[Federal Register Volume 64, Number 2 (Tuesday, January 5, 1999)]
[Proposed Rules]
[Pages 457-464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-110]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 801

[REG 119192-98]
RIN 1545-AW80


Establishment of a Balanced Measurement System

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the 
adoption by the IRS of a balanced system to measure organizational 
performance within the IRS. These proposed regulations further 
implement a requirement that all employees be evaluated on whether they 
provided fair and equitable treatment to taxpayers and bar use of 
records of tax enforcement results to evaluate or to impose or suggest 
goals for any employee of the IRS. These regulations implement sections 
1201 and 1204 of the Internal Revenue Restructuring and Reform Act of 
1998. These regulations affect internal operations of the IRS and the 
systems that agency employs to evaluate the performance of 
organizations within IRS and individuals employed by IRS. This document 
also provides notice of public hearing on these proposed regulations.

DATES: Written comments and electronic comments must be received by 
March 8, 1999. Outlines of oral comments to be presented at the public 
hearing scheduled for Thursday, May 13, 1999 at 10 a.m. must be 
received by Thursday, April 22, 1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-119192-98), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
119192-98), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on

[[Page 458]]

the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in room 2615, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Julie Barry (202) 401-4013; concerning submission of comments, the 
hearing, or to be placed on the building access list to attend the 
hearing, Michael Slaughter, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations to establish a Balanced 
System for Measuring Organizational and Individual Performance Within 
the Internal Revenue Service (26 CFR Part 801).
    Section 1201 of the Internal Revenue Service Restructuring and 
Reform Act of 1998 (RRA), Public Law 105-206 (112 Stat. 685, 713 et 
seq. (1998)), requires the Internal Revenue Service to establish a 
performance management system for those employees covered by 5 U.S.C 
4302 that, inter alia, establishes ``goals or objectives for 
individual, group, or organizational performance (or any combination 
thereof), consistent with the Internal Revenue Service's performance 
planning procedures, including those established under the Government 
Performance and Results Act of 1993, division E of the Clinger-Cohen 
Act of 1966 * * *, Revenue Procedure 64-22 * * *, and taxpayer service 
surveys.'' It further requires the IRS to use ``such goals and 
objectives to make performance distinctions among employees or groups 
of employees,'' and to use ``performance assessments as a basis for 
granting employee awards, adjusting an employee's rate of basic pay, 
and other appropriate personnel actions * * *'' Finally, section 1201 
expressly requires that any performance management system adopted by 
the IRS conform to the requirements of section 1204 of RRA.
    Section 1204 of RRA provides that the IRS shall not use ``records 
of tax enforcement results'' in the evaluation of IRS employees or to 
suggest or impose production goals for such employees. It further 
provides that the IRS shall use the ``fair and equitable treatment of 
taxpayers by employees as one of the standards for evaluating employee 
performance.'' Finally, section 1204 requires that ``each appropriate 
supervisor'' certify quarterly in a letter to the Commissioner 
``whether or not tax enforcement results are being used in a manner 
prohibited by'' that section.

Antecedents to Sections 1201 and 1204

    Until the recent change, the Mission Statement for the IRS had 
provided, in part: ``The purpose of the Internal Revenue Service is to 
collect the proper amount of tax revenue at the least cost * * *'' 
Consistent with this Mission Statement, the IRS has long adhered to the 
principle that all IRS officials with discretion to make decisions 
regarding enforcement matters in individual cases should do so only on 
the basis of the correct application of the law to the facts of each 
individual case. It has also sought to give the taxpayers maximum 
efficiencies in its day-to-day operations and has applied many modern 
management techniques to measure and encourage such efficiencies.
    In order to achieve these dual goals, the IRS has adopted a number 
of systems by which it sets goals for and measures the success of its 
various operating units, and directs the activities of its employees. 
The ultimate objective of these measurement systems is to help the IRS 
achieve its overall mission.

Measuring Organizational Performance

    In General. The Government Performance and Results Act of 1993, 
Public Law 103-62 (107 Stat. 285 (Aug. 3, 1993)) (GPRA), requires the 
IRS and other federal agencies to establish a hierarchy of performance 
measures and goals applicable to various organizational units within 
their agencies. These performance measures and goals should be 
expressed in objective, quantifiable and measurable forms to define the 
level of performance to be achieved by a program activity.
    As indicated by the General Accounting Office (``Executive Guide: 
Effectively Implementing the Government Performance and Results Act,'' 
(GAO/GGD-96-118 at 24)):

    [L]eading organizations * * * strive to align their activities 
and resources to achieve mission-related goals[;] they also seek to 
establish clear hierarchies of performance goals and measures. Under 
these hierarchies, the organizations try to link the goals and 
performance measures for each organizational level to successive 
levels and ultimately to the organization's strategic goals. They 
have recognized that without clear, hierarchically linked 
performance measures, managers and staff throughout the organization 
will lack straightforward roadmaps showing how their daily 
activities can contribute to attaining organizationwide strategic 
goals and mission.

