Tax Systems Modernization: Progress in Achieving IRS' Business Vision
(Testimony, 05/09/96, GAO/T-GGD-96-123).
GAO discussed the Internal Revenue Service's (IRS) progress in achieving
its business vision for 2001 and how its Tax Systems Modernization (TSM)
supports that vision. GAO noted that: (1) as part of its business
vision, IRS will increase the number of returns it receives
electronically, consolidate its paper processing operations, and provide
return-free filing; (2) without a returns processing strategy based on
its customer service and compliance needs and a cost analysis, IRS has
no assurance that its TSM investments are sound; (3) IRS plans to
improve customer service by reorganizing its customer service centers
according to the work performed, expanding and simplifying telephone
interaction with customers, and using information systems to provide the
information IRS employees need to assist customers; (4) while IRS
customer service improvements appear promising, IRS must continue to
handle its current workload through the conversion, train its customer
service employees, and develop the necessary information systems; (5)
IRS plans to improve enforcement and voluntary compliance; (6) while
access to good data and more staff could improve enforcement and
voluntary compliance, IRS does not plan to use its savings from TSM to
hire more employees; and (7) managerial and technical weaknesses could
jeopardize TSM investments.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-GGD-96-123
TITLE: Tax Systems Modernization: Progress in Achieving IRS'
Business Vision
DATE: 05/09/96
SUBJECT: Tax administration systems
Tax returns
Human resources utilization
Customer service
Strategic information systems planning
Systems conversions
Information processing operations
Voluntary compliance
Electronic forms
Data collection operations
IDENTIFIER: IRS Tax System Modernization Program
TSM
IRS Document Processing System
IRS TeleFile Program
IRS Totally Integrated Examination System
IRS Service Center Recognition/Image Processing System
IRS Form 1040PC
IRS Integrated Data Retrieval System
IRS Automated Underreporter System
IRS Corporate Accounts Processing System
IRS Workload Management System
IRS Integrated Case Processing System
IRS Taxpayer Compliance Measurement Program
TCMP
IRS Compliance Research Information System
IRS Crisis Intervention Program
IRS Integrated Collection System
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Cover
================================================================ COVER
Before the Committee on Governmental Affairs, U.S. Senate
For Release
on Delivery
Expected at
10:00 a.m. EDT
Thursday, May 9, 1996
TAX SYSTEMS MODERNIZATION -
PROGRESS IN ACHIEVING IRS'
BUSINESS VISION
Statement of Lynda D. Willis,
Director, Tax Policy and Administration Issues,
General Government Division
GAO/T-GGD-96-123
GAO/GGD-96-123T
(268735)
Abbreviations
=============================================================== ABBREV
CAPS - Corporate Accounts Processing System
CRIS - Compliance Research Information System
DPS - Document Processing System
ICP - Integrated Case Processing
ICS - Integrated Collection System
IDRS - Integrated Data Retrieval System
IRS - Internal Revenue Service
SCRIPS - Service Center Recognition Image Processing System
TCMP - Taxpayer Compliance Measurement Program
TIES - Totally Integrated Examination System
TSM - Tax Systems Modernization
WMS - Workload Management System
PROGRESS IN ACHIEVING IRS'
BUSINESS VISION
====================================================== Chapter Summary
In 1986, IRS initiated Tax Systems Modernization (TSM) primarily to
replace computers that it was using to process and store the
information on tax returns. In 1992, in response to recommendations
by GAO and others, IRS began to analyze how it might use new
technology to change its business operations. As a result, IRS
developed a vision for 2001 that called for organizational,
technological, and operational changes affecting the way IRS
processes tax returns, provides customer service, and ensures
compliance.
Since 1992, IRS has made some progress in modernizing its operations,
but the differences between IRS' current operations and those
proposed in its vision are great. Congress cut IRS' fiscal year 1996
TSM budget due in part to concerns about IRS' progress in delivering
new TSM systems. In response, IRS reassessed its business vision and
identified those aspects that it can accomplish by 2000 and those
that will be delayed. Although IRS has not released all of the
details of its reassessment, it appears that it will affect IRS'
ability to resolve by 2001 many longstanding operational problems.
One of the biggest problems facing IRS is its inefficient system for
processing most tax returns. IRS has made little progress either in
reducing the number of paper returns it processes or in delivering
the new systems needed to better process paper. For example, IRS
established a goal to receive 80 million tax returns electronically
by 2001, but it lacks a comprehensive business strategy for achieving
this goal. Recently, IRS began a project to reengineer its tax
returns processing system. It is too early to tell whether this
effort will have an impact on IRS' ability to reduce the volume of
paper returns processed.
