[Congressional Record Volume 140, Number 78 (Monday, June 20, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: June 20, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
 STATEMENT UNDER SECTION 25 OF THE CONCURRENT RESOLUTION ON THE BUDGET

 Mr. SASSER. Mr. President, on behalf of the Committee on the 
Budget, under section 25 of the concurrent resolution on the budget, 
House Concurrent Resolution 218, I hereby submit revised discretionary 
spending limits, allocations to the Committee on Appropriations, 
budgetary aggregates, and maximum deficit amount in connection with 
H.R. 4539, the Treasury, Postal Service, and General Government 
Appropriations Act, 1995.
  Section 25 of the budget resolution states:

     SEC. 25. INTERNAL REVENUE SERVICE COMPLIANCE INITIATIVE.

       (a)(1) Adjustment.--For purpose of points of order under 
     the Congressional Budget and Impoundment Control Act of 1974 
     and concurrent resolutions on the budget--
       (A) the discretionary spending limits under section 
     601(a)(2) of that Act (and those limits as cumulatively 
     adjusted) for the current fiscal year and each outyear;
       (B) the allocations to the Committees on Appropriations 
     under section 302(a) and 602(a) of that Act;
       (C) the appropriate budgetary aggregates in the most 
     recently agreed to concurrent resolution on the budget; and
       (D) the maximum deficit amount under section 601(a)(1) of 
     that Act (and that amount as cumulatively adjusted) for the 
     current fiscal year,

     shall be adjusted to reflect the amounts of additional new 
     budget authority or additional outlays (as defined in 
     paragraph (2)) reported by the Committee on Appropriations in 
     appropriations Acts (or by the committee of conference on 
     such legislation) for the Internal Revenue Service compliance 
     initiative activities in any fiscal year, but not to exceed 
     in any fiscal year $405,000,000 in new budget authority and 
     $405,000,000 in outlays.
       (2) Additional amounts.--As used in this section, the terms 
     ``additional new budget authority'' or ``additional outlays'' 
     shall mean, for any fiscal year, budget authority or outlays 
     (as the case may be) in excess of the amounts requested for 
     that fiscal year for the Internal Revenue Service in the 
     President's Budget for fiscal year 1995.
       (b) Revised Limits, Allocations, and Aggregates.--Upon the 
     reporting of legislation pursuant to subsection (a), and 
     again upon the submission of a conference report on such 
     legislation (if a conference report is submitted), the 
     Chairman of the Committee on the Budget of the Senate or the 
     House of Representatives (as the case may be) shall submit to 
     that Chairman's respective House appropriately revised--
       (1) discretionary spending limits under section 601(a)(2) 
     of the Congressional Budget Act of 1974 (and those limits as 
     cumulatively adjusted) for the current fiscal year and each 
     outyear;
       (2) allocations to the Committees on Appropriations under 
     sections 302(a) and 602(a) of that Act;
       (3) appropriate budgetary aggregates in the most recently 
     agreed to concurrent resolution on the budget; and
       (4) maximum deficit amount under section 601(a)(1) of that 
     Act (and that amount as cumulatively adjusted) for the 
     current fiscal year,

     to carry out this subsection. These revised discretionary 
     spending limits, allocations, and aggregates shall be 
     considered for purposes of congressional enforcement under 
     that Act as the discretionary spending limits, allocations, 
     and aggregates.
       (c) Reporting Revised Suballocations.--The Committees on 
     Appropriations of the Senate and the House of Representatives 
     may report appropriately revised suballocations pursuant to 
     sections 302(b)(1) and 602(b)(1) of the Congressional Budget 
     Act of 1974 to carry out this section.
       (d) Contingencies.--
       (1) The Internal Revenue Service and the Treasury 
     Department have certified that they are firmly committed to 
     the principles of privacy, confidentiality, courtesy, and 
     protection of taxpayer rights. To this end, the Internal 
     Revenue Service and the Treasury Department have explicitly 
     committed to initiate and implement educational programs for 
     any new employees hired as a result of the compliance 
     initiative made possible by this section.
       (2) This section shall not apply to any additional new 
     budget authority or additional outlays unless--
       (A) in the Senate, the Chairman of the Budget Committee 
     certifies, based upon information from the Congressional 
     Budget Office, the General Accounting Office, and the 
     Internal Revenue Service (as well as from any other sources 
     he deems relevant), that such budget authority or outlays 
     will not increase the total of the Federal budget deficits 
     over the next five years; and
       (B) any funds made available pursuant to such budget 
     authority or outlays are available only for the purpose of 
     carrying out Internal Revenue Service compliance initiative 
     activities.

  The Committee on Appropriations has reported H.R. 4539, the Treasury, 
Postal Service, and General Government Appropriations Act, 1995, with 
committee amendments. H.R. 4539 as reported provides additional new 
budget authority and additional outlays for Internal Revenue Service 
compliance initiative activities. As required by section 25(a)(2) of 
the budget resolution, these budget authority and outlays amounts are 
in excess of the amounts requested for fiscal year 1995 for the 
Internal Revenue Service in the President's budget for fiscal year 
1995.
  As the budget resolution noted, the Internal Revenue Service and the 
Treasury Department have certified that they are firmly committed to 
the principles of privacy, confidentiality, courtesy, and protection of 
taxpayer rights. To this end, the Internal Revenue Service and the 
Treasury Department have explicitly committed to initiate and implement 
educational programs for any new employees hired as a result of the 
compliance initiative. At the end of my statement, I shall ask consent 
to place letters from the Commissioner of the Internal Revenue Service 
and the Secretary of the Treasury attesting to these commitments.
  Furthermore, as required by section 25(d)(2)(A) of the budget 
resolution, I hereby certify, based upon information from the 
Congressional Budget Office, the General Accounting Office, and the 
Internal Revenue Service, that the additional budget authority and 
outlays in H.R. 4539 for the Internal Revenue Service compliance 
initiative activities will not increase the total of the Federal budget 
deficits over the next 5 years. At the end of my statement, I shall ask 
consent to place letters from the Director of Tax Policy and 
Administrative Issues of the General Accounting Office, the Director of 
the Congressional Budget Office, and the Commissioner of the Internal 
Revenue Service supporting these findings. The language of H.R. 4539 
also provides, as required by section 25(d)(2)(B) of the budget 
resolution, that any funds made available pursuant to this budget 
authority and outlays are available only for the purpose of carrying 
out Internal Revenue Service compliance initiative activities.
  As H.R. 4539 complies with the conditions set forth in the budget 
resolution, under the authority of section 25(b) of the budget 
resolution, I hereby submit to the Senate appropriately revised 
discretionary spending limits under section 601(a)(2) of the 
Congressional Budget Act of 1974 for fiscal year 1995, allocations to 
the Committee on Appropriations under sections 302(a) and 602(a) of 
that act, appropriate budgetary aggregates in the most recently agreed 
to concurrent resolution on the budget, and maximum deficit amount 
under section 601(a)(1) of that act for fiscal year 1995, to carry out 
this subsection.
  Mr. President, I ask that letters and supporting material be printed 
in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