    The legislative history underlying passage of GPRA indicates that 
not only must performance goals be established on an hierarchal basis 
throughout an organization, but those goals must reflect the full range 
of the organization's objectives. As the Senate Report accompanying the 
Act indicates (S. Rep. No. 103-58, 103d Cong., 1st Sess. at 29 (1993)):

    The Committee believes agencies should develop a range of 
related performance indicators, such as quantity, quality, 
timeliness, cost, and outcome. A range is important because most 
program activities require managers to balance their priorities 
among several subgoals. * * * Reliance on any single one of these 
measures could create a perverse incentive for managers to achieve 
one subgoal at the expense of the others.

    As a government agency responsible for collecting 95 percent of the 
nation's revenues, the IRS adopted, pursuant to GPRA and other statutes 
\1\, a number of performance measures that focus on the amount of 
adjustments proposed by examination units or the dollars collected by 
collection offices. For example, the budgets submitted by the IRS since 
the mid-1990's have contained performance measures that were heavily 
focused upon enforcement revenue collected or protected. The two 
performance measures for field examination units contained in the FY 
1997 budget request were examination dollars recommended and 
examination dollars recommended per employee (FTE). A similarly 
enforcement-focused set of measures applied to field collection 
functions: dollars collected, dollars collected per FTE, and average 
cycles per TDA/TDI (tax delinquency account/tax delinquency 
investigation) disposition.
---------------------------------------------------------------------------

    \1\ Both the Chief Financial Officers Act of 1990, Pub. L. 101-
576, 104 Stat. 2838 (1990), and Division E, National Defense 
Authorization Act for Fiscal Year 1996 (the Clinger-Cohen Act of 
1996), Pub. L. 104-106, 110 Stat. 186, 679 (1996), also contain 
requirements that federal agencies establish performance measurement 
systems.
---------------------------------------------------------------------------

Measures of Special Compliance Programs

    The IRS, apart from requirements imposed upon it by statutes and 
regulations of general applicability, has periodically been required by 
Congress to establish and to report on other performance measures. For 
example, in connection with expected additional funding promised for FY 
1995 through FY 1999 pursuant to a Compliance Initiative, the IRS made 
a commitment to generate $9.179 billion in additional enforcement 
revenues. It was expected both to track how those additional funds were 
employed and to provide

[[Page 459]]

``quarterly reports * * * identifying the progress being made through 
these enhanced activities to collect taxes due.'' S. Rep. No. 103-286, 
103d Cong., 2d Sess. at 40 (1994); see H.R. Rep. No. 103-534, 103d 
Cong., 2d Sess. at 33 (1994); ``IRS FY 1995 Compliance Initiatives 
Final Report,'' Document 9383 (Rev. 1-96), Catalog Number 21508R.
    More recently, the appropriation for the IRS for FY 1998 provided 
additional monies for ``funding essential earned income tax credit 
compliance and error reduction initiatives.'' The Conference Report 
accompanying that appropriation bill stated (H.R. Conf. Rep. No. 105-
284, 105th Cong.,1st Sess. at 64 (1997)) that ``the IRS should 
establish a method to track the expenditure of funds and measure the 
impact [of the additional funding] on compliance. The IRS shall submit 
quarterly reports to the Committee on Appropriations which identify the 
expenditures and the change in the rates of compliance.'' In the 
absence of accurate information regarding compliance rates, the IRS has 
attempted to comply with this congressional requirement by reporting, 
inter alia, on amounts of revenue protected or collected by various 
EITC compliance programs. See, e.g., ``IRS Tracking Earned Income Tax 
Credit Appropriation,'' Document 9383 (Rev. 6-98), Catalog Number 
21508R.

Measuring the Performance of Employees

    The IRS also must comply with a variety of government-wide mandates 
to measure the performance of individual employees. The civil service 
rules require that the IRS evaluate the performance of employees on an 
annual basis. Performance evaluations also figure in recommendations 
for awards, incentives, allowances or bonuses, an assessment of an 
employee's qualifications for promotion, reassignment or other change 
in duties, and the ranking of other than full-time permanent personnel 
for purposes of release/recall schedules. While these individual 
performance ratings are based upon the elements set forth in various 
workplans and job elements, a manager's success in achieving 
organizational goals will inevitably play an important role in any 
evaluation of his or her performance. Other employees' performance with 
respect to items set forth in their job elements will be viewed in 
light of these goals.

Past Criticisms

    Over the years, the IRS has been repeatedly criticized for placing 
too much reliance upon tax enforcement measures it has adopted. The 
critics have charged that front-line personnel have felt pressured by 
performance measures that were focused on tax enforcement outcomes, 
such as dollars assessed per FTE or dollars collected per FTE, to take 
inappropriate enforcement actions in order to achieve perceived 
enforcement goals. The bulk of this criticism has focused on the impact 
such tax enforcement measures have had upon field personnel in the 
examination and collection functions.
    For example, in 1955, a report by an advisory group appointed by 
the Chairman of the Joint Committee on Internal Revenue Taxation (The 
Internal Revenue Service: Its Reorganization and Administration, July 
25, 1955, at 6) describes a 1954 initiative by the IRS to ``establish 
specific office standards of production [for examination personnel in 
regional and district offices], so that both supervisors and employees 
know what is considered normal.'' This advisory group reported that 
imposition of these standards ``appears to have caused a worsening of 
the enforcement picture.''