The second part of IRS' business vision is to improve service to
taxpayers. Taxpayers have long had a problem reaching IRS by
telephone. And, when they reach IRS, assistors do not always have
easy access to the information needed to resolve their problems.
IRS' strategy for improving customer service includes consolidating
work units, changing work processes, and increasing the use of or
implementing new information systems. It is a promising strategy,
but IRS faces many challenges in its implementation.
The third part of IRS' vision is to increase compliance to 90 percent
by 2001. Compliance levels have remained at 87 percent for the last
several years. IRS established its 90-percent goal on a set of
assumptions that have since changed significantly--changes that could
jeopardize achievement of IRS' goal. For example, budget and
taxpayer burden concerns led IRS to postpone indefinitely the
Taxpayer Compliance Measurement Program, the results of which were to
provide more up-to-date information for a new compliance research
information system.
GAO questions IRS' ability to make sound investment decisions until
reengineering of important processes, such as tax return processing,
is sufficiently completed. Until clearly defined business
requirements drive TSM projects, there is no assurance that these
projects will achieve the desired objectives and result in improved
operations.
PROGRESS IN ACHIEVING IRS'
BUSINESS VISION
==================================================== Chapter STATEMENT
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to assist you in your
continuing review of the Internal Revenue Service's (IRS) Tax Systems
Modernization (TSM). In March 1996, we appeared before this
Committee to discuss the managerial and technical weaknesses of
TSM.\1 Today, our testimony focuses on IRS' progress in achieving
important programmatic aspects of its business vision for 2001 and
how TSM supports that vision.
In 1992, IRS developed a new business vision that was designed to
address critical longstanding problems with its programs, such as
-- the lack of accurate and readily accessible information on
taxpayers, their accounts, and IRS operations, due in part to an
antiquated tax return processing system that relies on
labor-intensive, error-prone methods to process over 200
million, primarily paper, tax returns annually;
-- taxpayer frustration in dealing with IRS as they seek to resolve
tax law or account questions. These frustrations revolve around
very low levels of telephone accessibility, confusing and
hard-to-understand notices, and the need to repeatedly call or
correspond with IRS to resolve tax issues; and
-- a stagnant level of taxpayer compliance and a sizable inventory
of accounts receivable.
IRS' business vision calls for addressing these problems through a
series of organizational, business process, and technology changes,
including TSM. Specifically, IRS' vision calls for (1) moving from a
paper-laden, labor-intensive tax return processing environment to a
modern electronic environment; (2) providing better service to
taxpayers through wider use of the telephone, better access to data,
and new information systems; and (3) improving compliance through
access to accurate, up-to-date data, earlier identification of
noncompliant taxpayers, and increased efficiencies in its field
enforcement functions.
Our statement today is based on previous and ongoing work on IRS'
business vision and TSM. While our statement addresses the
importance of technology to IRS' business vision, it also points to
the importance of organizational and business process change in
making IRS' vision a reality. Our statement makes the following
points:
-- Initially, TSM was technology-driven rather than
business-driven. As a result, important business requirements
were not fully defined when early TSM projects were designed.
IRS subsequently recognized that TSM could be an enabler for
organizational and business process change and, in 1992,
developed a business vision for 2001. Many of the requirements
for this vision remain undefined today, jeopardizing the future
success of both TSM and the successful accomplishment of IRS'
vision. IRS is far from achieving the operational benefits of
its vision.
-- Little progress has been made either in reducing the number of
paper returns IRS processes or in delivering the new systems
needed to better process paper returns. In May 1993, IRS
established a goal to receive 80 million tax returns
electronically by 2001. As we told this Committee in March, IRS
lacks a comprehensive business strategy for achieving its
80-million goal.\2 Recently, after spending about $270 million
of a projected $1.3 billion on a Document Processing System
(DPS) for scanning and imaging paper returns, and about $94
million on an interim service center scanning and imaging system
known as SCRIPS, IRS began a project to reengineer its tax
returns processing system. It is too early to tell whether this
new reengineering effort will have a significant impact on IRS'
ability to reduce the volume of paper returns it processes.
-- IRS is beginning to implement aspects of its vision for
improving customer service. IRS anticipates improving customer
service by consolidating work sites, changing work processes,
and putting in place new information systems. However, IRS must
address several important managerial, technical, and human
resource challenges to fully achieve that vision.
-- IRS' goal is to increase compliance from 87 percent to 90
percent by 2001. However, IRS established that goal on a set of
assumptions that have changed significantly. For example, IRS
no longer plans to reinvest staff savings from TSM into
compliance activities. Thus, compliance activities are likely
to have fewer staff than IRS envisioned when it established the
90-percent goal. Also, IRS no longer has a specific plan for
obtaining more up-to-date information for a new compliance
research information system that IRS is developing as a part of
TSM.