 REVISED LIMITS, ALLOCATIONS, AND AGGREGATES PURSUANT TO SECTION 25 OF 
  THE CONCURRENT RESOLUTION OF THE BUDGET FOR FY 1995--IN MILLIONS OF 
                                DOLLARS

                                                                   1995
Revised Discretionary Spending Limits:
  Current budget authority limits under section 601(a)(2).......510,754
    Additional budget authority in H.R. 4539 for IRS enforcement....405
                                                             __________

  Revised budget authority limits under section 601(a)(2).......511,159
                                                               ==========
_______________________________________________________________________

  Current budget outlay limits under section 601(a)(2)..........540,574
    Additional budget outlays in H.R. 4539 for IRS enforcement......405
                                                             __________

  Revised budget outlay limits under section 601(1)(2)..........540,979
                                                               ==========
_______________________________________________________________________

Revised Allocations to the Committee on Appropriations:
  Current budget authority allocations under sections 302(b) and 
    602(a)......................................................784,939
    Additional budget authority in H.R. 4539 for IRS enforcement....405
                                                             __________

  Revised budget authority allocations under sections 302(b) and 
    602(a)......................................................785,344
                                                               ==========
_______________________________________________________________________

  Current budget outlay allocations under sections 302(b) and 60805,972
    Additional budget outlays in H.R. 4539 for IRS enforcement......405
                                                             __________

  Revised budget outlay allocations under sections 302(b) and 60806,377
                                                               ==========
_______________________________________________________________________

Revised Budgetary Aggregates:
  Current budget authority aggregates.........................1,238,300
    Additional budget authority in S. 1491\1\....................... 39
                                                             __________

  Revised budget authority aggregates.........................1,238,339
    Additional budget authority in H.R. 4539 for IRS enforcement....405
                                                             __________

  Revised budget authority aggregates.........................1,238,744
                                                               ==========
_______________________________________________________________________

  Current outlay aggregates...................................1,217,200
    Additional budget outlays in H.R. 4539 for IRS enforcement......405
                                                             __________

  Revised outlay aggregates...................................1,217,605
                                                               ==========
_______________________________________________________________________

Revised Maximum Deficit Amount:
  Current Maximum Deficit Amount section 601(a)(1)..............240,638
    Additional budget outlays in H.R. 4539 for IRS enforcement......405
                                                             __________

  Revised Maximum Deficit Amount section 601(a)(1)..............241,043

\1\Reserve fund filing pursuant to section 27(a)(3) for S. 1491, the 
Federal Aviation Administration Authorization Act of 1993, as reported.
                                  ____

                                       Department of the Treasury,


                                     Internal Revenue Service,

                                   Washington, DC, April 22, 1994.
     Hon. David H. Pryor,
     Chairman, Subcommittee on Private Retirement Plans and 
         Oversight of IRS, Committee on Finance, U.S. Senate, 
         Washington, DC.
       Dear Mr. Chairman: I would like to follow up on our 
     conversation yesterday about the language currently contained 
     in Simon-Bond-Pryor IRS compliance initiative amendment to 
     the Senate budget proposal.
       The Internal Revenue Service fully recognizes the need to 
     protect the rights and privacy of taxpayers and the need to 
     continue to increase the knowledge of our employees about 
     those rights. We will initiate and implement educational 
     programs with respect to the Taxpayer Bill of Rights for any 
     new employees that we hire as a result of the compliance 
     initiative called for in the amendment.
       In fact, many of our training programs already address the 
     Taxpayer Bill of Rights, either directly or indirectly. For 
     example, this year all IRS employees attended Ethics 
     Workshops that teach the tenets of respect for others, 
     treatment with courtesy and decency, and principles of 
     fairness and concern for others. I have enclosed a copy of 
     that material for you. More directly, all new collection and 
     examination employees receive mandatory training on the 
     Taxpayer Bill of Rights and I will forward copies of those 
     materials to you under separate cover.
       I firmly believe that continued reinforcement of the 
     principles of privacy and confidentiality, courtesy, and 
     protection of rights is the right thing to do to ensure the 
     ethical treatment of taxpayers and one of the foundations of 
     voluntary compliance. I also believe this compliance 
     initiative makes good business sense for increasing revenue, 
     enhancing compliance and reducing the deficit. I appreciate 
     your support and efforts on behalf of this initiative and the 
     taxpaying public.
           Sincerely,
                                       Margaret Milner Richardson.
                                  ____