    [U]nder the established production quota system proper standards 
of individual performance and proper standards of examination are 
ignored in favor of number of returns examined. The established 
production quota procedure has too frequently reduced the agent's 
investigation to a cursory examination of readily available records 
and a quick look for a few obvious items on which a change can be 
made so as to close the case and meet the quota set.

    In 1957 and again in 1959, questions were raised during hearings 
before the House Ways and Means Committee regarding IRS production 
quotas. ``Reorganization and Administration of the Internal Revenue 
Service,'' Hearings before the Subcommittee on Internal Revenue 
Taxation of the Committee of Ways and Means, 85th Cong., 1st Sess., at 
118-119 (1957); ``Income Tax Revision, Panel Discussions before the 
Committee on Ways and Means, House of Representatives,'' 86th Cong., 
1st Sess. at 805, 808 (1959); ``Compendium of Papers on Broadening the 
Tax Base Submitted to the Committee of Ways and Means,'' 86th Cong., 
1st Sess. at 1527, 1533 (1959).
    In November of 1959, the IRS issued a revised policy statement that 
provided, in part:

    If the duties of the position require the exercise of judgment 
based on detailed knowledge of laws and regulations or involve 
material factors of technical or professional judgment, performance 
must be evaluated in the light of the actual cases or other 
assignments handled, and no quantitative measurement may be utilized 
which does not take such differences into account. Dollar production 
shall not be used as the measurement of any individual's 
performance.

Policy Statement P-1200-9, Approved Nov. 24, 1959

    Questions regarding ``the rating of revenue agents on the basis of 
numbers of examinations made and amounts of additional tax 
recommended'' were again raised during the 1961 confirmation hearings 
held for Commissioner-designate Caplin. Hearings Before the Committee 
on Finance, United States Senate, 87th Cong., 1st Sess., at 14-15 
(1961). Following his confirmation, Commissioner Caplin announced in 
July of 1961 that the IRS was embarking on a ``New Direction,'' which 
was designed to counter what he described as the ``undue emphasis'' 
placed upon production statistics and the ``adverse effect'' the 
perception that production statistics formed the ``main basis'' for 
evaluation of offices and individuals had upon examination quality. 
Under this ``New Direction,'' production goals and statistics would be 
de-emphasized, statistical data would be given more limited circulation 
and qualitative measures of performance would be adopted. ``New Audit 
Program Concepts: Views of Commissioner Caplin on Evaluation of 
Individuals, Programs and Offices in the Audit Activity.''
    The following year, Commissioner Caplin issued a Special Message to 
All Audit Personnel, discussing some misunderstandings that had arisen 
regarding the new audit program. The Commissioner indicated that while 
supervisors were not allowed to evaluate performance on the basis of 
statistics or to pressure agents to produce deficiencies at the cost of 
inadequate audits or inequities to the taxpayer, nothing in the new 
audit program prohibited supervisors from keeping track of the quality 
and amount of work produced by agents. Indeed, ``this is exactly what 
the supervisor of a group of agents is expected to do.'' The Message 
went on to state ``Special Message from the Commissioner,'' dated 
September 7, 1962, at 2:

    More serious than these misunderstandings, is the fact that 
enforcement results have fallen off very substantially. Despite 
having 1,022 more agents and office auditors in FY 62 than in FY 61, 
the number of returns examined decreased by 13,000, while additional 
taxes and penalties recommended decreased by $66 million.
    You can readily see how this drop-off endangers our Long Range 
Plan for gradually increasing our manpower and doing our

[[Page 460]]

work more effectively. Under this plan, we have been allowed almost 
10,000 additional people over the last three years, and it calls for 
the addition of about 24,000 more by 1968. Yet, when a substantial 
increase in staff is followed by this kind of a drop in our 
enforcement results, the appropriating authorities naturally begin 
to wonder about the wisdom of financing the rest of our proposed 
expansion.