-- We have questions about IRS' ability to make sound investment
decisions on TSM until IRS completes the reengineering of
important processes, such as its tax return processing system.
The outcome of IRS' reengineering efforts could generate new
business requirements that are not addressed by TSM projects or
that make some of those projects obsolete.
--------------------
\1 Tax Systems Modernization: Management and Technical Weaknesses
Must Be Overcome To Achieve Success (GAO/T-AIMD-96-75, Mar. 26,
1996).
\2 GAO/T-AIMD-96-75.
IRS' BUSINESS VISION
-------------------------------------------------- Chapter STATEMENT:1
In 1986, IRS initiated TSM primarily to replace the computers that it
was using to process and store the information on tax returns. IRS
planned to introduce the new technology without changing its existing
organizational and operating structure, which included 10 service
centers that processed tax returns, over 70 telephone call sites that
provided various types of service to taxpayers, and 63 district
offices that were responsible for many of IRS' compliance activities.
In June 1991, we testified before this Committee on important
management challenges facing IRS as it moved to resolve longstanding
problems with its programs, their effectiveness, and the quality of
service provided to taxpayers.\3 In discussing those challenges, we
said that "computers are only tools to help achieve management's
vision of a future IRS; they are not a substitute for that vision."
We also said that TSM offered IRS the opportunity to rethink the way
it does business and the way it is structured to do that business.
In 1992, in response to our and others' recommendations, IRS began to
analyze how it might use new technology to change its business
operations. Subsequently, IRS decided on a series of business
process and organizational changes that it set forth in a business
vision for 2001. These proposals envisioned dramatic changes in the
way IRS did business, with the changes supported by a new
organizational structure, new business processes, and new technology.
The new vision depended on new technology to be the vehicle to
resolve many longstanding problems that resulted from IRS managers
and employees not having access to the information they needed in a
timely fashion. But other equally dramatic changes were envisioned,
specifically many fewer processing centers and customer service
sites, a shift from correspondence to the telephone in communicating
with taxpayers, and a focus on earlier identification and resolution
of taxpayer problems and noncompliance. While IRS predicted that it
would need many fewer staff to maintain existing work levels, it
anticipated investing the staff savings made available from TSM back
into its customer service and enforcement programs.
During the past 4 years, IRS has made some progress in modernizing
its operations to reflect its business vision, but the differences
between IRS' current operations and those proposed in its vision are
great. TeleFile, a system that allows filers of very simple returns
to do so over the telephone, went nationwide this year, and about 2.8
million people participated. Yet the total number of people filing
their returns electronically remains below 1994 levels and far below
what is needed to accomplish IRS' electronic filing goals. Telephone
accessibility was up this filing season--IRS assistors answered over
a million more calls than last filing season due in part to better
data availability--yet IRS was still able to answer only about 20
percent of the calls. IRS' accounts receivable inventory remains on
our high risk list.
Congress cut IRS' fiscal year 1996 TSM budget due in part to concerns
about the value of TSM investments and IRS' progress in delivering
new systems. In response, IRS recently identified those aspects of
its original business vision that it expects to accomplish by 2000
and those that will have to be delayed. We refer to this effort as
IRS' reassessment of TSM. Although IRS has not released information
on which TSM projects will be continued and on what schedule, it
appears the reassessment will affect IRS' ability to resolve by the
year 2001 many of the longstanding problems it faces.
The remainder of our testimony provides more information on IRS'
business vision and IRS' progress in achieving that vision.
--------------------
\3 Management Challenges Facing IRS (GAO/T-GGD-91-20, June 25, 1991).
IRS LACKS A COMPREHENSIVE
STRATEGY TO SIGNIFICANTLY
REDUCE THE VOLUME OF PAPER
RETURNS
-------------------------------------------------- Chapter STATEMENT:2
One of the biggest problems facing IRS is its antiquated, inefficient
system for processing most tax returns. The system involves
thousands of staff moving mountains of paper through several
processing stages. It is a time-consuming, inefficient process that
requires considerable effort just to correct errors made by IRS
employees during the process. Storing and retrieving the paper
returns involves further inefficiencies. It can take weeks, for
example, for an IRS employee to retrieve a paper return from storage.
IRS' strategy for receiving and capturing data from tax returns was
and still is a crucial component of IRS' business vision. Initially,
IRS' strategy focused on replacing computers in its 10 service
centers with more efficient ones. However, in 1992, IRS began
examining other processing options. As a part of that analysis, IRS
concluded that it had to make various organizational and business
changes. Probably the most important business change was IRS'
decision to significantly increase the number of tax returns received
electronically by 2001.
Although IRS has implemented some initiatives that have increased the
number of electronic returns since 1993 when it established a goal to
receive 80 million returns by 2001, those initiatives are targeted at
tax returns that are among the least costly paper returns to process.
