IRS Restructuring Act: Implementation Under Way but Agency Modernization
Important to Success (Testimony, 02/02/2000, GAO/T-GGD-00-53).
This testimony discusses the Internal Revenue Service's (IRS) progress
in implementing the taxpayer rights and protections mandated by the IRS
Restructuring and Reform Act of 1998. The act was passed in response to
concerns that IRS had been overemphasizing revenue production and
compliance at the expense of fairness and consideration of taxpayer
interests. GAO found that IRS has made a concerted effort to implement
the taxpayer protection provisions. In some cases, implementation is not
complete, and in others, it is too soon to tell whether implementation
will be successful. IRS has had difficulty in implementing some of the
act's mandates. These problems include determining when enforced
collection actions, such as the seizure of taxpayers' assets, are
appropriate and responding to requests for relief under the innocent
spouse provisions. GAO believes that IRS' efforts to modernize its
organizational structure, performance management system, and information
systems are heading the agency in the right direction. If successful,
IRS' modernization efforts should create an agency culture dedicated to
serving the public and spur efficiency improvements throughout the
agency. Both are necessary for culture change to institutionalize
taxpayer service as a core value, and efficiency gains to allow IRS to
better target is resources to promote compliance and taxpayer service.
resources to promote compliance and taxpayer service.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-GGD-00-53
TITLE: IRS Restructuring Act: Implementation Under Way but Agency
Modernization Important to Success
DATE: 02/02/2000
SUBJECT: Taxpayers
Tax administration systems
Federal agency reorganization
Information resources management
Tax law
Performance measures
Tax return audits
Search and seizure
IDENTIFIER: IRS Tax System Modernization Program
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GAO/T-GGD-00-53
United States General Accounting Office
GAO
Testimony
Before the Committee on Finance, U.S. Senate
For Release on Delivery
Expected at
10:00 a.m., EST
on Wednesday
February 2, 2000
GAO/T-GGD-00-53
IRS RESTRUCTURING ACT
Implementation Under Way but Agency
Modernization Important to Success
Statement of James R. White, Director
Tax Policy and Administration Issues
General Government Division
(268913)
IRS Restructuring Act: Implementation Under Way
but Agency Modernization Important to Success
Page 5 GAO/T-GGD-00-53
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the
Internal Revenue Service's (IRS) progress in
implementing the taxpayer rights and protections
mandates of the IRS Restructuring and Reform Act
of 1998 (Restructuring Act).1 I will also
discuss a related topic--the challenges IRS faces
in its ongoing efforts to modernize. The
connection is important, as was recognized by
Congress in the Restructuring Act. As my
statement today underscores, modernization is key
to improving the way IRS interacts with taxpayers,
including protecting their rights.
Passage of the Restructuring Act signaled
strong congressional concern that IRS had been
overemphasizing revenue production and compliance
at the expense of fairness and consideration of
taxpayer interests. To deal with this concern,
Congress mandated that IRS make numerous changes.
Many of these changes, such as provisions
governing the seizure of delinquent taxpayers'
assets and innocent spouse relief, were designed
to address specific taxpayer protection issues.
Others, like the mandate to reorganize IRS into
units serving specific groups of taxpayers, were
broader in scope. In their totality, the
Restructuring Act's provisions were aimed at
fundamentally changing the way IRS interacts with
taxpayers and otherwise conducts its business.
My statement is based on our past work,
principally our reviews of IRS' reorganization
process, performance management system, systems
modernization efforts and use of collection
enforcement authority. My statement makes the
following points regarding IRS' progress in
implementing the act's requirements.
� First, IRS has embarked on a concerted effort
to implement the taxpayer protection provisions.
In some instances, implementation is not complete,
and in some others, it is too early to tell if
implementation is successful.
� Second, IRS has experienced difficulties in
implementing some aspects of the mandates. These
difficulties included determining when enforced
collection actions, such as the seizure of
delinquent taxpayers' assets, are appropriate and
dealing with requests for relief under the
innocent spouse provisions.