                                   Department of the Treasury,

                                   Washington, DC, April 22, 1994.
     Hon. David H. Pryor,
     Chairman, Subcommittee on Private Retirement Plans and 
         Oversight of IRS, Committee on Finance, U.S. Senate, 
         Washington, DC.
       Dear David: I have spoken with Commissioner Richardson 
     about continuing to reinforce the principles and provisions 
     of the Taxpayer Bill of Rights through training new IRS 
     employees. I want to add my support to the IRS' efforts to 
     protect the rights and privacy of taxpayers.
       The Internal Revenue Service is committed to initiating and 
     implementing educational programs with respect to the 
     Taxpayer Bill of Rights for any new employee hired as a 
     result of the Simon-Bond-Pryor IRS compliance initiative 
     amendment to the Senate budget proposal. I fully support the 
     training programs that the IRS already has in place and will 
     initiate for all new employees to enhance the ethical 
     treatment of taxpayers and to protect their rights.
           Sincerely,
                                                    Lloyd Bentsen.
                                  ____



                               U.S. General Accounting Office,

                                    Washington, DC, June 16, 1994.
     Hon. Jim Sasser,
     Chairman, Committee on the Budget,
     U.S. Senate.
       Dear Mr. Chairman: By letter dated June 14, 1994, you 
     referred to the additional budget authority being requested 
     for fiscal year 1995 Internal Revenue Service (IRS) 
     compliance initiatives and asked for our opinion on the 
     effect of the additional authority on budget deficits over 
     the next 5 years.
       We believe that the additional budget authority will not 
     increase the budget deficit over the 5-year period in 
     question provided (1) the funds are used as intended to 
     increase IRS' enforcement staffing levels and thus generate 
     more revenues through enhanced compliance efforts, (2) funds 
     are provided in the fiscal years after 1995 to maintain the 
     increased staffing levels, and (3) IRS is able to 
     successfully hire, train, and retrain the additional staff 
     provided by the budget authority. A deficit increase in the 
     first year is possible because of the lag between the time 
     new staff are hired and the time they become productive. In 
     our opinion, however, based on past reviews of IRS' 
     enforcement programs, an increase in enforcement staffing 
     will help generate significant revenues over the long term, 
     provided the increased staffing levels are maintained. IRS' 
     enforcement presence is relatively low (e.g., IRS now audits 
     less than 1 percent of the total number of income tax returns 
     filed) and yet revenues to be collected are substantial--the 
     estimated income tax gap for tax year 1992 was $127 billion. 
     Last month, we issued a report on the tax gap in which, among 
     other things, we discussed efforts toward and ideas of 
     reducing the gap, including the possibility of providing IRS 
     with additional enforcement resources.\1\
---------------------------------------------------------------------------
     \1\Footnotes at end of article.
---------------------------------------------------------------------------
       We are taking a position on the budget authority's impact 
     on budget deficits even though it is not yet certain how IRS 
     intends to allocate the additional funding among its various 
     enforcement programs. Earlier this year, as shown in the 
     enclosures, IRS had prepared an allocation and a 
     corresponding estimate of revenue return on the investment of 
     about $9.2 billion over 5 years. However, IRS premised its 
     allocation and estimate on the assumption that (1) total 
     funding for the compliance initiatives would amount to $2.5 
     billion over 5 years and (2) that level of funding would 
     support 5,078 full-time equivalents (FTE) in fiscal year 1995 
     and 8,136 FTEs is succeeding years.\2\ The Senate budget 
     resolution, however, limits funding in any 1 year to no more 
     than $405 million. This amount is the same as the cost 
     presented in the President's budget--$405 million a year, or 
     $2.025 billion over 5 years.
       IRS is revising its staffing allocation and revenue 
     estimate to reflect the funding level in the budget 
     resolution. The kinds of changes being considered, as we 
     understand them, would not alter our opinion as to the impact 
     of the additional budget authority on budget deficits. One of 
     the changes being considered, for example, is consistent with 
     out past recommendation that IRS put more emphasis on 
     telephone contacts in trying to collect delinquent taxes.\3\
       Our past work in earlier IRS compliance initiatives, which 
     was done for your Committee, raised two basic concerns that 
     warrant repeating: (1) the initiatives were not implemented 
     as Congress intended and (2) IRS' revenue estimates were 
     unreliable.\4\
       As summarized in our recent report on IRS' budget request 
     for fiscal year 1995, IRS' inability to deliver past 
     compliance initiatives resulted, in large part, from 
     shortfalls (i.e., unfunded costs) that caused IRS to 
     reprogram to other activities funds appropriated for the 
     compliance initiatives.\5\ Some of the shortfalls were 
     because of circumstances, such as unfunded pay raises, that 
     were beyond IRS' control, while others stemmed from IRS' 
     problems in accurately estimating labor costs.
       IRS is facing another shortfall in fiscal year 1995 due to 
     several assumptions embodied in its budget request. First, 
     according to IRS budget officials, the Department of the 
     Treasury required IRS to use a non-pay inflation factor that 
     is less than the rate applied to other agencies. As a result, 
     those officials expect IRS' support cost budget to be short. 
     Second, IRS' budget is to be decreased to reflect its share 
     of government-wide procurement savings that were proposed by 
     the President as a result of work by the National Policy 
     Review. IRS budget officials told us that those savings will 
     be difficult to realize. Third, the President's budget, and 
     thus IRS', assumes a 1.6 percent federal workers' pay raise 
     for fiscal year 1995. The actual pay raise may be more. 
     Fourth, IRS' budget assumes productivity savings associated 
     with various systems being implemented as part of Tax Systems 
     Modernization. Realization of those savings could be 
     jeopardized if IRS' appropriation for Tax Systems 
     Modernization is reduced as called for in the appropriation 
     bill being considered by the House of Representatives. Using 
     data provided by IRS budget officials, these factors together 
     could result in a shortfall of between $100 and $200 million.
       Such a shortfall could erode IRS' ability to adequately 
     fund its base enforcement operations and could, as in the 
     past, result in some of the compliance initiative money being 
     used to bring IRS back to the level it was before the 
     erosion. To the extent that happens, the effect of the 
     compliance initiatives on IRS' overall enforcement presence 
     will be diminished. Even under those circumstances, however, 
     we believe that funding of the initiatives will result in 
     more revenue than they cost with the stipulations mentioned 
     earlier.
       In past reports to your Committee, we documented various 
     deficiencies with IRS' methodologies for estimating the 
     amount of additional revenue the government could expect to 
     realize as a result of past compliance initiatives. Because 
     of those deficiencies, we questioned the reliability of IRS' 
     estimates.
       IRS has since changed its methodology for estimating the 
     additional revenues to be generated by augmenting its 
     Examination function. Although we have not done an in-depth 
     review of that methodology or the estimates generated 
     thereby, information we have reviewed indicates that IRS' 
     changes addressed most of the problems we identified with the 
     earlier methodology. Thus, we are more confident than in the 
     past about the reliability of the revenue estimates 
     associated with the Examination part of the compliance 
     initiatives.
       IRS has said that the revenue estimating methodologies for 
     its Collection and Information Returns programs have also 
     been improved, but we have not done any work that would 
     enable us to comment on the nature or adequacy of those 
     changes.
       I trust this information is responsive to your request. If 
     you have any questions or if we can be of any more help, 
     please call me at 512-5407.
           Sincerely yours,
                                                Jennie S. Stathis,
                                              Director, Tax Policy
                                        and Administration Issues.