Furthermore, IRS has not yet successfully addressed one of the major
impediments to the expansion of electronic filing--its cost to
taxpayers.
IRS' current initiatives to increase electronic filing will not, in
their entirety, bring IRS close to its 80-million goal. IRS has
acknowledged that it lacks a comprehensive business strategy for
achieving that goal and needs to rethink its overall approach for
receiving and capturing tax return data. To that end, IRS recently
began a reengineering project to identify strategies for
significantly reducing its paper tax return filings.
ORIGINAL PLANS FOR TSM
FOCUSED ON IMAGING A LARGE
NUMBER OF PAPER RETURNS
------------------------------------------------ Chapter STATEMENT:2.1
As noted earlier, IRS' original TSM plans for receiving and capturing
tax return data centered on replacing existing computers at its 10
service centers. Accordingly, in 1988, IRS began designing a
Document Processing System (DPS) that would use imaging and optical
character recognition technologies to process paper tax returns and
capture 100 percent of the data on those returns (IRS now captures
only about 40 percent of the data on paper returns).\4 IRS planned to
implement this system at all 10 service centers.
In April 1992, we said that IRS had not adequately assessed the
cost/benefit tradeoffs associated with its strategy for receiving and
capturing tax return data using DPS.\5 We said that two prerequisites
for developing good information systems were an analysis of the
business functional requirements and an identification of
alternatives for meeting those requirements. We recommended that IRS
develop a comprehensive analysis to determine the cost and benefits
of alternative strategies for receiving and capturing tax return
information. We said that IRS, as part of that analysis, should
determine the impact of various electronic filing incentives on the
requirements for imaging and optical character recognition. IRS
proceeded with the development of DPS without this analysis but
decided that DPS would be rolled out in 5 service centers instead of
10. IRS records show that it had spent about $270 million on DPS
through fiscal year 1995.
According to IRS officials, it is uncertain whether the benefits of
DPS outweigh the costs. Over the next 120 days, according to those
officials, IRS will be evaluating its need for an imaging and
data-capture system. One important aspect of this evaluation will be
a determination of how much tax return data IRS needs for compliance
purposes and whether data needs vary by type of return. This
analysis was not done when DPS was initially planned. In light of
the ongoing evaluation of DPS, according to an IRS official, the
pilot test of DPS that was scheduled for January 1997 has been
delayed.
--------------------
\4 Data capture involves electronic storage for later retrieval,
analyses, etc.
\5 Tax Systems Modernization: Input Processing Strategy is Risky and
Lacks a Sound Analytical Basis (GAO/T-IMTEC-92-15, Apr. 29, 1992).
IRS' BUSINESS VISION CALLS
FOR AN INCREASE IN THE
NUMBER OF ELECTRONIC RETURNS
AND OTHER CHANGES
------------------------------------------------ Chapter STATEMENT:2.2
IRS analysis of options for changing its processing system for tax
returns and other paper tax documents, such as information returns,
resulted in several recommendations. Probably the most important
recommendation was one to increase the number of returns that IRS
would receive electronically in 2001. The other recommendations
focused on consolidating paper processing of tax documents at fewer
service centers and providing a return-free filing capability for
certain taxpayers.
ELECTRONIC FILING
---------------------------------------------- Chapter STATEMENT:2.2.1
When TSM began in 1986, IRS assumed that it would eventually receive
about 40 million electronic returns a year. After analyzing options
for business change, IRS adopted a goal of 80 million electronic
returns by 2001. Compared with IRS' current procedures for
processing paper returns, electronic filing has several benefits for
IRS. These benefits include reduced processing, storage, and
retrieval costs and faster, more accurate processing of returns and
refunds.
Since the inception of electronic filing in 1986, IRS' marketing
approach was to encourage tax return preparers to provide electronic
filing in the hope that they would market the service to the general
public. IRS' rationale for this approach was based primarily on the
large number of professional preparers--about 57 million tax returns
for tax year 1993 were prepared by professional preparers. Because
we saw the need for IRS to expand the appeal of electronic filing, we
recommended in January 1993 that IRS identify additional market
segments and specify strategies for attracting those segments to
electronic filing.\6 To that end, IRS developed a strategy that
encompassed 21 initiatives for increasing the number of electronic
returns.
IRS has implemented some of the 21 initiatives and has realized some
positive results. For example, certain taxpayers who are eligible to
file a Form 1040EZ are now allowed to file electronically using a
toll-free number on touch-tone phones. This year, about 2.8 million
taxpayers used that filing method, known as TeleFile.
