[Federal Register Volume 70, Number 199 (Monday, October 17, 2005)]
[Rules and Regulations]
[Pages 60214-60217]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-20439]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 801

[TD 9227]
RIN 1545-BE46


Balanced System for Measuring Organizational and Employee 
Performance Within the Internal Revenue Service

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the balanced system for measuring organizational and 
employee performance within the IRS. The temporary regulations 
prospectively amend the existing final regulations in 26 CFR part 801 
to clarify when quantity measures, which are not tax enforcement 
results, may be used in measuring organizational and employee 
performance. The portions of this document that are final regulations 
provide necessary cross-references to the temporary regulations. These 
regulations affect internal operations of the IRS and the systems it 
employs to evaluate the performance of organizations within the IRS. 
The text of the temporary regulations also serves as the text of 
proposed regulations set forth in the Proposed Rules section in this 
issue of the Federal Register.

DATES: Effective Date: These regulations are effective on October 17, 
2005.
    Applicability Date: For dates of applicability, see Sec. Sec.  
801.7 and 801.8T.

FOR FURTHER INFORMATION CONTACT: Neil Worden, (202) 283-7900 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends final regulations in 26 CFR part 801 (the 
Final Regulations) that implement the Balanced System for Measuring 
Organizational and Employee Performance within the IRS. The Final 
Regulations were published in the Federal Register on August 6, 1999 
(64 FR 42834-42837). The Final Regulations emanated from section 1201 
of the Internal Revenue Service Restructuring and Reform Act of 1998, 
Public Law 105-206, 112 Stat. 685, 713 (1998) (the Act), which required 
the IRS to establish a performance management system for those 
employees covered by 5 U.S.C. 4302 that, among other things, 
establishes ``goals or objectives for individual, group, or 
organizational performance (or any combination thereof), consistent 
with the IRS' 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.'' Section 1201 further 
required 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 * * *.''
    In addition, section 1201 of the Act required that the IRS 
performance management system comply with section 1204, which prohibits 
the use of ``records of tax enforcement results'' (ROTERs) in the 
evaluation of IRS employees or to suggest or impose production goals 
for such employees. Section 1204, however, does not prohibit the use of 
quantity measures in evaluating organizational and employee 
performance. The temporary regulations in this document amend the 
existing regulations in part 801 to clarify when quantity measures may 
be used in measuring organizational and employee performance.

Explanation of Provisions

    The final regulations provide guidance and direction for the 
establishment of a balanced performance measurement system for the IRS. 
The three elements of this balanced measurement system are (1) customer 
satisfaction measures, (2) employee satisfaction measures and (3) 
business results measures. These organizational measures may be used to 
evaluate the performance of, or to impose or suggest production goals 
for, any organizational unit.
    The temporary regulations contained in this document relate 
primarily to the business results measures. Business results are 
measured through quality measures and quantity measures. Quality 
measures are based on reviews of a statistically valid sample of cases 
handled by certain organizational units such as examination, collection 
and Automated Collection System units. The quality review of other work 
units is determined according to criteria established by the 
Commissioner or his delegate.
    The IRS and Treasury Department have determined that the provisions 
of the existing part 801 regulations that limit the use of quantity 
measures in evaluating organizational units and imposing or suggesting 
production goals for employees restrict the IRS' ability to monitor 
program performance and track effectiveness of operations, and have 
caused confusion as to what types of data or measures may be discussed 
between managers and employees and reflected in manager and employee 
goals. These temporary regulations remove the limitations on the use of 
quantity measures in evaluating the performance of, or imposing or 
suggesting goals for organizational units. These temporary regulations 
also remove the limitations on the use of quantity measures to impose 
or suggest goals for employees. The regulations continue to provide 
that performance

[[Page 60215]]

measures based on quantity measures will not be used to evaluate the 
performance of such employees. The temporary regulations do not affect 
the continuing prohibition on the use of ROTERS to evaluate employee 
performance or to impose or suggest production quotas or goals for any 
employee.

Special Analyses

    It has been determined that this is not a significant regulatory 
action as defined in Executive Order 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. For applicability of the Regulatory 
Flexibility Act, please refer to the cross-reference notice of proposed 
rulemaking published elsewhere in this Federal Register. Pursuant to 
section 7805(f) of the Internal Revenue Code, these temporary 
regulations will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal author of these regulations is Karen F. Keller, 
Office of Associate Chief Counsel (General Legal Services). However, 
other personnel from the IRS participated in their development.

List of Subjects in 26 CFR Part 801

    Government employees, Organization and functions (Government 
agencies).

Amendments to the Regulations

0
Accordingly, 26 CFR part 801 is amended as follows:

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

0
Paragraph 1. The authority citation for part 801 continues to read in 
part as follows:

    Authority: 5 U.S.C. 9501 * * *.


0
Par. 2. Section 801.1 is amended by:
0
1. Adding the new center heading.
0
2. Removing and reserving paragraph (b).
    The addition reads as follows:

Regulations Applicable Before October 17, 2005


Sec.  801.1  Balanced performance measurement system; in general.