� Third, we believe that IRS' ongoing efforts
to modernize its organizational structure,
performance management system, and information
systems are heading the agency in the right
direction. IRS' modernization is a long-term
effort that, if successful, should help IRS create
a culture focused on serving the public and
generate efficiency improvements throughout the
agency. Both are necessary-a culture change to
institutionalize taxpayer service as a core value,
and efficiency gains to allow IRS to better target
its resources to promote compliance and taxpayer
service.
Implementation Under Way but Work Remains
IRS has made a concerted effort to implement the
Restructuring Act's taxpayer rights and
protections mandates. Not surprisingly, given the
magnitude of change required by these provisions,
work remains in completing, and in some instances
expanding on, current implementation efforts.
To manage Restructuring Act implementation, IRS
delegated lead responsibility for each of the
provisions to the affected organizational unit and
required those units to develop detailed
implementation plans. For example, IRS assigned
to its Collections unit the lead responsibility
for implementing the 22 collection-related
taxpayer protection provisions in title III of the
act. Our review of each of these plans identified
numerous action items, such as developing tax
regulations, forms, instructions, and procedures,
as well as milestones for completing the actions.
According to IRS officials, although IRS has met
all of the legal requirements of the provisions
whose effective dates have passed, it is still in
the process of completing several actions or
implementation steps. For example, in order to
meet the effective dates of some provisions, IRS
issued temporary procedures until the final
rulemaking could be completed.
Despite the rather detailed nature of the
implementation plans, in some instances we have
questions concerning the sufficiency of those
plans. For example, with respect to selling
assets seized from delinquent taxpayers to resolve
their tax debts, the Restructuring Act mandated
IRS, by July 2000, to remove revenue officers from
any participation in such sales and to consider
"outsourcing." In our November 1999 report on IRS
seizures, we reported on IRS' implementation
efforts, including establishment of a study group
to develop implementation plans. 2 Given the
study group's preliminary work, however, we
concluded that removing revenue officers from the
sales process was not, by itself, sufficient to
ensure that some basic problems that we identified
in the sales process would be corrected. These
problems involved the sale of taxpayer assets
without competitive biding, sales based on
unreliable minimum prices, and insufficient
controls to establish accountability and control
over assets. Accordingly, we made a number of
recommendations to IRS regarding these problems
and are awaiting a final response concerning its
plans to implement the recommendations.
In another instance, IRS has made changes to meet
the Restructuring Act's mandate but does not have
information necessary to determine whether the
implementation steps have been sufficient. The
act prohibits IRS from using enforcement
statistics to impose or suggest production quotas
or goals for any employee, or to evaluate an
employee based on such enforcement quotas. IRS
has taken a number of actions to implement this
mandate, such as issuing a handbook on the
appropriate use of performance measures and
conducting agencywide training sessions. IRS has
also taken action on our recommendations,3 such as
by clarifying the requirements for IRS managers to
certify that they have not used enforcement
statistics inappropriately. In its spring 1999
survey, IRS found that about 7 percent of
Collections employees and 9 percent of Examination
employees reported that their supervisors had
either discussed enforcement statistics with them
or used statistics to evaluate their performance.
Until it has more recent comparison data, IRS will
not know if its actions were sufficient to fulfill
the Restructuring Act's mandate.
IRS' Difficulties in Implementing the
Restructuring Act
IRS has also experienced some difficulty in
implementing the Restructuring Act. Two notable
examples are the decline in enforcement actions,
particularly liens, levies, and seizures and the
backlog of "innocent spouse" cases.
IRS' use of enforcement actions to collect
delinquent taxes has declined significantly since
passage of the act. Comparing pre-Restructuring
Act data on IRS' use of liens, levies and
seizures, with fiscal 1999 data shows that lien
filings were down about 69 percent, levies down
about 86 percent, and seizures down about 98
percent. Moreover, according to IRS, collections
from delinquent taxpayers were down about $2
billion from fiscal year 1996 levels.
We do not know the appropriate number of
enforcement actions that IRS should take because
such decisions necessarily involve the use of
judgment by IRS officials. However, based on our
review of fiscal year 1997 seizure cases, the
current number of seizures is probably too low.