However, the one initiative that IRS assumed would have the single
most significant impact on electronic filing, generating 46 million
electronic returns, has since been dropped. That initiative called
for legislative mandates requiring that (1) preparers of 100 or more
individual returns offer electronic filing and (2) businesses with 10
or more employees file their returns electronically. IRS dropped
that initiative because IRS and Treasury officials believed there was
little chance that Congress would pass such legislation.
IRS estimates that it will receive 16 million returns electronically
for 1996. To date, most of the returns being filed electronically
are ones that, if filed on paper, could be filed on forms (like the
1040EZ) that are among the least costly paper returns to process.
With that in mind, we recommended, in October 1995, that IRS identify
those groups of taxpayers that offer the greatest opportunity to
reduce IRS' paper processing workload and operating costs if they
filed electronically and develop strategies that focus on eliminating
or alleviating impediments that inhibit those groups from
participating in the program.\7 The primary impediment we cited was
the cost of electronic filing. To file electronically, taxpayers
generally have to go through a tax return preparer or some other
third party at a cost that typically ranges from $15 to $40.
As we told this Committee in March, IRS has taken several actions
that could result in future progress toward increasing the number of
electronic returns. However, these initiatives have yet to culminate
in a comprehensive strategy that will help IRS achieve its 80-million
goal.\8
--------------------
\6 Tax Administration: Opportunities to Increase the Use of
Electronic Filing (GAO/GGD-93-40, Jan. 22, 1993).
\7 Tax Administration: Electronic Filing Falling Short of
Expectations (GAO/GGD-96-12, Oct. 31, 1995).
\8 GAO/T-AIMD-96-75.
CONSOLIDATING PAPER
PROCESSING
---------------------------------------------- Chapter STATEMENT:2.2.2
Another aspect of IRS' business vision for 2001 was to consolidate
the processing of all paper documents (tax returns, correspondence,
and information returns) into 5 of its 10 service centers. IRS has
identified which five centers will specialize in paper processing and
has consolidated the processing of paper information returns and
Federal Tax Deposit coupons in those centers with the roll out of an
interim scanning and imaging technology known as the Service Center
Recognition Image Processing System (SCRIPS). SCRIPS was also
expected to process about 50 percent of the Form 1040EZ returns for
the 1996 filing season. However, SCRIPS is performing well below
IRS' original expectations. Besides information returns and tax
deposit coupons, SCRIPS was expected to be processing all forms
1040EZ, 1040PC, and 941 (employment tax returns). Instead, SCRIPS is
processing about 50 percent of the 1040EZs and none of the 1040PCs
and 941s.
RETURN-FREE FILING
------------------------------------------------ Chapter STATEMENT:2.3
As part of its vision for 2001, IRS planned to provide a return-free
filing capability for a limited number of taxpayers by 2001. Under
this system, the taxpayer would not have to file a tax return. IRS
would calculate the tax liability and send the taxpayer either a bill
or a refund. However, this capability depends on accelerated
processing of information returns, such as wage and interest and
dividend information submitted by third parties, so that IRS can
determine the taxpayer's liability and prepare a return for the
taxpayer during the January through early March time frame.
Currently, there is a 1-year lag between the time a taxpayer files a
tax return and when IRS notifies the taxpayer that it has identified
unreported income for that tax year. For example, in March 1996, IRS
was sending out underreporter notices for returns filed in 1995.
However, as a result of IRS' reassessment of TSM, IRS does not plan
to accelerate the processing of information returns to the extent
needed to support return-free filing. Until it does so, return-free
filing will not be an option.
IRS LACKS A COST-EFFECTIVE
STRATEGY FOR OBTAINING THE
TAXPAYER DATA THAT MAY BE
NEEDED FOR CUSTOMER SERVICE
AND COMPLIANCE
------------------------------------------------ Chapter STATEMENT:2.4
Our message regarding IRS' progress in achieving its business vision
for processing tax returns is really no different than it was in
1992--IRS' strategy for returns processing needs to be based on a
clear definition of its downstream business requirements for customer
service and compliance and an analysis of the cost and benefits of
providing those requirements under some of the different scenarios
that IRS is currently considering as a part of its reengineering
effort. Until such an analysis is completed, IRS has no assurance
that its technology investments for submission processing are sound.
As part of the reassessment of TSM referred to earlier, IRS reviewed
its business assumptions for the receipt and capture of tax return
data and the costs associated with those assumptions. In doing so,
IRS concluded that it needed to "aggressively reengineer" its
returns-processing function to significantly reduce paper filings.
According to the Deputy Secretary of the Treasury, this reengineering
effort will consider various alternatives beyond simply converting
from paper to electronic filing. Those alternatives include
eliminating certain classes of tax returns, expanding eligibility for
filing simple forms, and outsourcing the data capture function.