                                                                          INTERNAL REVENUE SERVICE COMPLIANCE PROPOSALS                                                                         
                                                                                      [Dollars in Millions]                                                                                     
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Resources--fiscal year 1995                             Revenue return--fiscal year                                Total    
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                                                                                    Dollars in                                                                                                  
                                                                        FTE          millions          1995            1996            1997            1998            1999           1995-99   
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       TAX LAW ENFORCEMENT                                                                                                                                                      
                                                                                                                                                                                                
Increase number of tax returns examined:                                                                                                                                                        
    Field audits (revenue agents)...............................           1,582             119            (43)              11             176             257             364             764
    Office audits (tax auditors)................................             633              40             13              107             264             365             393           1,141
    Service center correspondence audits........................             479              27             71              204             284             319             354           1,232
Collection of delinquent taxes..................................           1,222              77            191              542             823             912             912           3,380
More effective use of information reporting documents to tax                                                                                                                                    
 unreported income..............................................             703              54            102              417             672             688             691           2,570
                                                                 -------------------------------------------------------------------------------------------------------------------------------
      Subtotal, tax enforcement.................................           4,619             317            333            1,281           2,218           2,540           2,713           9,086
                                                                 ===============================================================================================================================
                    INTERNATIONAL ENFORCEMENT                                                                                                                                                   
                                                                                                                                                                                                
International examinations......................................              90               9             (2)               3              21              25              46              93
Chief counsel--Large case initiative............................              40               5              0                0               0               0               0               0
                                                                 -------------------------------------------------------------------------------------------------------------------------------
      Subtotal, international...................................             130              14             (2)               3              21              25              46              93
                                                                 ===============================================================================================================================
                      CRIMINAL ENFORCEMENT                                                                                                                                                      
                                                                                                                                                                                                
Fraud investigations............................................             231              56  ..............  ..............  ..............  ..............  ..............  ..............
Motor fuel excise tax...........................................              98              18  ..............  ..............  ..............  ..............  ..............  ..............
                                                                 -------------------------------------------------------------------------------------------------------------------------------
      Subtotal, criminal enforcement............................             329              74  ..............  ..............  ..............  ..............  ..............  ..............
                                                                 ===============================================================================================================================
        Total compliance proposals..............................           5,078             405            331            1,284           2,240           2,565           2,759           9,179
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                                  ____



                               footnotes

     \1\Tax Gap: Many Actions Taken But a Cohesive Compliance 
     Strategy Needed (GAO/GGD-94-123, May 11, 1994).
     \2\The number of FTEs in 1995 differs from succeeding years 
     because staff hired to fill many of the new positions would 
     only be on board for part of fiscal year 1995. Thus the 
     number of FTEs in that year would be less than in succeeding 
     years when all staff would be working a full year.
     \3\Tax Administration: New Delinquent Tax Collection Methods 
     for IRS (GAO/GGD-93-67, May 11, 1993).
     \4\Tax Administration: IRS' Implementation of the 1987 
     Revenue Initiative (GAO/GGD-88-16, Dec. 2, 1987); Tax 
     Administration: Difficulties in Accurately Estimating Tax 
     Examination Yield (GAO/GGD-88-119, Aug. 8, 1988); Tax 
     Administration: Potential Audit Revenues Lost While Training 
     New Revenue Agents (GAO/GGD-90-77, Apr. 6, 1990); Tax 
     Administration: IRS Needs More Reliable Information on 
     Enforcement Revenues (GAO/GGD-90-85, June 20, 1990); and Tax 
     Administration: IRS' Improved Estimates of Tax Examination 
     Yield Need to Be Refined (GAO/GGD-90-119, Sept. 5, 1990).
     \5\Tax Administration: Analysis of IRS' Budget Request for 
     Fiscal Year 1995 (GAO/GGD-94-129, Apr. 20, 1994).
       Enclosure 2.