    Issues regarding the IRS' use of production statistics also came up 
during Commissioner Alexander's 1973 confirmation hearings before the 
Senate Finance Committee. When questioned about his opinion toward 
production quotas, Commissioner Alexander responded that he was 
completely opposed to their use. Hearings Before the Committee on 
Finance, United States Senate, 93d Cong., 1st Sess., at 4-5 (1973).
    In November of 1973, the IRS adopted the current version of Policy 
Statement P-1-20, revising its policies regarding the use of records of 
tax enforcement results and prohibiting absolutely the use of 
enforcement statistics to evaluate the performance of enforcement 
personnel; this statement permitted the accumulation and use of 
enforcement statistics only for ``long-range planning, financial 
planning, allocation of resources, work planning and control, effective 
functional management, or other related staffing utilization systems 
and plans.'' In an accompanying Special Message to all Enforcement 
Personnel, Commissioner Alexander stated that this prohibition was 
applicable to all personnel who exercised judgment in determining tax 
liability or the ability to pay. Commissioner Alexander further 
declared, ``[i]ndividual case or dollar goals--formal, informal, or 
implied--are not permitted and will not be tolerated.''
    During 1974, Senate Appropriations Committee hearings again focused 
on allegations that taxpayers were being mistreated as a result of 
production quotas (both case closings and dollar amounts). A number of 
witnesses and the Committee chairman expressed concerns that individual 
production statistics were being used to evaluate field employees, 
notwithstanding the existing policy. Testimony during those hearings 
also indicated that pressure to increase the number of cases closed in 
Collection directly led to inappropriate seizures. Hearings Before the 
Subcommittee on the Department of the Treasury, U.S. Postal Service, 
and General Government Appropriations of the Committee on 
Appropriations, United States Senate, 93d Cong., 2d Sess., at 2-25, 
520, 543-546, 574-584, 586-601, 653-670 (1974); see also, ``Taxpayer 
Assistance and Compliance Programs,'' Hearings before the Senate 
Committee on Appropriations, 93d Cong., 1st Sess. at 41-46, 568-569, 
642-643, 680-681 (1974).
    In 1988, the Senate Appropriations Committee held hearings focusing 
again on allegations that the IRS' use of enforcement statistics to 
evaluate programs and personnel had led to inappropriate enforcement 
actions. Treasury, Postal Service and General Government 
Appropriations, Fiscal Year 1989, Before the Committee on 
Appropriations, 100th Cong., 2d Sess. at 588-590 (1988). On November 
10, 1988, the Technical and Miscellaneous Revenue Act of 1988, Public 
Law 100-647 (102 Stat. 3734 (1988)) (TBOR 1) was enacted. Section 6231 
of that measure prohibits the use of records of tax enforcement 
results:

    (1) To evaluate employees directly involved in collection 
activities and their immediate supervisors, or

    (2) To impose or suggest production quotas or goals [for such 
employees and supervisors].

    During the appropriation hearings for FY 1989, Commissioner Gibbs 
testified about the TBOR 1 prohibition (Treasury, Postal Service and 
General Government Appropriations, Fiscal Year 1989, Before the Senate 
Committee on Appropriations, 100th Cong., 2d Sess. at 589 (1988)):

    The problem that I have with our policy statement--that policy 
statement, by the way, being in the taxpayer bill of rights--is that 
it tells our people what not to do. It says, ``Don't use enforcement 
statistics.'' * * * I don't think that this helps someone on the 
front line very much to tell them what not to do.
    What we have started, within the last 18 months that I have been 
the Commissioner, is to begin to develop at the working level 
criteria as to what constitutes a quality collection action, what 
constitutes a quality examination action. It is an entirely 
different approach to collection and examination, trying to train 
the people as to how to approach what they are doing so that if they 
do it the right way, the numbers will flow. The idea is to get away 
from simply dollar amounts, comparing one another in terms of how 
they are doing with respect to collections, or seizures, or anything 
like that.

    The General Accounting Office has expressed a somewhat different 
view of the appropriate use of enforcement results to measure IRS 
performance. Its December 10, 1991, report on ``IRS' Implementation of 
the 1988 Taxpayer Bill of Rights'' stated (GAO/GGD-92-23 at 14-15):

    In an October 1987 letter to the Chairmen of the House Committee 
on Ways and Means and the Senate Committee on Finance, we commented 
on various proposals to prohibit the use of collection statistics in 
performance evaluations. Our position then and now is that 
collection statistics should not be the only indicator of 
performance but, along with other factors, could very well be a 
useful tool in evaluating employees. We pointed out that relying on 
a single factor can place more emphasis on that factor than on 
overall performance. We said that it is not totally inappropriate to 
generally consider the amount of revenues collected as part of an 
employee's evaluation if that consideration is only one of several 
factors under review. We added that setting arbitrary quotas for 
amounts collected, property seized, or cases closed cannot be 
justified in evaluating performance, particularly because of the 
negative impact that trying to achieve those quotas can have on 
taxpayers.

In its May 11, 1993, report on ``Tax Administration: New Delinquent Tax 
Collection Methods for IRS'' (GAO/GGD093-67 at 9), GAO reiterated this 
view:

    As we have stated in the past, IRS should be able to use 
collection performance as a criterion in determining compensation 
and rewards for individual collectors. We believe that information 
such as taxes collected is a reasonable basis on which to judge the 
performance of employees whose job it is to collect taxes as long as 
other criteria, such as fair and courteous treatment of taxpayers, 
are also evaluated.

    In a similar vein, a December 23, 1993, report by the GAO on the 
offer in compromise program (``Tax Administration: Changes Needed to 
Cope with Growth in Offer in Compromise Program'' (GAO/GGD-94-47 at 24) 
indicated:

    The Commissioner of Internal Revenue should develop the 
indicators necessary to evaluate the Offer in Compromise Program as 
a collection and compliance tool. The indicators should be based on 
accurate data and include (1) the yield of the program in terms of 
costs expended and amounts collected, (2) the amount of revenues 
collected that would not have been collected through other 
collection means. * * *

    In September 1997, the Senate Finance Committee held three days of 
widely-publicized oversight hearings on the Internal Revenue Service. 
During these hearings, several IRS employees testified that IRS' 
performance measurement system was creating an environment in which 
they felt pressured to achieve certain quantitative goals for tax 
enforcement results (such as dollars recommended or collected). In his 
testimony at the conclusion of these hearings, the Acting Commissioner 
responded to the concerns that had been raised about the negative 
impact of the IRS performance measurement system by announcing a number 
of immediate changes in the system. In particular, he announced that 
IRS would suspend the comparative