Because this reengineering project is in its infancy, it is too early
to determine whether the results will provide IRS with a clear
definition of the functional requirements for its future
returns-processing system. The foundation for this analysis needs to
be a determination of the type of tax return data that IRS needs for
compliance and customer service--something IRS says it is doing as
part of its reevaluation of DPS.
IRS FACES SEVERAL CHALLENGES IN
IMPLEMENTING ITS CUSTOMER
SERVICE VISION
-------------------------------------------------- Chapter STATEMENT:3
The second part of IRS' business vision is to improve service to
taxpayers. A key IRS goal is to resolve 95 percent of taxpayer
inquiries after one contact. For service to improve, taxpayers must
be able to reach IRS by telephone when they have questions or
problems and IRS employees must have easy access to the information
needed to help taxpayers.
Taxpayers have long had problems reaching IRS by telephone. The
percentage of taxpayers' calls that IRS assistors answered decreased
from 58 percent for the 1989 filing season to 8 percent for the 1995
filing season. Although the accessibility rate improved during the
1996 filing season, assistors were still only able to answer 20
percent of taxpayers' telephone calls. And, even when a taxpayer
gets through to IRS, the assistor does not always have easy access to
the information needed to resolve the taxpayer's problem. As a
result, the assistor may have to either (1) refer the taxpayer to
another office, (2) research the problem and call the taxpayer back,
or (3) tell the taxpayer to call back later.
IRS' strategy for improving customer service includes consolidating
work units, changing work processes, and increasing the use of or
implementing new information systems. IRS' strategy offers promise
as it is designed to improve taxpayers' ability to get assistance
from IRS and to provide IRS employees easy access to information.
However, IRS faces many challenges in implementing that strategy.
CONSOLIDATING WORK UNITS
------------------------------------------------ Chapter STATEMENT:3.1
IRS' customer service vision calls for consolidating the work of
different functional areas that do not have face-to-face interaction
with taxpayers.
IRS has different functional areas that answer taxpayer inquiries,
clarify and correct tax returns, and collect unpaid taxes. Because
each of these functional areas maintains separate taxpayer databases,
taxpayers who contact IRS either by mail or by telephone are often
told to write or call other offices rather than those they initially
contact. As a result, taxpayers may have to make several inquiries
before locating an IRS office that can address their concern or
question.
Non face-to-face interaction with taxpayers has traditionally been
done in at least 70 IRS organizational units in 44 locations. The
customer service vision calls for consolidating the work of these 70
organizational units into 23 customer service centers. Customer
service centers would absorb the functions of (1) toll-free taxpayer
assistance sites, which answer calls about tax law and procedures,
taxpayer accounts, and notices that taxpayers receive from IRS; (2)
automated collection call sites, which contact taxpayers to secure
delinquent tax returns and payments and answer calls from taxpayers
who are the subject of collection actions; and (3) forms distribution
centers, which handle requests for tax forms and publications.
IRS has made some progress toward implementing the organizational
changes. IRS has selected the locations for its customer service
centers, developed a schedule for start-up operations, and formulated
a plan for progressively expanding the workload of the new centers.
Two customer service centers (Nashville and Fresno) are experimenting
with new ways of providing customer service over the telephone. As
of April 1996, IRS had partial customer service operations at 13 of
its 23 sites. Of the 28 organizational units that are scheduled to
close, 6 are closed. The remaining offices will be closed on a
staggered schedule through 2002.
CHANGING WORK PROCESSES
------------------------------------------------ Chapter STATEMENT:3.2
IRS' customer service vision emphasizes use of the telephone to
interact with taxpayers. As such, IRS' plans include actions
directed at converting to telephone much of the work now being done
by correspondence and at making it easier for taxpayers to reach IRS
and resolve their problems by telephone.
The Fresno prototype customer service center has experience in
converting paper correspondence to the telephone. According to IRS,
after it began including Fresno's telephone number on some outgoing
notices, the center's correspondence receipts declined by 15 percent.
Other customer service centers are testing a new toll-free telephone
number that IRS added to certain account notices this year. In past
years, those notices instructed taxpayers to write to IRS if they had
any questions.
IRS' strategy for improving the accessibility of its telephone
service calls for (1) extending its hours of operation, (2) improving
its ability to route calls, (3) increasing the use of interactive
systems, and (4) reducing demand for assistance.
First, office hours would be extended to 20 hours a day during the
week and 8 hours each day on the weekend. Also, taxpayers would have
access to interactive systems 24 hours a day. Starting in January
1995, by routing calls among some call sites and extending the hours
of others, IRS enabled taxpayers nationwide to call IRS from 7:30
a.m. to 5:30 p.m. weekdays--an additional 2 hours of service than
in the past.
