-driven assessment of 
our progress towards achieving our human capital aims and assist us in 
analyzing root causes of problems and issues--thereby improving our 
ability to maximize the value of our human capital investments while 
managing the related risks. When implemented, the data will be made 
available to those who oversee the IRS.

   Questions for the Record Addressed to IRS Commissioner Everson By 
                           Senator Max Baucus

    Background: Congress created the earned income tax credit in 1975 
as a bipartisan effort to reduce the tax burden on low income 
Americans, while giving a powerful incentive to work. President Reagan 
hailed the expansion of the EITC in 1986, as the ``best anti-poverty, 
the best pro-family, the best job creation measure to come out of 
Congress.'' It is estimated that nearly 4.8 million people, including 
2.6 million children, are lifted out of poverty every year because of 
the earned income tax credit.
    Questions.
    1. There is some confusion regarding IRS's plans with regard to its 
proposed EITC ``precertification'' program, especially with regard to 
whether there will be a public comment period for the new forms that 
selected families will be required to submit. Will there be a public 
comment period on the forms and documentation requirements? If not, why 
not? If there will be a public comment period, when will it be 
announced? Will the comments be reviewed and considered before the 
forms are mailed to the first 45,000 families this summer?
    Answer. We are working closely with affected stakeholders, and have 
incorporated many of their concerns and comments into the draft form. 
In addition, on June 13th, we issued an announcement (Announcement 
2003-40) requesting public comment on the EITC residency certification 
pilot. We welcome all comments and suggestions on how taxpayers can 
establish that they are entitled to the credit because a qualifying 
child resided with them for more than half the year. Concerns expressed 
by stakeholders prior to and in response to this Announcement will be 
carefully considered by the IRS and Treasury Department in developing 
the certification pilot and will be considered before contacting the 
initial 45,000 participants in the pilot project. During the comment 
period, we will continue to work with Congress and other interested 
stakeholders to ensure the best possible program.
    2. Since becoming IRS Commissioner, have you had a chance to 
thoroughly evaluate the proposed pre-certification program? Did your 
evaluation examine not only the impact of the program on compliance, 
but also its impact on participation? To what extent will the pre-
certification initiative deter or block families who are truly eligible 
from receiving the credit? How does the IRS intend to remedy the 
potential adverse impact on eligible recipients of the EITC?
    Answer. I have evaluated both the current administration of the 
EITC and the administrative proposals (which include the certification 
initiative). The EITC participation rate is very high, and we will make 
every effort to ensure that any changes in the administration of the 
program do not deter participation by eligible claimants. As a result 
of my review, the IRS has announced a 5-point EITC initiative to (1) 
reduce the backlog of pending EITC examinations to ensure that eligible 
claimants receive the refunds quickly, (2) minimize the burden and 
enhance the quality of communications with taxpayers by improving the 
existing audit process, (3) encourage eligible taxpayers to claim the 
EITC by increasing outreach efforts and making the requirements for 
claiming the credit easier to understand, (4) ensure fairness by 
refocusing compliance efforts on taxpayers who claim the credit but are 
ineligible because their income is too high, and (5) pilot a 
certification effort to substantiate qualifying child residency 
eligibility for claimants whose returns are associated with a high risk 
of error.
    The IRS will evaluate the effects of the certification pilot on 
participation, and will use this information to further refine the 
certification process.
    3. We understand that the IRS plans to expand these new 
requirements to two million filers starting next summer without waiting 
for the full evaluation results, and in particular, without waiting for 
results on the impact of the initiative beyond roughly the 45,000 level 
before the evaluation has been completed and the answers to these 
questions are known? If so, please explain the rational for proceeding 
without conducting an appropriate evaluation?
    Answer. We will not expand the qualifying child certification 
proposal arbitrarily. The IRS intends to evaluate the qualifying child 
certification pilot during pre-filing, filing and post-filing stages. A 
decision to expand the certification program will only be made after 
consideration of claimant response to, and IRS operational experience 
with, the pilot.
    4. The latest draft of the new pre-certification forms and 
requirements available from the IRS would require tax filers to produce 
documents that will be impossible for significant numbers of eligible 
tax filers to secure despite their best efforts. Specifically, it 
appears that if eligible filers cannot find a third party to fill out 
the affidavit who fits one of the IRS' categories, the filers could be 
denied the EITC. What is the IRS doing to address this problem so that 
eligible filers are not denied the EITC because they cannot produce 
documents that are impossible for them to secure?
    Answer. Under the certification pilot, taxpayers will only be asked 
to submit documentation showing that the claimed child lived with them 
for more than half the year and will not be asked to submit 
relationship documentation. Affected taxpayers will be given multiple 
ways and multiple sources to demonstrate that they meet the EITC 
residency requirement. The IRS is continuing to seek outside 
stakeholder feedback, through Announcement 2003-40 and through taxpayer 
and practitioner focus groups, on suggestions for other credible 
sources of documentation. In addition, claimants who cannot obtain the 
suggested documentation can seek help at an IRS Taxpayer Assistance 
Center or through a special toll-free number to speak with IRS 
personnel specializing in the EITC qualifying child certification 
process. The IRS will evaluate the effects of the certification pilot 
on compliance, participation, and taxpayer burden, and will use this 
information to further refine the certification process.
    5. The pre-certification initiative would require a group of hard-
working, low-income families to submit forms to IRS and go through a 
procedure required of no other group of tax filers. Treasury Secretary 
Snow was recently asked about the EITC pre-certification program during 
a luncheon speech he gave at the University Club. Secretary Snow 
indicated that the IRS also would be doing something to ``pre-certify 
the rich.'' Could you explain how the IRS intends to ``pre-certify the 
rich?'' How would this program work? What taxpayers would be targeted? 
When will it be initiated?
    Answer. We already collect information about many sources of income 
and some deductions and credits. For example, mortgage interest is 
reported to taxpayers and to the IRS by mortgage companies on Form 
1098. Divorced, noncustodial parents must attach a waiver from the 
custodial parent to their tax return in order to claim a dependent 
exemption. Employers must obtain state certification that an employee 
is a targeted group employee before claiming the Work Opportunity Tax 
Credit. In other situations, the IRS requires taxpayers to provide 
additional information about claimed tax benefits. For example, we 
recently issued regulations requiring the disclosure of tax shelters 
that may be abusive. In addition, we are developing a process for the 
Health Coverage Tax Credit (HCTC) that would require certain taxpayers 
applying for the advance payment of the HCTC to provide documentation 
(the COBRA election form) to the IRS before payments are made to the 
insurer on their behalf. We continually try to balance the need to 
collect information for tax law enforcement with the need to minimize 
taxpayer burden.