                                                          FISCAL YEAR 1995 TAX GAP INITIATIVES                                                          
                                                           [In thousands of dollars collected]                                                          
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Fiscal year--                                                          
                                                         ------------------------------------------------------------  Outyears      Total     Yield per
                                                             1995        1996        1997        1998        1999                                 FTE   
--------------------------------------------------------------------------------------------------------------------------------------------------------
Collection:                                                                                                                                             
  Collection FTE........................................      1,075        1,791       1,791       1,791       1,791  ..........       8,239  ..........
  Follow-on FTE.........................................        147          245         245         245         245  ..........       1,127  ..........
                                                         -----------------------------------------------------------------------------------------------
    Total FTE...........................................      1,222        2,036       2,036       2,036       2,036  ..........       9,366  ..........
  Revenue...............................................    191,147      542,064     823,380     911,564     911,564  ..........   3,379,719         361
Examination:                                                                                                                                            
  Revenue Agent:                                                                                                                                        
    Exam FTE............................................      1,145        1,832       1,832       1,832       1,832  ..........       8,473  ..........
    Follow-on FTE.......................................        437          699         699         699         699  ..........       3,234  ..........
    Revenue.............................................    (43,200)      10,600     175,000     256,600     363,800     830,400   1,594,200         136
  Tax Auditor:                                                                                                                                          
    Exam FTE............................................        458          733         733         733         733  ..........       3,390  ..........
    Follow-on FTE.......................................        175          280         280         280         280  ..........       1,295  ..........
    Revenue.............................................     12,700      106,800     263,800     364,500     392,600     554,800   1,695,200         362
  Tax Examiner:                                                                                                                                         
    Exam FTE............................................        347          555         555         555         555  ..........       2,567  ..........
    Follow-on FTE.......................................        132          211         211         211         211  ..........         976  ..........
    Revenue.............................................     71,200      204,200     283,600     319,200     354,100     499,600   1,731,900         489
  International Examination:                                                                                                                            
    Exam FTE............................................         70           92          92          92          92  ..........         438  ..........
    Follow-on FTE.......................................         20           26          26          26          26  ..........         125  ..........
    Revenue.............................................     (2,400)       3,200      21,200      24,900      46,000     157,200     250,100         444
  Total Examination FTE.................................      2,020        3,212       3,212       3,212       3,212  ..........      14,868  ..........
  Total Follow-on FTE...................................        764        1,217       1,217       1,217       1,217  ..........       5,631  ..........
  Total FTE.............................................      2,784        4,429       4,429       4,429       4,429  ..........      20,499  ..........
  Total Examination Revenue.............................     38,300      324,800     744,600     965,200   1,156,700   2,041,800   5,271,400         257
Information Returns Processing:                                                                                                                         
  Unmatchable Followup IR:                                                                                                                              
    IRP FTE.............................................        200          200         200         200         200  ..........       1,000  ..........
    Follow-on FTE.......................................         16           16          16          16          16  ..........          82  ..........
    Revenue.............................................     81,100      164,500     218,000     234,500     237,600     118,800   1,054,500         975
  Corr Exam/SFR/K-1 Processing:                                                                                                                         
    IRP FTE.............................................        250          700         800         800         800  ..........       3,350  ..........
    Follow-on FTE.......................................         20           57          65          65          65  ..........         273  ..........
    Revenue.............................................     20,494      252,658     453,600     453,600     453,600  ..........   1,633,952         451
  Voluntary Compliance:                                                                                                                                 
    IRP FTE.............................................        200          140          40          40          40  ..........         460  ..........
    Follow-on FTE.......................................         16           11           3           3           3  ..........          36  ..........
    Revenue.............................................  ..........  ..........  ..........          NA  ..........  ..........  ..........  ..........
  Total IRP FTE.........................................        650        1,040       1,040       1,040       1,040  ..........       4,810  ..........
  Total Follow-on FTE...................................         53           85          85          85          85  ..........         392  ..........
  Total FTE.............................................        703        1,125       1,125       1,125       1,125  ..........       5,202  ..........
  Total IRP Revenue.....................................    101,594      417,158     571,600     688,100     691,200     118,800   2,588,452         571
                                                         ===============================================================================================
Totals:                                                                                                                                                 
  Functional FTE........................................      3,745        6,043       6,043       6,043       6,043  ..........      27,917  ..........
  Follow-on FTE.........................................        964        1,507       1,507       1,507       1,507  ..........       6,994  ..........
  Other FTE*............................................        369          586         586         586         586  ..........       2,713  ..........
  Total FTE.............................................      5,078        8,136       8,136       8,136       8,136  ..........      37,624  ..........
                                                         -----------------------------------------------------------------------------------------------
  Revenue...............................................    331,041    1,284,022   2,239,580   2,564,864   2,759,464   2,160,600  11,339,571        330 
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Other FTE includes Criminal Investigation Initiative (329 FTE/526 positions) and Chief Counsel International (40 FTE/60 positions).                    

                                  ____

                                      Congressional Budget Office,
     U.S. Congress,
                                    Washington, DC, June 16, 1994.
     Hon. Jim Sasser,
     Chairman, Committee on the Budget,
     U.S. Senate, Washington, DC.
       Dear Mr. Chairman: Your letter of June 6 requested that CBO 
     analyze the effect on the deficit of providing additional 
     funding for Internal Revenue Service (IRS) compliance 
     initiative activities. Because the collection of revenues by 
     the IRS depends on the total level of resources provided to 
     the agency, as well as other factors, it is not possible to 
     identify the net effect on the deficit of a portion of the 
     funding provided.
       In developing the baseline projection of revenues for 
     fiscal years 1995 through 1999, CBO assumed that collection 
     activities would continue at the 1994 level. Because IRS has 
     some flexibility in allocating funds to its different 
     activities and because management changes can affect the 
     level of compliance without changing expenditures, this level 
     of collection activity cannot be precisely tied to a 
     particular appropriation level. However, if funding for the 
     IRS during the 1995-1999 period is very different from the 
     1994 appropriation ($7,345 million), adjusted for inflation, 
     it will be difficult for the IRS to maintain its current 
     level of compliance. The President's budget proposed cuts 
     below this inflation-adjusted 1994 level in each year--by 
     more than $200 million in 1995 and more than $1,700 million 
     in 1999. The IRS tax law enforcement account, from which the 
     IRS compliance initiative activities are funded, is cut by 
     more than $200 million in 1995 and more than $1,200 million 
     in 1999. If funding were provided at the levels proposed by 
     the President's budget, CBO expects that revenues would fall 
     below the levels projected in the baseline.
       Providing $405 million more than the President proposed for 
     the IRS each year through 1999 would raise the 1995 and 1996 
     funding levels somewhat above CBO's baseline, but would still 
     leave total IRS funding over the 1995-1999 period more than 
     $1,500 million below the CBO baseline. Thus, the additional 
     funding proposed for the IRS compliance initiative would only 
     partially offset the reduced collection capabilities that 
     would likely result from the real cuts in IRS funding 
     proposed by the President.
       GAO has analyzed the question of whether spending an 
     additional $405 million a year for five years to fund the 
     IRS's compliance initiative would bring in more revenue than 
     it cost. Their analysis assumes that the additional funding 
     would be on top of the current level, but their estimate of 
     the payoff is likely to be even greater if the base level of 
     resources is smaller. CBO agrees with GAO that spending money 
     on compliance is a productive use of resources.
       The additional funding, however, would be offset by 
     increased revenues only if the $405 million were provided at 
     least through 1996. In 1995, the IRS expects less than $405 
     million in additional revenues because the new hires will not 
     be able to generate revenue while they are being trained and 
     because their training will take current agents away from 
     their normal activities. Only in 1996 and later years would 
     the additional employees be able to generate more than $405 
     million in revenues. Because appropriations are provided one 
     year at a time, it is impossible to know whether an 
     additional $405 million in 1995 will be followed by the 
     additional funding in 1996 that would result in a cost 
     increase in revenues sufficient to offset the total 
     additional spending in the two years.
       In any case, CBO would not include any increase in revenues 
     in a cost estimate of legislation providing additional 
     funding for the IRS. The level of funding for virtually all 
     agencies affects the ability of the agency to either collect 
     funds (whether taxes, fees, loan repayments or any other 
     money owed to the government), to guard against overpayments, 
     or to speed up expenditures. It is not feasible for CBO to 
     estimate and count the effects on the collection or spending 
     capabilities of the agency of every increase or cut in 
     administrative funding. As a result, CBO does not include any 
     change in collections or spending that might result from 
     increases or cuts in such funding in its estimates of 
     legislation. Consequently, CBO would not score any revenue 
     effects for the additional $405 million for IRS compliance 
     initiatives in its estimate of legislation providing that 
     funding--just as we would not score any reduction in revenues 
     in an estimate of legislation that provided less for the IRS 
     than is assumed in the baseline.
       If you wish further details, please feel free to contact me 
     or your staff may wish to contact Richard Kasten at 226-2690.
           Sincerely,
                                             Robert D. Reischauer,
                                                         Director.
                                  ____