[[Page 461]]

ranking of its 33 district offices and suspend distribution of any 
goals related to revenue production to field offices. ``Practices and 
Procedures of the Internal Revenue Service,'' Hearings before the 
Committee on Finance, United States Senate, 105th Cong., 1st Sess., at 
3, 105-106, 123-128, 153, 155-156, 162-163, 206-209, 212-213, 303-304, 
310, 317-318, 320-322, 325-326, 330, 333, 351-356.
    Following these hearings, the IRS Office of Chief Inspector 
undertook three management audits to determine how enforcement 
statistics were then being used as part of the IRS performance 
measurement system. See, ``Review of the Use of Statistics and the 
Protection of Taxpayer Rights in the Arkansas-Oklahoma District 
Collection Field Function,'' Internal Audit Reference Number 380402 
(December 5, 1997); ``Use of Enforcement Statistics in the Collection 
Field Function,'' Internal Audit Reference Number 081904 (January 12, 
1998); ``Examination Division's Use of Performance Measures and 
Statistics,'' Internal Audit Reference Number 084303 (July 7, 1998). 
These three inquiries generally confirmed that IRS performance measures 
were focused largely on enforcement goals and productivity as defined 
by statistics relating to dollars recommended, assessed or collected, 
or other enforcement actions taken. They found a lack of corresponding 
emphasis on quality casework, adherence to law, and protection of 
taxpayer rights.
    In order to deal with specific allegations of misconduct made 
during the September hearings, or discovered in the course of the 
management audits described above, the IRS Office of Chief Inspector 
also undertook a number of individual investigations. The Commissioner 
then established a Special Review Panel of career executives from 
outside the IRS to review the evidence and to recommend appropriate 
personnel actions. The Special Review Panel issued a Report to the 
Commissioner in August 1998. In its Report, the Special Review Panel 
agreed with earlier conclusions that IRS had responded to external 
pressures to close the revenue gap through improved productivity by 
shifting management emphasis to goals and measures that placed a heavy 
emphasis on use of enforcement statistics. See also ``IRS Personnel 
Administration: Use of Enforcement Statistics in Employee Evaluations'' 
(GAO/GGD-99-11, November 30, 1998).

Internal Revenue Service Restructuring and Reform Act of 1998

    Sections 1201 and 1204 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (RRA) represent the most recent 
legislative action regarding performance measures used by the IRS. 
Section 1201 directs the IRS, consistent with its current performance 
planning procedures, including those established under the GPRA, to 
establish a performance management system that will establish ``goals 
or objectives for individual, group, or organizational performance.'' 
The IRS is directed to use this performance system in the evaluation of 
employees or groups of employees, in determining salary adjustments and 
awards, and in other personnel matters. The Conference Report 
accompanying RRA (H. R. Conf. Rep. No. 105-599, 105th Cong., 2d Sess., 
at 228 (June 24, 1998) indicates that ``in no event would performance 
measures be used which rank employees or groups of employees based 
solely on enforcement results, establish dollar goals for assessments 
or collections, or otherwise undermine fair treatment of taxpayers.''
    Section 1204 of RRA repealed section 6231 of TBOR 1 and replaced 
TBOR 1's prohibition on the use of ``records of tax enforcement 
results'' to evaluate or to impose or suggest goals for personnel 
directly involved in collection activity with a prohibition against 
using such records of tax enforcement results to evaluate, or to impose 
or suggest production quotas or goals for, any IRS ``employee.''

Explanation of Provisions

Proposed Effective Date

    These regulations are proposed to be effective thirty days after 
the date of publication in the Federal Register of the final 
regulations.

Balanced Measurement System

    These proposed regulations provide guidance and direction for the 
establishment of a balanced performance measurement system for the 
Internal Revenue Service. They also provide guidance for implementing 
the restrictions on the use of ``records of tax enforcement results'' 
in evaluating, or imposing or suggesting goals for employees and for 
establishing ``fair and equitable treatment of taxpayers'' as one of 
the standards for evaluating employees.
    These proposed regulations establish a new balanced system for 
measuring the performance of and establishing performance goals for 
various operational units within the Internal Revenue Service. The 
three elements of this balanced measurement system are (1) Customer 
Satisfaction Measures, (2) Employee Satisfaction Measures and (3) 
Business Results Measures. These measures will, consistent with GPRA, 
be based on ``quantifiable and measurable'' data, and will be 
numerically scored.
    The proposed regulations do not provide procedures for certifying 
whether or not records of tax enforcement results have been used in a 
manner prohibited by section 1204. Subsequent guidance will provide 
that information.
a. Customer Satisfaction
    To measure customer satisfaction, the IRS will develop data from 
customer satisfaction surveys it receives from a statistically valid 
sample of taxpayers with whom it has dealt. Among other things, 
taxpayers will be asked to provide information regarding whether they 
were treated courteously and professionally, whether they were informed 
of their rights and whether they were given an opportunity to voice 
their concerns and adequate time to respond to IRS requests. Using data 
derived from these surveys, the IRS will derive quantitative indices of 
customer satisfaction which will be used to measure progress in 
achieving customer satisfaction goals.
b. Employee Satisfaction
    To measure employee satisfaction, the IRS will utilize an employee 
survey that permits employees to provide, on an anonymous basis, their 
assessment of the wide variety of factors that determine whether 
employees believe that the work environment permits them to perform 
their duties in a professional manner. Among other items included in 
the employee survey, the questionnaires should elicit information 
regarding employees' assessment of the quality of supervision and the 
adequacy of training and support services. As in the case of the 
Customer Satisfaction measures, the goals and the accomplishments of 
units subject to the balanced measurement system will be expressed in 
quantified form.
c. Business Results
    The IRS will employ two parallel avenues to measure business 
results.
1. Quality Measures
    The first of these approaches will focus on the quality of the work 
done in a sample of cases that were worked on by employees. Such 
reviews will be conducted of a statistically valid sample of cases 
worked on by units designated by the Commissioner, such as a