   Questions for the Record Addressed to IRS Commissioner Everson By 
                           Senator Carl Levin

    Questions from Senator Carl Levin:
    1. Please describe the new EITC rule to be proposed by the IRS, 
including a detailed description of any heightened certification, 
verification or documentation requirements that would be placed on EITC 
claimants; identify precedents and requirements that would be placed on 
EITC claimants; identify precedents and equivalent existing 
requirements for taxpayers claiming similar tax credits; and indicate 
whether these requirements would apply only to EITC claimants or also 
to other groups of taxpayers claiming federal tax benefits.
    Answer. The pre-certification pilot will require certain taxpayers 
to demonstrate that they meet the residency requirement with respect to 
a child before their EIC claims are accepted. The taxpayers required to 
demonstrate residency will be those who, based on IRS research, are 
more likely to claim children who do not satisfy the residency 
requirement (such as caregivers other than the child's parents and 
fathers who do not file joint returns.)
    Under the pre-certification pilot, a taxpayer will be encouraged to 
fill out a form and provide certain documentation that establishes that 
the taxpayer meets the residency requirement with respect to a child in 
advance of the filing season. To establish residency, taxpayers can use 
records, letters on official letterhead, or affidavits from third 
parties, such as clergy, health care providers, community based 
organizations, and social services agencies, that have information 
about the residency of the claimant and child--either through their 
records or personal experience. Claimants who cannot obtain the 
suggested documentation can seek help at an IRS Taxpayer Assistance 
Center or through a special toll-free number to speak with IRS 
personnel specializing in the EITC qualifying child certification 
process. Additionally, we will assign these claimants a qualifying 
child specialist who will handle his or her qualifying child issues 
from start to finish.
    If the chosen taxpayers choose not to pre-certify, they will be 
required to send in the same forms and documentation with their tax 
returns. Taxpayers who pre-certify will receive their EIC refunds 
faster than taxpayers who send information with their tax returns. 
Taxpayers who do not pre-certify or send in the required information 
with their tax returns will be given an additional opportunity to 
certify residency, after which time, they will be denied the EIC with 
respect to a claimed child, subject to normal appeals rights and the 
ability to contest the denial in Tax Court.
    We are currently developing a process to register taxpayers for the 
advance payment of the Health Coverage Tax Credit, which will be 
similar to a ``pre-certification program.'' As discussed in our 
response to question 2 below, there are other circumstances in which we 
request taxpayers to provide documentation prior to receiving a tax 
benefit.
    2. Does the IRS plan to ask taxpayers, in some circumstances, to 
submit an affidavit to support an EITC claim? If so, please identify 
precedents for requiring taxpayer affidavits in similar circumstances.
    Answer. If a taxpayer uses an affidavit to prove residency, then it 
must be filled out by someone other than the taxpayer or the taxpayer's 
spouse. As stated above in response to question 1, an affidavit from 
third parties is one way to prove residency. We also require taxpayers 
to obtain verification before claiming certain other tax benefits. For 
example, employers must obtain state certification that an employee is 
a targeted group employee before claiming the Work Opportunity Tax 
Credit (WOTC). Although certification for the WOTC does not require 
affidavits, it does require certain forms to be completed by the 
employer.
    3. Please indicate whether the IRS intends to issue the EITC rule 
in a form that will require taxpayers immediately to comply with new 
documentation requirements to obtain the credit, and, if so, why the 
IRS is failing to solicit or consider any public comment or analysis 
prior to these requirements taking effect?
    Answer. The 45,000 taxpayers selected for the pilot will be 
contacted in the latter half of August. These taxpayers will have until 
December 31, 2003 to submit documentation before the filing season. 
Taxpayers who respond by December 31, will avoid any delay in receiving 
their EITC refund. A taxpayer who fails to submit documentation before 
the filing season does not have his or her claim denied at that time. 
Rather, the taxpayer can still submit the required documentation with 