                                       Department of the Treasury,


                                     Internal Revenue Service,

                                    Washington, DC, June 17, 1994.
     Hon. Jim Sasser,
     Chairman, Committee on the Budget,
     U.S. Senate, Washington, DC.
       Dear Mr. Chairman: I am responding to your request for an 
     analysis of the effect of the proposed FY 1995 Internal 
     Revenue Service Compliance Initiative on Federal budget 
     deficits in the FY 1995 to FY 1999 time period. Let me first 
     say we greatly appreciate the support of the Committee for 
     this initiative which will be of great benefit in supporting 
     effective tax administration and improving compliance with 
     the tax laws.
       I am confident you can certify that the IRS Compliance 
     Initiative will not increase the Federal deficit over the 
     next five years. In fact, it is our belief that the 
     investment will actually reduce the deficit over the five 
     year period. On an average, IRS Compliance programs return 
     almost five dollars in additional collected tax for every 
     dollar expended.
       We will concentrate the additional resources received on 
     specific compliance problem areas. Enclosure 1 summarizes the 
     compliance areas and IRS programs to which additional 
     resources will be directed. The Initiative will be earmarked 
     for tax law enforcement programs whose purpose is to serve 
     taxes due and owing that would otherwise go uncollected 
     absent enforcement action. These are our Examination, 
     Collection and Information Reporting/Document Matching 
     Programs.
       For each program area scheduled to receive additional 
     resources, IRS made a specific five year revenue estimate. 
     Estimates are based on historical experience with the type of 
     compliance cases that will be worked and other forecasting 
     assumptions. These other assumptions address such issues as 
     how soon additional employees can be hired, how long it will 
     take for new employees to become fully productive, how long 
     it will take cases to close from the point of initiation and 
     what revenue will be lost as a result of redirecting current 
     employees from case related duties to training new employees.
       Enclosure 2 summarizes the additional revenue anticipated 
     from the program increases we proposed. In total, we 
     estimated over $9.0 billion in collections over the FY 1995-
     FY 1999 period. The Budget Resolution provides for an annual 
     additional expenditure of $405 million over a five year 
     period for a cumulative cost of $2.025 billion.
       Enclosure 3 summarizes the process we used to make revenue 
     estimates and discusses the types of assumptions made.
       There have been serious and legitimate criticisms in the 
     past concerning IRS' ability to deliver on Compliance 
     Initiative commitments. I believe we have responded to these 
     criticisms and for FY 1995 are in an unprecedented position 
     to make a compliance difference. First, IRS can deliver on 
     its Compliance FTE commitment. For the first time, IRS is 
     confident its labor costs--70% of the total IRS budget--are 
     fully funded in the FY 1995 Budget as submitted by the 
     President. The IRS and Office of Management and Budget have 
     worked together to identify factors affecting IRS labor 
     costs, and our FTE is funded on the basis of mutually agreed 
     projections.
       Second, we will be able to track actual enforcement revenue 
     results. A new system for tracking enforcement revenues 
     separately from voluntary receipts was put into place on 
     October 1, 1993. A new financial system installed in FY 1993 
     will account for costs and FTE realization accurately at all 
     organizational levels. Also, our tracking methodology has 
     been shared with the General Accounting Office to alleviate 
     concerns that have been expressed in tracking previous 
     initiatives. We will report on revenue results and FTE 
     validation on a quarterly basis.
       Third, Tax Systems Modernization (TSM) investments are 
     helping IRS work smarter and faster. A new compliance 
     research system supported by TSM will allow IRS to pinpoint 
     specific compliance problem areas.
       Finally, new business approaches within IRS mean more 
     employees will be on the front-line. The IRS is consolidating 
     its resources management support in fewer sites and reducing 
     regional and headquarters staff. Therefore, IRS will put many 
     more of the initiative FTE into front-line compliance related 
     positions than in prior initiatives. Also, these additional 
     positions will be distributed selectively to those districts 
     with the most serious compliance problems or workload 
     inventories.
       Should your staff have any questions regarding this 
     Compliance Initiative or any of the information provided 
     herein, they may contact either Carl Moravitz or Richard Hays 
     in our Budget Division on (202) 622-8770.
           Sincerely,
                                       Margaret Milner Richardson.
                                  ____