[[Page 462]]

collection or examination unit. A staff of personnel specially 
dedicated to the task will review and numerically score the quality of 
work done by IRS personnel. These reviews will focus on such factors as 
whether IRS personnel provided proper and timely service to the 
taxpayer, properly analyzed the facts, correctly applied the law, 
protected taxpayer rights by following applicable IRS policies and 
procedures, devoted an appropriate amount of time to the case, made 
appropriate judgments regarding liability for tax and ability to pay 
and provided accurate answers to tax law or account questions posed by 
callers.
2. Quantity Measures
    The quantity measures element of the business results measure will 
focus exclusively on outcome-neutral production data. Accordingly, as 
described in the regulation, data concerning the enforcement outcome in 
cases, such as the dollar amount of audit adjustments, the numbers of 
liens filed or levies served, and the number of referrals for criminal 
investigation, would be excluded from the production data used in the 
quantity measures. On the other hand, outcome-neutral production data, 
such as cases closed, time per closing or cycle time, which do not 
reflect the outcome produced by any IRS official's exercise of judgment 
in determining liability for tax or the collection mechanism to be 
employed may be used in determining the production element of the 
business results measures. The IRS has determined, however, that as a 
matter of policy such outcome-neutral production data may not be used 
to set goals for or for evaluating any non-supervisory employee with 
tax enforcement responsibilities.
    Further, an organization with enforcement responsibilities may not 
be given a goal or an evaluation based on enforcement-neutral 
production data regarding matters calling for the exercise of judgment 
with respect to tax enforcement results unless that goal or evaluation 
constitutes only one element in a set of goals or one element in an 
evaluation based also upon the balanced measurement system.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It also has been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) does not apply to these regulations and, because these 
regulations do not impose on small entities a collection of information 
requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does 
not apply. Therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(f) of the Internal Revenue Code, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments (a 
signed original and eight (8) copies) that are submitted timely to the 
IRS. The IRS and Treasury specifically request comments on the clarity 
of the proposed regulation and how it may be made easier to understand. 
All comments will be available for public inspection and copying.
    A public hearing has been scheduled for Thursday, May 13, 1999, 
beginning at 10 a.m. in room 2615 of the Internal Revenue Building, 
1111 Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter at the 10th Street entrance, located 
between Constitution and Pennsylvania Avenues, NW. In addition, all 
visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 15 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit comments and 
an outline of the topics to be discussed and the time to be devoted to 
each topic by Thursday, April 22, 1999. A period of 10 minutes will be 
allotted to each person for making comments. An agenda showing the 
scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Julie A. Barry, Office 
of Assistant Chief Counsel (General Legal Services). However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects in 26 CFR Part 801

    Government employees, Organization and functions (Government 
agencies).

Proposed Amendments to the Regulations

    Accordingly, 26 CFR Chapter I is proposed to be amended by adding 
part 801 to Subchapter H to read as follows:

PART 801--BALANCED SYSTEM FOR MEASURING ORGANIZATIONAL AND 
INDIVIDUAL PERFORMANCE WITHIN THE INTERNAL REVENUE SERVICE

Sec.
801.1  Balanced performance measurement system; in general.
801.2  Balanced performance measurement system.
801.3  Customer satisfaction measures.
801.4  Employee satisfaction measures.
801.5  Business results measures.

    Authority: 5 U.S.C 9501 et seq.; secs. 1201, 1204, Pub. L. 105-
206, 112 Stat. 685, 715-716, 722 (26 U.S.C. 7804 note).


Sec. 801.1  Balanced performance measurement system; in general.

    (a) In general. The regulations in this part 801 implement the 
provisions of sections 1201 and 1204 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (Pub. L. 105-106, 112 stat. 685, 
715-716, 722) and provide rules relating to the establishment by the 
Internal Revenue Service of a balanced performance measurement system.
    (b) Effective date. This part 801 is effective thirty days after 
the date these regulations are published as final regulations in the 
Federal Register.


Sec. 801.2  Balanced performance measurement system.