the tax return. There will be a minor delay in the receipt of the EITC-
portion of the refund, while the documentation is processed. If a 
taxpayer has not pre-certified and has not submitted the required 
documentation with the tax return, the EITC-portion of the refund will 
be frozen and the IRS will contact the taxpayer to request the 
documentation. If the taxpayer fails to submit the documentation, the 
claim will be denied (just as it is currently denied in the 
correspondence examination context) and the taxpayer will be afforded 
all rights to Appeals and judicial determination of his or her claim.
    The IRS has been briefing stakeholder groups and receiving their 
input since March. The Stakeholder Partnerships, Education and 
Communication (SPEC) organization within the Wage and Investment (W&I) 
Division of IRS provides comprehensive EITC services through education, 
outreach and assistance to low-income taxpayers.
    The following SPEC national partners attended a briefing and 
roundtable discussion on the EITC task force proposals on March 25, 
2003: U.S. Department of Health & Human Services (HHS) (national); 
National Credit Union Administration (NCUA) (national); Federal Deposit 
Insurance Corporation (FDIC) (national); Center on Budget & Policy 
Priorities (national); Community Action Agency (national); National 
League of Cities (national); and Armed Forces Tax Council (national).
    The following SPEC local partners and/or community based coalitions 
that also participated in discussions of the EITC task force proposals, 
in roughly the same March 25th time period: Boston EITC Coalition 
(Boston, MA); Family Economic Success Services (Denver, CO); 
Indianapolis Asset Building Coalition; Milwaukee Asset Building 
Coalition; Central City Asset Building Coalition (New Orleans, LA); 
Technical Vocational Institute (Albuquerque, NM); City of Tempe 
Coalition (Tempe, AR); Central Region Coalition for Building Family 
Wealth (San Diego, CA); and San Antonio EITC Coalition.
    The National Taxpayer Advocate also holds regular roundtable 
discussions. The following groups were invited to participate in an NTA 
roundtable discussion about the EITC task force proposals: American 
University, Washington College of Law LITC; Annie E. Casey Foundation; 
Brooklyn Legal Service Corporation LITC; Center for Economic Progress 
LITC; Center on Budget and Policy Priorities; Community Action Project 
of Tulsa County LITC; Community Food Resource Center; Council on La 
Raza; DNA-People's Legal Services, Inc. LITC; Georgia State College of 
Law LITC; H&R Block; Legal Aid Society of Middle Tennessee and the 
Cumberlands LITC; Los Angeles Legal Aid Society; Military Armed Forces 
Counsel; National Women's Law Center; Pine Tree Legal Services LITC; 
Quinnipiac College School of Law LITC; Taxpayer Advocacy Panel, EITC 
Issue Committee; The Community Tax Law Project LITC; The Legal Aid 
Society of Cleveland; University of Connecticut School of Law LITC; 
University of Washington School of Law LITC; University of Wisconsin, 
Milwaukee School of Business Administration LITC; and Villanova 
University School of Law LITC.
    The IRS National Public Liaison also coordinates regular meetings 
between the IRS and various stakeholder groups. The following groups 
were briefed on approximately March 18, 2003: IRS Advisory Council 
(IRSAC) W&I subgroup; American Institute of Certified Public 
Accountants (AICPA); National Society of Accountants (NSA); National 
Association of Tax Professionals (NATP); National Association of 
Enrolled Agents (NAEA); American Society of CPAs (AAA-CPA); National 
Conference of CPA Practitioners (NCCPAP); AARP Foundation; HR Block; 
and Jackson Hewitt.
    In addition, on June 13, 2003, we issued an announcement seeking 
public comments on aspects of the pre-certification pilot. Throughout 
the pre-filing and filing season, we will evaluate all aspects of the 
verification process, including claimant response. We will use this 
feedback to determine our next steps. If we decide to move forward, we 
will use the results of the pilot to refine the process and to 
determine how to maximize participation and minimize burden for 
legitimate claimants.
    4. A May 2002 report published by the Brookings Institution 
concluded that, in 1999, ``an estimated $1.75 billion in EITC refunds 
was diverted toward paying for tax preparation, electronic filing and 
high-cost refund loans.'' Please explain how the proposed EITC rule 
would address the issue of substantial EITC funds being diverted away 
from low-income taxpayers to tax preparation professionals.
    Answer. At this time we do not know whether there will be any 