                             [Enclosure 1]

                 Fiscal Year 1995 Compliance Investment

       Market Segments--IRS will use better information about 
     compliance patterns of specific categories of taxpayers--
     market segments--to design the compliance-enhancing 
     techniques that work best. Improved and outreach programs 
     will be part of the answer as well as enforcement.
       The FY 1995 IRS Compliance investment will increase 
     enforcement staff by approximately 5,000 FTE, 8% over the 
     President's FY 1995 baseline budget. Key areas:


                            1. underpayment

       Accounts receivable inventories--taxes due from current and 
     prior years but not paid in full--have grown 35% over the 
     past five years. The number of taxpayers failing to pay their 
     liability in full at the time of filing has increased from 14 
     million to 16 million over the past three years. Additional 
     staff will mean quicker case assignment and accelerated 
     taxpayer contact, improving collection opportunities.


                           2. underreporting

       A major program used by IRS to detect unreported income is 
     the document matching program. IRS will improve the 
     usefulness of documents currently not matched, initiate 
     educational efforts to improve the accuracy of information 
     reporting, and improve compliance by Federal Government 
     payors with reporting requirements.


                              3. nonfiling

       Expanded document matching will enhance collection efforts 
     to secure more of the estimated 10 million returns not filed 
     each year.
       Enhanced efforts to collect taxes will result in securing 
     additional returns. This effort will pay dividends in FY 
     1995, and in subsequent years by keeping filers on the tax 
     rolls.


                              4. tax fraud

       IRS' efforts to collect delinquent taxes must be augmented 
     by enforcement of criminal tax fraud statutes. Expanded 
     efforts will be undertaken to detect motor fuel tax evasion, 
     bankruptcy fraud and financial fraud involving pensions and 
     refund fraud.
                                  ____


                 FISCAL YEAR 1995 COMPLIANCE INITIATIVE                 
 [Resource commitment: 5078 FTE, $405 million, Results: $9-$10 billion, 
                         fiscal years 1995-1999]                        
------------------------------------------------------------------------
          Compliance issue                      Resource focus          
------------------------------------------------------------------------
Income tax underreporting            Examination--Increase the number of
                                      correspondence examinations and   
                                      contacts (limited focus audits    
                                      involving overstated deducations, 
                                      improper filing status, or failure
                                      to report income).                
                                     Information Reporting--Improve     
                                      compliance by Federal Government  
                                      payors; correct wage reporting by 
                                      the military; reduce the number of
                                      unmatchable documents.            
Tax fraud-exercise tax, pension      Criminal Investigation--Increase   
 plans                                resources dedicated to detecting  
                                      motor fuel excise tax evasion     
                                      schemes, bankruptcy fraud/pension 
                                      plan, insurance fraud and         
                                      investigation of refund fraud.    
                                      Increase investigations of these  
                                      legal income sector tax crimes.   
Foreign controlled corporations--    International--Chief Counsel.      
 international issues                 Expand coordination and National  
                                      Office support in large case      
                                      development and litigation;       
                                      concentrate Counsel resources on  
                                      the development and implementation
                                      of the Advance Pricing Agreement  
                                      (APA) Program.                    
                                     International--Examination.        
                                      Increase enforcement based on     
                                      identified market segments        
                                      targeting foreign business        
                                      activity in the U.S. Use          
                                      Compliance 2000 methodology to    
                                      address foreign controlled        
                                      corporation tax compliance.       
Underpayment/nonfiling               --Collection Increase--the         
                                      collection of delinquent accounts:
                                      enhance case selection and        
                                      prioritization, quicker case      
                                      assignment and accelerated        
                                      taxpayer contact; obtaining       
                                      delinquent returns and collecting 
                                      delinquent taxes. Use additional  
                                      document matching non-filer leads.
------------------------------------------------------------------------

                                  ____

       Enclosure 2.

       FISCAL YEAR 1995 COMPLIANCE INITIATIVES REVENUE PROJECTIONS      
                   [In millions of dollars collected]                   
------------------------------------------------------------------------
                                       Fiscal year--                    
       Initiatives       ----------------------------------------  Total
                           1995    1996    1997    1998    1999         
------------------------------------------------------------------------
Examination:                                                            
  Revenue Agent.........    (43)      11     176     257     364     764
  Tax Auditor...........     13      107     264     365     393   1,141
  Tax Examiner..........     71      204     284     319     354   1,232
  International                                                         
   Examination..........     (2)       3      21      25      46      93
Collection..............    191      542     823     912     912   3,380
Information Reporting                                                   
 Program:                                                               
  Unmatchable IR                                                        
   Followup.............     81      165     218     235     238     936
  Correspondence Exams..     20      253     464     464     454   1,634
                         -----------------------------------------------
    Totals..............    331    1,284   2,240   2,565   2,759   9,179
------------------------------------------------------------------------