    (a) In general. Modern management practice and various statutory 
and regulatory provisions require the IRS to set performance goals for 
organizational units and to measure the results achieved by those 
organizations with respect to those goals. To fulfill these 
requirements, the IRS has established a balanced performance 
measurement system, composed of three elements: Customer Satisfaction 
Measures; Employee Satisfaction Measures; and Business Results 
Measures. The IRS is likewise required to establish a performance 
evaluation system for individual employees.
    (b) Measuring organizational performance--(1) In general. The 
performance measures that comprise the balanced measurement system 
will, to the maximum extent possible, be stated in objective, 
quantifiable and measurable terms and, subject to the limitation set 
forth in paragraph (b)(2) of

[[Page 463]]

this section, will be used to measure the overall performance of 
various operational units within the IRS. In addition to implementing 
the requirements of the Internal Revenue Service Restructuring and 
Reform Act of 1998, Pub. L. 105-206, 112 Stat. 685, the measures 
described here will, where appropriate, be used in performance goals 
and performance evaluations established, inter alia, under Division E, 
National Defense Authorization Act for Fiscal Year 1996 (the Clinger-
Cohen Act of 1996), Pub. L. 104-106, 110 Stat. 186, 679; the Government 
Performance and Results Act of 1993, Pub. L. 103-62, 107 Stat. 285; and 
the Chief Financial Officers Act of 1990, Pub. L. 101-576, 108 Stat. 
2838.
    (2) Limitation--quantity measures (as described in Sec. 801.5) will 
not be used to evaluate the performance of or to impose or suggest 
production goals for any organizational unit with employees who are 
responsible for exercising judgment with respect to tax enforcement 
results (as defined in Sec. 801.5) except in conjunction with an 
evaluation or goals based also upon Customer Satisfaction Measures, 
Employee Satisfaction Measures, and Quality Measures.
    (c) Measuring individual performance. All employees of the IRS will 
be evaluated according to the critical elements and standards or other 
performance criteria established for their positions. In accordance 
with the requirements of 5 U.S.C. 4312 and 9508 and section 1201 of the 
Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 
105-206 (112 Stat. 685), (as is appropriate to the employee's 
position), the performance criteria for each position will be composed 
of elements that support the organizational measures of Customer 
Satisfaction, Employee Satisfaction and Business Results; however, such 
organizational measures will not directly determine the evaluation of 
individual employees.
    (1) Fair and equitable treatment of taxpayers. In addition to all 
other criteria required to be used in the evaluation of employee 
performance, all employees of the IRS will be evaluated on whether they 
provided fair and equitable treatment to taxpayers.
    (2) Senior Executive Service and special positions. Employees in 
the Senior Executive Service will be rated in accordance with the 
requirements of 5 U.S.C. 4312 and employees selected to fill positions 
under 5 U.S.C. 9503 will be evaluated pursuant to workplans, employment 
agreements, performance agreements or similar documents entered into 
between the Internal Revenue Service and the employee.
    (3) General workforce. The performance evaluation system for all 
other employees will:
    (i) Establish one or more retention standards for each employee 
related to the work of the employee and expressed in terms of 
individual performance; and--
    (A) Require periodic determinations of whether each employee meets 
or does not meet the employee's established retention standards; and
    (B) Require that action be taken, in accordance with applicable 
laws and regulations, with respect to employees whose performance does 
not meet the established retention standards.
    (ii) Establish goals or objectives for individual performance 
consistent with the IRS's performance planning procedures; and--
    (A) Use such goals and objectives to make performance distinctions 
among employees or groups of employees; and (B) Use performance 
assessments as a basis for granting employee awards, adjusting an 
employee's rate of basic pay, and other appropriate personnel actions, 
in accordance with applicable laws and regulations.
    (4) Limitations. (i) No employee of the IRS may use records of tax 
enforcement results (as defined in Sec. 801.5) to evaluate any other 
employee or to impose or suggest production quotas or goals for any 
employee.
    (A) For purposes of the limitation contained in this paragraph 
(c)(4), employee has the meaning as defined in 5 U.S.C. 2105(a).
    (B) For purposes of the limitation contained in this paragraph 
(c)(4), evaluate includes any process used to appraise or measure an 
employee's performance for purposes of providing the following:
    (1) Any required or requested performance rating.
    (2) A recommendation for an award covered by Chapter 45 of Title 5; 
5 U.S.C. 5384; or section 1201(a) of the Internal Revenue Service 
Restructuring and Reform Act of 1998, Pub. L. 105-206 (112 Stat. 685, 
713-716).
    (3) An assessment of an employee's qualifications for promotion, 
reassignment or other change in duties.
    (4) An assessment of an employee's eligibility for incentives, 
allowances or bonuses.
    (5) Ranking of employees for release/recall and reductions in 
force.
    (ii) Employees who are responsible for exercising judgment with 
respect to tax enforcement results (as defined in Sec. 801.5) in cases 
concerning one or more taxpayers may be evaluated with respect to work 
done on such cases only on the basis of information derived from a 
review of the work done on the taxpayer cases handled by such employee.
    (iii) Performance measures based in whole or in part on Quantity 
Measures (as described in Sec. 801.5) will not be used to evaluate the 
performance of or to impose or suggest goals for any non-supervisory 
employee who is responsible for exercising judgment with respect to tax 
enforcement results (as defined in Sec. 801.5).