* * * * *
0
Par. 3. Section 801.7 is added to read as follows:


Sec.  801.7  Effective dates.

    The provisions of Sec. Sec.  801.1 through 801.6 apply before 
October 17, 2005. For the applicable provisions on or after October 17, 
2005, see Sec. Sec.  801.1T through 801.7T.

0
Par. 4. Sections 801.1T through 801.8T and a new center heading are 
added to read as follows:

Regulations Applicable On or After October 17, 2005


Sec.  801.1T  Balanced performance measurement system; in general 
(temporary).

    (a) In general. (1) 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) (the Act) and provide rules relating to the establishment 
by the Internal Revenue Service (IRS) of a balanced performance 
measurement system.
    (2) 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 units 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) [Reserved]


Sec.  801.2T  Measuring organizational performance (temporary).

    The performance measures that comprise the balanced measurement 
system will, to the maximum extent possible, be stated in objective, 
quantifiable, and measurable terms and will be used to measure the 
overall performance of various operational units within the IRS. In 
addition to implementing the requirements of the Act, the measures 
described here will, where appropriate, be used in establishing 
performance goals and making 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). Thus, organizational measures of 
customer satisfaction, employee satisfaction, and business results 
(including quality and quantity measures as described in Sec.  801.6T) 
may be used to evaluate the performance of or to impose or suggest 
production goals for, any organizational unit.


Sec.  801.3T  Measuring employee performance (temporary).

    (a) In general. All employees of the IRS will be evaluated 
according to the critical elements and standards or such other 
performance criteria as may be established for their positions. In 
accordance with the requirements of 5 U.S.C. 4312, 4313, and 9508 and 
section 1201 of the Act, the performance criteria for each position as 
are appropriate to that 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.
    (b) 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.
    (c) 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 4313 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 IRS and the employee.
    (d) General workforce. The performance evaluation system for all 
other employees will--
    (1) Establish one or more retention standards for each employee 
related to the work of the employee and expressed in terms of 
individual performance;
    (2) Require periodic determinations of whether each employee meets 
or does not meet the employee's established retention standards;
    (3) 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;
    (4) Establish goals or objectives for individual performance 
consistent with the IRS's performance planning procedures;
    (5) Use such goals and objectives to make performance distinctions 
among employees or groups of employees; and
    (6) Use performance assessments as a basis for granting employee 
awards, adjusting an employee's rate of basic pay, and other 
appropriate personnel

[[Page 60216]]

actions, in accordance with applicable laws and regulations.
    (e) Limitations. (1) No employee of the IRS may use records of tax 
enforcement results (as described in Sec.  801.6T) to evaluate any 
other employee or to impose or suggest production quotas or goals for 
any employee.
    (i) For purposes of the limitation contained in this paragraph (e), 
employee has the meaning as defined in 5 U.S.C. 2105(a).
    (ii) For purposes of the limitation contained in this paragraph 
(e), evaluate includes any process used to appraise or measure an 
employee's performance for purposes of providing the following:
    (A) Any required or requested performance rating.
    (B) A recommendation for an award covered by Chapter 45 of Title 5; 
5 U.S.C. 5384; or section 1201(a) of the Act.
    (C) An assessment of an employee's qualifications for promotion, 
reassignment, or other change in duties.
    (D) An assessment of an employee's eligibility for incentives, 
allowances, or bonuses.
    (E) Ranking of employees for release/recall and reductions in 
force.
    (2) Employees who are responsible for exercising judgment with 
respect to tax enforcement results in cases concerning one or more 
taxpayers may be evaluated on work done on such cases only in the 
context of their critical elements and standards.
    (3) Performance measures based in whole or in part on quantity 
measures (as described in Sec.  801.6T) will not be used to evaluate 
the performance of any non-supervisory employee who is responsible for 
exercising judgment with respect to tax enforcement results (as 
described in Sec.  801.6T).


Sec.  801.4T  Customer satisfaction measures (temporary).

    The customer satisfaction goals and accomplishments of operating 
units within the IRS will be determined on the basis of information 
gathered through various methods. For example, questionnaires, surveys 
and other types of information gathering mechanisms may be employed to 
gather data regarding customer satisfaction. Information to measure 
customer satisfaction for a particular work unit will be gathered from 
a statistically valid sample of the customers served by that operating 
unit and will be used to measure, among other things, whether those 
customers believe that they received courteous, timely, and 
professional treatment by the IRS personnel with whom they dealt. 
Customers will be permitted to provide information requested for these 
purposes under conditions that guarantee them anonymity. For purposes 
of this section, customers may include individual taxpayers, 
organizational units, or employees within the IRS and external groups 
affected by the services performed by the IRS operating unit.


Sec.  801.5T  Employee satisfaction measures (temporary).

    The employee satisfaction numerical ratings to be given operating 
units within the IRS will be determined on the basis of information 
gathered through various methods. For example, questionnaires, surveys, 
and other information gathering mechanisms may be employed to gather 
data regarding satisfaction. The information gathered will be used to 
measure, among other factors bearing upon employee satisfaction, the 
quality of supervision and the adequacy of training and support 
services. All employees of an operating unit will have an opportunity 
to provide information regarding employee satisfaction within the 
operating unit under conditions that guarantee them anonymity.