The second part of IRS' strategy for improving telephone
accessibility calls for enhancing IRS' ability to route taxpayer
calls nationwide to those locations that have employees available to
answer taxpayers' questions. Early in 1995, IRS installed automated
call distributors that can send calls to other locations where IRS
employees are available to answer questions. However, IRS currently
routes calls using a "bottom up" approach--i.e., the call site
notifies the cognizant regional office when it is overloaded, and the
regional office then notifies the National Office. On the basis of
daily trend data, the National Office sends the calls to other call
sites not thought to be busy. National Office staff manually log the
change and log it into a terminal. After this process, the change
can be operational within 15 minutes to 1 hour later. However, by
the time the National Office responds, the overload situation may
have subsided or callers may have simply abandoned their calls. As
part of its customer service vision, IRS hopes to have a "top down"
approach to call routing using real-time data in 1997. This
capability depends on certain technology and establishment of a
National Command Center that will have access to real-time call
volumes for all customer service centers.
Increasing the use of interactive systems is the third part of IRS'
strategy to expand telephone service. Specifically, IRS expects that
45 percent of all taxpayers' calls will be resolved through
interactive systems. These systems are to allow taxpayers to get
answers to their questions and complete certain transactions, such as
making tax payments or entering into installment agreements, without
talking to an IRS employee. Overall, IRS expects to have 30 or more
of these systems available to taxpayers by 2000. As of January 1996,
IRS had developed and tested three such systems and had rolled-out
one of them to seven locations. Four more interactive telephone
systems are scheduled to be tested in September 1996.
We recently reported that the three interactive telephone systems
that IRS has tested were difficult for taxpayers to use because IRS'
telephone routing system (1) required taxpayers to remember up to
eight menu options when the design guidelines called for no more than
four options and (2) did not allow taxpayers to return to the main
menu when they made a mistake or wanted to resolve other issues.\9 We
recommended that IRS assess the various menu options and take actions
to overcome the problems caused by too many options, including using
multiple toll-free numbers and providing taxpayers with a written
step-by-step description of how to use the interactive systems'
menus. In response to our recommendation, IRS plans to further test
telephone menu options and interactive telephone systems to determine
taxpayers' needs and their ability to use the system easily. The
clarity of menu options will be even more critical as IRS plans to
expand its use of interactive systems.
The final part of IRS' strategy is to reduce the need for taxpayers
to call IRS. IRS plans to do this in several ways. In the near
term, demand on IRS' customer service centers will be reduced by
eliminating unnecessary notices. In that regard, as part of a recent
notice reengineering project, IRS decided to eliminate certain
notices. When the recommendations from the reengineering effort are
fully effective, in fiscal year 1997, IRS expects to be issuing
almost 46 million fewer notices annually to taxpayers. By
eliminating those notices, IRS expects to receive 9 to 10 million
fewer telephone calls from taxpayers.
In the longer term, IRS plans to reduce demand by successfully
responding to more taxpayer issues with only one contact. According
to IRS, this will require its assistors to have better quality
information and tools at their disposal. As discussed in the next
section, some progress has been made, but the systems IRS needs to
accomplish this goal remain in development.
--------------------
\9 Tax Administration: Making IRS' Telephone Systems Easier to Use
Should Help Taxpayers (GAO/GGD-96-74, Mar. 11, 1996).
IMPROVING INFORMATION
SYSTEMS
------------------------------------------------ Chapter STATEMENT:3.3
In addition to organizational and work process changes, IRS' customer
service vision depends on increasing the use of and implementing new
information systems.
Making it easier for taxpayers to reach IRS by telephone is of
limited value if IRS employees on the other end of the line do not
have access to the data needed to help the taxpayers. Inaccessible
data has been a longstanding problem in IRS. IRS' primary taxpayer
account database that is used for assisting taxpayers, known as the
Integrated Data Retrieval System (IDRS), was designed in the 1960s.
Until 1995, account information in IDRS was spread among 10 service
centers and employees in each center had access to information on
only a small percentage of the IDRS accounts. When an employee did
not have access to the account information needed to respond to a
taxpayer's question, the employee typically wrote down the question
and mailed it to the location that had access to the information
whose staff would then respond to the taxpayer.
Early in 1995, IRS implemented a networking capability among the 10
service centers so that employees could have access to IDRS data
nationwide. This networking capability is referred to as Universal
IDRS. Although Universal IDRS gives IRS employees access to taxpayer
account information nationwide, IDRS does not always contain complete
information on a taxpayer's account. Other information needed to
help the taxpayer may reside in different systems that are not linked
to IDRS. For example, an IRS employee using IDRS will know that a
taxpayer was sent an underreporter notice, but would not have access
to the actual notice. That notice is contained in IRS' Automated
Underreporter system. The notice would provide additional
information, such as the amount of unreported income and information
return data that may indicate, for example, the amount of dividend or
interest reported by financial institutions but not by the taxpayer.