In fiscal year 1997, the last full year before
passage of the Restructuring Act, about 42 percent
of seizures resulted in the tax debt being fully
resolved. In most cases, the debt was resolved
when the taxpayers produced funds to fully pay
their tax liabilities and have their assets
returned. Prior to the seizures, the involved
taxpayers had been unresponsive to other IRS
collection efforts, including letters, phone
calls, personal collection visits, and levies of
bank accounts and wages. We concluded from these
observations that there was little likelihood that
the tax debts would have been paid without the
seizure actions.
At the conclusion of our seizure work in
1999, it was clear to us that neither IRS
management officials nor front line employees
believed that seizure authority was being used
when appropriate. Front line employees expressed
concerns about the lack of guidance on when to
make seizures in light of Restructuring Act
changes. Accordingly, we made recommendations
aimed at (1) clarifying when seizures ought to be
made, (2) preventing departures from process
requirements established to protect taxpayer
interests, and (3) delineating senior managers'
responsibilities for ensuring that seizures are
made when justified. Effective use of tax
collection enforcement authority, such as seizing
delinquents' property to resolve their tax debts,
plays an important role in ensuring voluntary
compliance---a practice dependent on taxpayers
having confidence that their neighbors or
competitors are complying with the tax law.
A second example of IRS difficulty in
implementing the Restructuring Act is related to
"innocent spouse" cases. The Restructuring Act
expanded innocent spouses' right to seek relief
from tax liabilities assessed on jointly filed
returns. IRS published forms and temporary
guidance to implement this provision and has just
recently issued permanent guidance on equitable
relief provisions.4 However, as Commissioner
Rossotti has acknowledged, IRS was
administratively unprepared to deal with the
volume of requests for relief because its data
systems did not allow the separation of single tax
liability for spouses into multiple liabilities.
Thus, IRS established manual processes and
controls to deal with the requests, a measure
requiring about 330 additional staff. As of
October 1999, of the 41,000 relief requests
received, only about 12 percent had been processed
to the point where at least a preliminary
determination had been reached. IRS considers the
remaining relief requests to be a significant
backlog that will require an average of about 12
staff hours per case to resolve.
To Make Lasting Process and Efficiency
Improvements, IRS First Needs to Address Systemic
Barriers
Underlying the Commissioner's modernization
strategy is the understanding that fulfilling the
Restructuring Act's mandate to place greater
emphasis on taxpayer rights and needs while
ensuring compliance depends on two key factors.
First, IRS must make material improvements in the
processes and procedures through which it
interacts with taxpayers and collects taxes due.
Second, IRS must make efficiency improvements that
will allow reallocation of its limited resources.
Historically, however, IRS has not had much
success designing and implementing these kinds of
process changes. The Commissioner has argued, and
we agree,5 that this difficulty is due in large
part to systemic barriers in IRS' organization,
management, and information systems. Accordingly,
and in compliance with the Restructuring Act, the
Commissioner has begun to implement a multifaceted
modernization strategy, the first stages of which
are designed to address these systemic barriers.
Creating a Taxpayer-Focused Structure and Clearer
Lines of Authority and Accountability
Notwithstanding a reduction in the number of its
field offices, IRS' organizational structure has
not changed significantly in almost 50 years.
Under this structure, authority for serving
taxpayers and administering the tax code is
decentralized to 33 districts and 10 service
centers, with each of these geographic units
organized along functional lines-such as
collection, examination, and taxpayer service.
This has resulted in convoluted lines of
authority. In the collection area, for example,
IRS has three separate kinds of organizations
spread over all 43 operational units that use four
separate computer systems to collect taxes from
all types of taxpayers. This decentralized
structure has also allowed disparity among
districts in their compliance approaches and, as a
result, inconsistent treatment of taxpayers. To
illustrate, in our review of IRS' use of its
seizure authority, we found that seizures were as
much as 17 times more likely for delinquent
individual taxpayers in some district offices than
in others.6 Similar variations exist in other IRS
programs as well.
To streamline its management structure and create
a more taxpayer-focused organization, IRS is in
the midst of instituting a major reorganization.