change in the amount of EITC funds spent on tax preparation services. 
However, the IRS has programs and services to provide low-income 
taxpayers with free tax preparation assistance. For example, Free File 
is an Internet-based tax preparation and electronic filing program that 
is cost-free for eligible taxpayers. Generally eligibility is based on 
factors such as age, eligibility to file for the EITC, adjusted gross 
income, state residency, or military status. Each participating 
software company sets its own eligibility requirements and these may 
differ company to company. Because individuals who file their return 
electronically receive their refunds fairly quickly, electronic filing 
could reduce the demand for refund anticipation loans. Other free 
services including tax preparation are offered through the Volunteer 
Income Tax Assistance (VITA) program, the Tax Counseling for the 
Elderly (TCE) program, the American Association of Retired Person's 
Tax-Aide program, and our Taxpayer Assistance Centers.
    IRS will send to taxpayers a question and answer brochure and a 
listing of low cost/free taxpayer assistance clinics along with the 
Form 8836. The accompanying letter (which will be printed in English 
and Spanish) and the Form 8836 instructions will include a phone number 
that's dedicated to helping taxpayers with pre-certification problems. 
We have also included the phone number for the Taxpayer Advocate office 
in the instructions.
    5. One 2003 press report asserted that those applying for the EITC 
have a one in 47 chance of being audited, while those making more than 
$100,000 a year have one in 208 chance of being audited. For the most 
recently available tax year, please provide IRS statistics showing:
           the total number of EITC claimants;
           the total number of EITC claimants audited by the 
        IRS;
           the total amount of additional revenues resulting 
        from the EITC claimant audits;
           the total number of individual taxpayer returns with 
        gross income in excess of $100,000;
           the total amount of additional revenues resulting 
        from the audits of individual taxpayer returns with gross 
        income in excess of $100,000.
    Answers. For examinations, we define the audit rate as the number 
of examinations closed in a given fiscal year (e.g., FY 2002) divided 
by the number of returns filed in preceding calendar year (e.g., CY 
2001). Presenting the data by tax year would only permit me to give you 
accurate data up to tax year 1999 because of the time involved in 
completing some audits. I have taken the liberty of using the preceding 
format in order to give you an accurate picture with more recent data.
           The total number of EITC returns: CY 2001--19.1 
        million.
           the total number of EITC claimants audited by the 
        IRS: FY 2002--377,758 audits closed.
           The total amount of additional revenues resulting 
        from the EITC claimant audits: TY 2001--$965,169,000 (revenue 
        assessed).
           The total number of individual taxpayer returns with 
        gross income in excess of $100,000: CY 2001--13,020,100.
           The total number of individual taxpayer returns with 
        gross income in excess of $100,000 audited by the IRS: FY 
        2002--109,242.
           The total amount of additional revenue resulting 
        from the audit of individual taxpayer returns with gross income 
        in excess of $100,000: FY 2002--$1,497,943,000 (revenue 
        assessed).
    The above data indicates that EITC claimants are more heavily 
audited than those individuals with gross income in excess of $100,000. 
We note, however, that 97% of EITC audits are correspondence audits 
that are used when there are only 1 or 2 relatively simple issues on a 
return. In contrast, 51% of audits of taxpayers with gross incomes in 
excess of $100,000 required face-to-face contact with the taxpayer. 
Face-to-face audits are used for more complex returns with numerous 
issues and are believed to be more daunting to the taxpayer than a 
correspondence audit.
    When looking at audit coverage rates by traditional audit classes 
(i.e., comparing audit coverage of high income taxpayers to the audit 
coverage of all low income taxpayers and not merely EITC recipients), 
the IRS has higher coverage rates in the higher income classes than the 
lower income classes. For cases closed in FY 2002, only 1 in 130 
taxpayers with income less than $25K were audited (0.78% coverage) 
versus 1 in 120 for those with income over $100K (0.86% coverage). 
After removing the EITC cases, only 1 in 580 taxpayers with income less 
than $25K were audited in FY 2002 (0.17% coverage).