Sec. 801.3  Customer satisfaction measures.

    The customer satisfaction goals and accomplishments of operating 
units will be determined on the basis of data derived from 
questionnaires, surveys and other types of information gathering 
mechanisms. Surveys designed to measure customer satisfaction for a 
particular work unit will be distributed to a statistically valid 
sample of the taxpayers served by that operating unit and will be used 
to measure whether those taxpayers believe that they received 
courteous, timely and professional treatment by the IRS personnel with 
whom they dealt. Taxpayers will be permitted to provide information 
requested for these purposes under conditions that guarantee them 
anonymity.


Sec. 801.4  Employee satisfaction measures.

    The numerical ratings to be given operating units within the IRS 
for employee satisfaction will be determined on the basis of 
information derived from a questionnaire which will be distributed to 
all employees of the operating unit; the employees will be permitted to 
provide information on an anonymous basis. Data from these surveys will 
measure, among other factors bearing upon employee satisfaction, the 
quality of supervision and the adequacy of training and support 
services.


Sec. 801.5  Business results measures.

    (a) In general. The business results measures will consist of 
numerical scores determined under the Quality Measures and the Quantity 
Measures described elsewhere in this section.
    (b) Quality measures. The quality measure will be determined on the 
basis of a review by a specially dedicated staff within the IRS of a 
statistically valid sample of work items handled by certain functions 
or organizational units determined by the Commissioner or his delegate 
such as the following:
    (1) Examination and collection units and Automated Collection 
System units (ACS). The quality review of the handling of cases 
involving particular

[[Page 464]]

taxpayers will focus on such factors as whether IRS personnel devoted 
an appropriate amount of time to a matter, properly analyzed the issues 
presented, developed the facts regarding those issues, correctly 
applied the law to the facts, and complied with statutory, regulatory 
and IRS procedures, including timeliness, adequacy of notifications and 
required contacts with taxpayers.
    (2) Toll-free telephone sites. The quality review of telephone 
services will focus on such factors as whether IRS personnel provided 
accurate tax law and account information.
    (3) Other workunits. The quality review of other workunits will be 
determined according to criteria prescribed by the Commissioner or his 
delegate.
    (c) Quantity measures. The quantity measures will consist of 
outcome-neutral production and resource data, such as the number of 
cases closed, work items completed, hours expended and similar 
inventory, workload and staffing information, that does not contain 
information regarding the tax enforcement result reached in any case 
involving particular taxpayers.
    (d) Definitions--(1) Tax enforcement result. A tax enforcement 
result is the outcome produced by an IRS employee's exercise of 
judgment recommending or determining whether or how the IRS should 
pursue enforcement of the tax law with respect to any assessed or 
unassessed tax.
    (i) Examples of data containing information regarding tax 
enforcement results. The following are examples of data containing 
information regarding tax enforcement results: number of liens filed; 
number of levies served; number of seizures executed; dollars assessed; 
dollars collected; full pay rate; no change rate; and number of fraud 
referrals.
    (ii) Examples of data that do not contain information regarding tax 
enforcement results. The following are examples of data that do not 
contain information regarding tax enforcement results: number of cases 
closed; time per case; direct examination time/out of office time; 
cycle time; number or percentage of overage cases; inventory 
information; toll-free level of access; talk time; and data derived 
from a quality review or from a review of an employee's or a workunit's 
work on a case, such as the number or percentage of cases in which 
correct examination adjustments were proposed or appropriate lien 
determinations were made.
    (iii) Records of tax enforcement results. Records of tax 
enforcement results are data, statistics, compilations of information 
or other numerical or quantitative recordations of the tax enforcement 
results reached in one or more cases, but does not include information, 
including the tax enforcement result, regarding an individual case to 
the extent the information is derived from a review of an employee's or 
a workunit's work on individual cases.
    (e) Permitted uses of records of tax enforcement results. Records 
of tax enforcement results may be used for purposes such as 
forecasting, financial planning, resource management, and the 
formulation of case selection criteria.
    (f) Examples. The following examples illustrate the rules of this 
section:

    Example 1. In conducting a performance evaluation, a supervisor 
may take into consideration information showing that the employee 
had failed to propose an appropriate adjustment to tax liability in 
one of the cases the employee examined, provided that information is 
derived from a review of the work done on the case. All information 
derived from such a review of individual cases handled by an 
employee, including time expended, issues raised, and enforcement 
outcomes reached may be considered in setting goals or evaluating 
the employee.
    Example 2. A supervisor may not establish a goal for proposed 
adjustments in a future examination, even though the goal was 
derived from analyses of previously-handled cases, because such 
enforcement goals are not based upon an analysis of the newly-
assigned case.
    Example 3. A headquarters unit may use records of tax 
enforcement results to develop methodologies and algorithms for use 
in selecting tax returns to audit.
Charles O. Rossotti,
Commissioner of Internal Revenue.
[FR Doc. 99-110 Filed 1-4-99; 8:45 am]
BILLING CODE 4830-01-U