IRS' new organizational structure is built around
four operating units, each with end-to-end
responsibility for serving a group of
taxpayers-such as individuals or small
businesses-with similar needs and tax issues.7
Through its new taxpayer-focused operating
divisions, IRS is centralizing management of key
functions and creating narrower scopes of
responsibility. For example, IRS estimates that
individual taxpayers account for 75 percent of all
filers, yet only 17 percent of the tax code is
ordinarily relevant to them. By creating a
division devoted solely to individual taxpayers,
IRS is creating a situation in which managers and
employees in that division will be able to focus
on compliance and service issues related to
individual taxpayers and will need expertise in a
much smaller body of tax law.
Creating a simpler, more coherent organization and
management structure is an important step, but it
does not guarantee good management. IRS' managers,
at all levels, need to be skilled in results-
oriented management, including planning,
performance measurement, and the use of
performance data in decisionmaking. Without these
skills, IRS cannot be assured that its employees
and the agency as a whole are performing as
expected with regard to both taxpayer rights and
enforcement. Our work has shown that ensuring that
IRS has the capacity it needs in this area will be
a challenge.
For example, in our recent work on IRS seizures,
we found that IRS did not generate information
sufficient for senior managers to use in
monitoring the program. IRS did not have a fully
developed capability to monitor the quality of
seizure work in terms of the appropriateness of
seizure decisionmaking or the conduct of asset
management and sales activity. In addition,
collection managers were not systematically
provided with information on the type of problems
experienced by taxpayers involved in a seizure or
on the resolution of those problems. We concluded
that IRS managers were not collecting the
information needed to effectively oversee the
program and made recommendations to improve
oversight. Our point today, however, is that
generating and using basic management information
needs to be routine among IRS managers at all
levels and across all taxpayer groups and
functions.
Developing Performance Measures and Evaluation
Systems That Support Agency Goals
The organizational and management changes I've
described, while significant, will not be
sufficient to achieve IRS' mission. As an agency
still dealing with the repercussions of a
performance system that was, for many years, based
on enforcement statistics, IRS well knows that
performance measures can create powerful
incentives to influence both organizational and
individual behavior. Consequently, IRS needs to
develop an integrated performance management
system that aligns employee, program, and
strategic performance measures and creates
incentives for behavior supporting agency goals,
including that of giving due recognition to
taxpayers' rights and interests.
Developing and implementing performance measures
are difficult tasks for any organization, but
especially for an organization like IRS that must
ensure both quality taxpayer service and tax law
compliance. At the operational level, IRS is
measuring its progress toward these goals through
customer satisfaction surveys and through the
business results measures of quality and quantity.
Mindful of concerns that the Service had focused
on revenue production as an end in itself, IRS
established what it believes are outcome-neutral
quantity measures. For example, instead of
measuring the revenue generated by compliance
employees, IRS is generally monitoring the total
number of cases closed, regardless of how those
cases were closed.
We have reported in the past that IRS employees'
performance focused more on IRS' objectives of
revenue production and efficiency than on taxpayer
service.8 Guided by these concerns and the
Restructuring Act's explicit prohibitions against
using enforcement statistics to evaluate
employees, IRS now recognizes that employees must
have a clearer line of sight between their day-to-
day activities, their resulting performance
evaluations, and the agency's broader goals. IRS
is still exploring several different approaches
for revising its employee evaluation system to
make the relationship between employee performance
and agency performance more transparent.
Modernizing Information Systems to Support
Business Modernization
IRS' system difficulties hinder, and will
continue to hinder, efforts to better serve
taxpayer segments. IRS has dozens of discrete
databases that are function specific and are
designed to reflect transactions at different
points in the life of a return or information
report-from its receipt to disposition. As a
consequence, IRS does not have any easy means of
accessing comprehensive information about
individual taxpayer accounts or summary data on
groups of taxpayers. Without this type of data,
IRS managers will continue to have a difficult
time monitoring and managing program
outcomes-including identifying taxpayer needs and
evaluating the effectiveness of programs to meet
those needs. In doing our work on small business
compliance issues, for example, we found that IRS
could not reliably provide data on the extent to
which small businesses filed various required
forms, when they made tax deposits, or the extent
to which they were involved in a variety of
enforcement processes.