   Questions for the Record Addressed to IRS Commissioner Everson by 
                       Honorable Marsha Blackburn

    Questions from Representative Marsha Blackburn:
    1. Why has the IRS been unable to realize internal savings 
sufficient to shift staff to high priority areas?
    Answer. We have mined our internal resources to generate 
efficiencies that could be applied to high priority areas. In the FY 
2003 Budget Request, the IRS generated $158 million internally that 
were intended to meet increased enforcement, enhanced customer service 
and increased return workload. However, a number of unfunded and 
unanticipated costs arose that reduced the funding available for hiring 
these additional staff. Since the IRS Operating budget consists of over 
70% for salaries and benefits, any unanticipated costs that must be 
paid requires the reduction of labor costs (i.e., FTE).
    For example, the FY 2002 annual pay raise of 4.6% cost an 
additional $43 million from the 3.6% budgeted amount. The IRS had also 
expected savings resulting from legislative proposals for postage and 
the FMS levy that were not passed that required us to fund an 
additional $23 million. The postage increase that was unfunded 
increased our postage costs by $22 million. Moreover, an unfunded 
increase in security costs resulting from 9/11 cost the agency an 
additional $20 million. These changes and others amounting to $170 
million that were unexpected, unfunded and were mandatory to meet our 
mission consumed the internally generated resources.
    2. The Inspector General testified that the Customer Account Data 
Engine (CADE) has experienced significant delays and increased costs 
and that Release 1 will be 20 months behind its delivery date. How long 
will this take to implement and what is the total expected cost?
    Answer. The Customer Account Data Engine project (CADE) Release 1 
is running about five or six months behind the plan to deploy in 
production this summer as indicated in the FY2003 Expenditure Plan. 
This delay is disappointing given that the target date of this summer 
already reflected a six-month schedule slip from the target date of 
January 2003 set last summer. We are currently re-planning the initial 
production operation of CADE R1 for the 2004 filing season.
    While we have incurred some costs for capacity increases for CADE 
and for the costs of contractors to support testing, we have not paid 
any additional monies to the PRIME contractor during FY2003 for CADE 
R1, as it is a fixed price engagement. The costs to date for CADE since 
1999 are $69.2 million. A finer breakout of these costs follows:

------------------------------------------------------------------------
                                                              Non-PRIME
                Lifecycle Phase                 PRIME ($MM)     ($MM)
------------------------------------------------------------------------
Planning (6/99-8/00)..........................          2.2  ...........
Design (9/00-6/01)............................         18.4  ...........
Development (7/01-6/03).......................         37.2         10.5
Filing season changes.........................          0.9  ...........
      Total...................................         58.7         10.5
------------------------------------------------------------------------

    Filing season changes are new requirements that we implement as new 
tax laws are enacted or other changes are made to the current IRS 
systems with which CADE interfaces. Additional costs are being incurred 
for filing season changes not yet implemented. Non-PRIME costs include 
hardware capacity increases and contract support for IRS product 
assurance testing.
    There are several reasons for this delay and for the difficulty in 
predicting exactly when CADE would be in production. CADE is inherently 
complex insofar as its integration with the current processing 
environment and the instability of that environment as it changes to 
adapt to the many new tax actions throughout the year. Second, the 
PRIME mis-estimated the complexity of the balancing and control feature 
and has struggled to design and code those parts of the application. 
The final code was only delivered last April and the PRIME has 
experienced difficulty in getting that code to operate smoothly and in 
conjunction with the other CADE software. As a measure of the impact, 
the overall size of CADE nearly doubled due to the impact of the 
balance and control features.
    Third, we believe that the IRS and PRIME underestimated the degree 
of business change required. While few users are directly affected by 
the start of CADE, the complexities of going from a weekly operation of 
the IMF to a mixed daily/weekly operation is far more complex from a 
business process and operations perspective than initially estimated.

  Questions for the Record Addressed to Pamela Gardiner by Honorable 
                            Marsha Blackburn




   Questions for the Record Addressed to James R. White by Honorable 
                            Marsha Blackburn









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