                                  ____


                      FISCAL YEAR 1995 COMPLIANCE INITIATIVES TRACKING REPORT, TOTAL RESULTS BY ORIGINATING FUNCTION, FISCAL YEAR 1995 QUARTERLY REPORT AS OF MAR. 30, 1995                     
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Collected Dollars [in millions]                                                       FTE staffing       On-rolls
                            --------------------------------------------------------------------------------------------------------------------------------------------------------------------
      Case Categories               FY 1995               FY 1996               FY 1997               FY 1998                1999                 TOTALS                FY 1995         FY 1995 
                            --------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                Plan      Actual      Plan      Actual      Plan      Actual      Plan      Actual      Plan      Actual      Plan      Actual      Plan      Actual     By QTR 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Examination:\1\ Base                                                                                                                                                                            
 Initiative................     $40.7   .........    $321.6   .........     $725.4  .........     $940.3  .........   $1,110.3  .........   $3,186.7  .........      1,948  .........  .........
Revenue Agents: Base                                                                                                                                                                            
 Initiative................     (43.2)  .........      10.0   .........      178.0  .........      255.8  .........      363.8  .........      763.8  .........        687  .........  .........
Individual: Base Initiative     (16.0)  .........       1.4   .........       47.8  .........       81.5  .........      106.3  .........      221.1  .........        386  .........  .........
Corporate: Base Initiative.     (17.3)  .........     (20.6)  .........       12.2  .........       29.2  .........       85.7  .........       90.2  .........        326  .........  .........
Employment: Base Initiative      (9.9)  .........      28.8   .........      115.9  .........      145.9  .........      170.6  .........      452.6  .........        156  .........  .........
All Others (Base Only)                                                                                                                                                                          
Tax Auditors Individual:                                                                                                                                                                        
 Base Initiative...........      12.7   .........     105.6   .........      263.8  .........      384.6  .........      382.5  .........    1,140.6  .........        347  .........  .........
All Others (Base Only)                                                                                                                                                                          
Service Center: Base                                                                                                                                                                            
 Initiative................      71.3   .........     204.2   .........      253.5  .........      318.2  .........      354.1  .........    1,232.3  .........        347  .........  .........
All others: Base Initiative  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........        388  .........  .........
Collection:\2\ Base                                                                                                                                                                             
 Initiative................     191.1   .........     542.1   .........      823.4  .........      911.8  .........      911.5  .........    3,378.7  .........      1,153  .........  .........
Collection Field Function:                                                                                                                                                                      
 Base Initiative...........     143.4   .........     406.5   .........      617.5  .........      683.7  .........      653.7  .........    2,534.6  .........        867  .........  .........
Automated Collection                                                                                                                                                                            
 System: Base Initiative...      47.8   .........     135.5   .........      205.3  .........      227.8  .........      227.8  .........      644.9  .........        188  .........  .........
Notices (Base Only)                                                                                                                                                                             
All Others: Base Initiative  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........         78  .........  .........
AP.........................     101.8   .........     417.2   .........      871.6  .........      686.1  .........      801.2  .........    2,568.7  .........        512  .........  .........
  Correspondence Exams.....      20.5   .........     262.7   .........      453.6  .........      453.6  .........      453.6  .........    1,834.0  .........        318  .........  .........
  Unmatchable Follow-up....      51.1   .........    184..5   .........      218.0  .........      234.6  .........      237.6  .........      836.7  .........        200  .........  .........
International Initiatives..      (2.4)  .........        32   .........       21.2  .........       24.8  .........       48.0  .........       92.8  .........         65  .........  .........
International Examination..      (2.4)  .........        32   .........       21.2  .........       24.8  .........       48.0  .........       92.8  .........         65  .........  .........
All Other Enforcement                                                                                                                                                                           
 Functions: Base Initiative  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........      1,261  .........  .........
IRP (Base Only)                                                                                                                                                                                 
 International (Base Only)                                                                                                                                                                      
 EPIEG                                                                                                                                                                                          
  Base Initiative..........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........          2  .........  .........
Criminal Investigation:                                                                                                                                                                         
 Base Initiative...........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........        349  .........  .........
Chief Counsel/Appeals: Base                                                                                                                                                                     
 Initiative................  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........        581  .........  .........
Resource Management: Base                                                                                                                                                                       
 Initiative................  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........        320  .........  .........
Plus Dollars Collected in                                                                                                                                                                       
 this Year from Open Cases.  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........  .........
Grand Total Base Initiative     331.0   .........   1,284.0   .........    2,259.9  .........    2,584.0  .........    2,752.5  .........    8,178.0  .........      4,947  .........  .........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Revenue amounts include only dollars from cases closed in FY 1995. Dollars collected from cases closed in other years are shown below.                                                       
\2\Revenue amounts exclude collections as a result of work originated in Examination or IRP. These dollars are included under those functional sections.                                        

                                  ____

       Enclosure 3.

   Fiscal Year 1995 Compliance Initiatives Revenue Estimating Process

       The five-year revenue projection of $9.2 billion is based 
     on standard methodologies that the IRS has employed in 
     developing estimates over the past few years. These 
     methodologies have been improved to reflect Treasury's Office 
     of Tax Analysis recommendations made during their validation 
     process.
       Our revenue estimating process begins with analysis of the 
     historical baseline data. We examine workload, staffing, and 
     revenue amounts from the various auditable management 
     information systems managed by the IRS functions. We develop 
     baseline yield factors from these various data sources.
       These yield factors are then discounted, where applicable, 
     to reflect the reduced workload and revenue that can be 
     attributed to new hires. Some of the major assumptions 
     followed in the IRS revenue estimating process are:
       Marginality of case value--where the new hires will work on 
     the next lowest valued set of cases in an audit class.
       Reduced productivity levels of new hires--new hires will go 
     through a learning experience during the first couple of 
     years, thus reducing the number of cases worked in a year.
       Training time of new hires--depending on the employment 
     category, the availability to work cases is reduced.
       Opportunity costs--the time that the trainers (i.e., on-
     board IRS employees) require to train the new hires will 
     reduce their productivity levels and result in lower revenue. 
     This lost revenue is referred to as opportunity costs.
       The discounted yield factors are then used to derive the 
     revenue totals for the staffing associated with the 
     initiatives. These revenue figures may be measured in 
     recommended, assessed or collected dollars (depending on the 
     function doing the estimating.) All estimates not already 
     measured in collected dollars are converted using models that 
     have been approved by Treasury during their scoring process.
       With the recent development of our Enforcement Revenue 
     Information System (ERIS), IRS will now be able to use one 
     standard system to track the revenue related to these 
     initiatives. ERIS will provide an automated link between 
     monies recommended, assessed, and collected for the different 
     types of cases tracked by enforcement activities. ERIS will 
     also be the primary data source for future revenue 
     projections, resulting in more accurate estimates. ERIS will 
     provide the necessary data to develop the rates and factors 
     used for revenue estimating purposes.

                          ____________________