For years, IRS has struggled to modernize its
information systems to support high quality
taxpayer service and management information needs.
In 1995, we made over a dozen recommendations to
correct management and technical weaknesses that
jeopardized the modernization process.9 In
February 1998, we made additional recommendations
to ensure, among other things, that IRS develops a
complete systems architectural blueprint for
modernizing its information systems.10
Subsequently, in fiscal years 1998 and 1999,
Congress provided IRS funds for systems
modernization and limited their obligation until
certain conditions, similar to our
recommendations, were met.11 While IRS has made
progress in addressing our recommendations and
complying with the legislative conditions, the
Service has not yet fully implemented our
recommendations.12 As a result, at the direction
of the Senate and House appropriation
subcommittees responsible for IRS' appropriation,
we have continued to monitor and report on IRS'
system modernization efforts.
IRS Is Relying on Successful Modernization to
Create Greater Opportunity for Frontline
Improvements
We believe that IRS' modernization efforts to
date are heading the agency in the right
direction. Without integrated improvements to its
organization, management, performance measures,
and information systems, IRS is at risk of being
unable to achieve the Restructuring Act's overall
mandate. If successful, however, IRS will be
better able to create a culture focused on serving
the public and to generate efficiency improvements
throughout the agency. Both are necessary-a
culture change to institutionalize taxpayer
service as a core value, and efficiency gains to
allow IRS to better target its resources to
promote compliance and taxpayer service.
Mr. Chairman, this concludes my prepared
statement. I would be happy to answer any
questions you or other Members of the Committee
may have.
Contact and Acknowledgments
For future contacts regarding this testimony,
please contact James R. White at 202-512-9110.
Thomas M. Richards, Deborah Parker Junod, Charlie
Daniel, and Ralph Block made key contributions to
this testimony.
_______________________________
1 Public Law 105-206, July 22, 1998.
2 See IRS Seizures: Needed for Compliance but
Processes for Protecting Taxpayer Rights Have Some
Weaknesses (GAO/GGD-00-4, Nov. 29, 1999).
3 See IRS Personnel Administration: Use of
Enforcement Statistics in Employee Evaluations
(GAO/GGD-99-11, Nov. 30, 1998).
4 See Revenue Procedure 2000-15 issued January 18,
2000.
5 See IRS Management: Business and Systems
Modernization Pose Challenges (GAO/T-GGD/AIMD-99-
138, Apr. 15, 1999) and IRS Management:
Formidable Challenges Confront IRS as It Attempts
to Modernize (GAO/T-GGD/AIMD-99-255, July 22,
1999).
6 Our comparisons among district offices showed
differences in the likelihood of seizure ranging
from 1.25 times to 17 times.
7 IRS' four operating divisions are: (1) Wage and
Investment, serving individual taxpayers; (2)
Small Business and Self-Employed, serving fully or
partially self-employed individuals and small
businesses with assets under $5 million; (3) Large
and Mid-Size Business, serving businesses with
assets over $5 million; and (4) Tax Exempt and
Government Entities, serving pension plans, exempt
organizations, and governments.
8 IRS Personnel Administration: Use of Enforcement
Statistics in Employee Evaluations (GAO/GGD-99-11,
Nov. 30, 1998) and IRS Employee Evaluations:
Opportunities to Better Balance Customer Service
and Compliance Objectives (GAO/GGD-00-1, Oct. 14,
1999).
9 See Tax Systems Modernization: Management and
Technical Weaknesses Must Be Corrected If
Modernization Is To Succeed (GAO/AIMD-95-156, July
26, 1995).
10 Tax Systems Modernization: Blueprint Is a Good
Start But Not Yet Sufficiently Complete to Build
or Acquire Systems (GAO/AIMD/GGD-98-54, Feb. 24,
1998).
11 Public Law 105-61, October 10, 1997, and Public
Law 105-277, October 21, 1998.
12 See Tax Systems Modernization: Results of Review
of IRS' Initial Expenditure Plan (GAO/AIMD/GGD-99-
206, June 15, 1999) and Major Management
Challenges and Program Risks: Department of the
Treasury (GAO/OCG-99-14, Jan. 1999).
*** End of document ***