Sec.  801.6T  Business results measures (temporary).

    (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. Quality measures 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 taxpayers will focus on such factors as whether 
IRS personnel devoted an appropriate amount of time to a matter, 
properly analyzed 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 work units. The quality review of other work units will 
be determined according to criteria prescribed by the Commissioner or 
his delegate.
    (c) Quantity measures. Quantity measures will consist of outcome-
neutral production and resource data that does not contain information 
regarding the tax enforcement result reached in any case that involves 
particular taxpayers. Examples of quantity measures include, but are 
not limited to--
    (1) Cases started;
    (2) Cases closed;
    (3) Work items completed;
    (4) Customer education, assistance, and outreach efforts completed;
    (5) Time per case;
    (6) Direct examination time/out of office time;
    (7) Cycle time;
    (8) Number or percentage of overage cases;
    (9) Inventory information;
    (10) Toll-free level of access; and
    (11) Talk time.
    (d) Definitions--(1) Tax enforcement results. A tax enforcement 
result is the outcome produced by an IRS employee's exercise of 
judgment in recommending or determining whether or how the IRS should 
pursue enforcement of the tax laws. Examples of tax enforcement results 
include a lien filed, a levy served, a seizure executed, the amount 
assessed, the amount collected, and a fraud referral. Examples of data 
that are not tax enforcement results include a quantity measure and 
data derived from a quality review or from a review of an employee's or 
a work unit'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.
    (2) 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. Such records may be used for purposes 
such as forecasting, financial planning, resource management, and the 
formulation of case selection criteria. Records of tax enforcement 
results may be used to develop methodologies and algorithms for use in 
selecting tax returns to audit. Records of tax enforcement results do 
not include tax enforcement results of individual cases when used to 
determine whether an employee exercised appropriate judgment in 
pursuing enforcement of the tax laws based upon a review of the 
employee's work on that individual case.

[[Page 60217]]

Sec.  801.7T  Examples (temporary).

    (a) The rules of Sec.  801.3T are illustrated by the following 
examples:

    Example 1. (i) Each year Division A's Examination and Collection 
functions develop detailed workplans that set goals for specific 
activities (e.g., number of audits or accounts closed) and for other 
quantity measures such as cases started, cycle time, overage cases, 
and direct examination time. These quantity measure goals are 
developed nationally and by Area Office based on budget allocations, 
available resources, historical experience, and planned 
improvements. These plans also include information on measures of 
quality, customer satisfaction, and employee satisfaction. Results 
are updated monthly to reflect how each organizational unit is 
progressing against its workplan, and this information is shared 
with all levels of management.
    (ii) Although specific workplans are not developed at the 
Territory level, Headquarters management expects the Area Directors 
to use the information in the Area plans to guide the activity in 
their Territories. For 2005, Area Office 1's workplan has a goal to 
close 1,000 examinations of small business corporations and 120,000 
taxpayer delinquent accounts (TDAs), and there are 10 Exam 
Territories and 12 Collection Territories in Area Office 1. While 
taking into account the mix and priority of workload, and available 
staffing and grade levels, the Examination Area Director 
communicates to the Territory Managers the expectation that, on 
average, each Territory should plan to close about 100 cases. The 
Collection Area Director similarly communicates to each Territory 
the expectation that, on average, they will close about 10,000 TDAs, 
subject to similar factors of workload mix and staffing.
    (iii) Similar communications then occur at the next level of 
management between Territory Managers and their Group Managers, and 
between Group Managers and their employees. These communications 
will emphasize the overall goals of the organization and each 
employee's role in meeting those goals. The communications will 
include expectations regarding the average number of case closures 
that would have to occur to reach those goals, taking into account 
the fact that each employee's actual closures will vary based upon 
the facts and circumstances of specific cases.
    (iv) Setting these quantity measure goals, and the communication 
of those goals, is permissible because case closures are a quantity 
measure. Case closures are an example of outcome-neutral production 
data that does not specify the outcome of any specific case such as 
the amount assessed or collected.
    Example 2. In conducting a performance evaluation, a supervisor 
is permitted to take into consideration information the supervisor 
has developed showing that the employee 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 the employee, including 
time expended, issues raised, and enforcement outcomes reached 
should be considered and discussed with the employee and used in 
evaluating the employee.
    Example 3. When assigning a case, a supervisor is permitted to 
discuss with the employee the merits, issues, and development of 
techniques of the case based upon a review of the case file.
    Example 4. A supervisor is not permitted to establish a goal for 
proposed adjustments in a future examination.

    (b) [Reserved].


Sec.  801.8T  Effective dates (temporary).

    (a) The provisions of Sec. Sec.  801.1T through 801.7T apply on or 
after October 17, 2005.
    (b) The applicability of Sec. Sec.  801.1T through 801.7T expires 
on or before October 14, 2008.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: October 3, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary (Tax Policy).
[FR Doc. 05-20439 Filed 10-14-05; 8:45 am]
BILLING CODE 4830-01-P