To resolve these kinds of problems, IRS eventually intends to provide
its employees with access to greater amounts of on-line taxpayer data
in shorter time frames than those for the current IDRS data. This
capability is to be delivered when IRS implements two TSM
projects--the Corporate Accounts Processing System (CAPS) and the
Workload Management System (WMS). CAPS is to be the main repository
of taxpayer account data, and WMS is to track and manage all open
account issues for a taxpayer. These projects are scheduled to be
implemented in 1999.
In the interim, IRS plans to use Integrated Case Processing (ICP) to
gain access to and integrate information from each of the existing
IRS functional databases that contain taxpayer information. Using a
taxpayer's social security number to obtain case information, the ICP
software is expected to automatically assemble the relevant
information on screen, provide questions and prompts for the customer
service representative, and perform calculations for updating the
account. With ICP, it is envisioned that IRS customer service staff
will have all relevant information from a number of important
databases available to them when they talk to the taxpayer. This is
key to meeting IRS' customer service goals.
IRS plans to deliver ICP in four software increments. The first
software increment consists of eliminating the need for IRS employees
to use multiple workstations to access data on individual taxpayers
from different information systems. As of February 1996, the first
increment of ICP was partially deployed at 13 of the 23 customer
service centers.\10 The next ICP software increment is being designed
to provide enhancements over the first increment. Some of the
enhancements include consolidating the information from multiple
systems onto a single standard screen and providing IRS with the
capability to route calls to the most skilled IRS employee who is
available at the time of a taxpayer's call. Later versions are
expected to provide this same level of access to information for
business taxpayers.
--------------------
\10 IRS' plans call for purchasing 16,000 ICP workstations through
2000. IRS has already purchased about 2,300 of those workstations.
MANAGERIAL, TECHNICAL, AND
HUMAN RESOURCE CHALLENGES
REMAIN
------------------------------------------------ Chapter STATEMENT:3.4
IRS' strategy for improving customer service offers promise as it is
designed to improve taxpayers' ability to get assistance from IRS and
provide IRS employees access to the information they need to help
taxpayers. However, IRS faces important managerial, technical, and
human resource challenges to fully achieve its customer service
vision. Specifically, it has to manage the transition to the
customer service vision while continuing to meet the current workload
for providing answers to taxpayer inquiries, managing taxpayer
accounts, and collecting unpaid taxes. IRS also has to determine the
scope of responsibilities for those staff employed at customer
service centers and provide the requisite training for that staff.
IRS also has to develop the information systems necessary to support
the accomplishment of its vision, including interactive telephone
systems that are easy for taxpayers to use.
IRS' COMPLIANCE GOAL MAY BE
JEOPARDIZED BY CHANGING
ASSUMPTIONS
-------------------------------------------------- Chapter STATEMENT:4
The third major part of IRS' vision is to increase compliance.
According to IRS, compliance levels have remained at 87 percent for
the last several years. IRS estimates that each percentage point
increase in compliance could generate billions of dollars in revenue.
In addition, IRS is faced with an inventory of collectible tax debts
that, according to IRS estimates, was about $46 billion as of
September 30, 1995.
IRS' goal is to increase compliance to 90 percent by 2001 through
improved voluntary compliance and enforcement. However, it is
unclear how IRS expects to achieve that goal, especially considering
some of the changes since the goal was established. Since then, for
example, IRS (1) has begun reassessing its data needs and revised its
plans to capture 100 percent of the data on tax returns; (2) has
postponed indefinitely the Taxpayer Compliance Measurement Program
(TCMP), which has been IRS' primary program for obtaining
comprehensive and reliable taxpayer compliance data since the 1960s;
(3) no longer anticipates being able to do up-front matching of tax
returns and information returns, at least until sometime after 2000;
and (4) has abandoned its assumption that staff-year savings from
modernization would be reinvested in front-line customer service and
compliance positions.
READY ACCESS TO GOOD DATA IS
CRITICAL TO ACHIEVING IRS'
COMPLIANCE GOAL
------------------------------------------------ Chapter STATEMENT:4.1
Achievement of IRS' compliance goal hinges on the ability of
enforcement staff to readily access good data. For example, as we
discussed in recent testimony on IRS' debt collection practices,
existing IRS computer systems do not provide ready access to needed
information and, consequently, do not adequately support modern work
processes.\11 Access to current and accurate information on tax debts
is essential if IRS is to enhance the effectiveness of its collection
tools and programs to optimize productivity, devise alternative
collection strategies, and develop programs to prevent taxpayers from
becoming delinquent in the first place.
Although technology plays a key role in helping an organization
collect good data and make it readily accessible to employees, it is
critical that the organization first determine what data it needs.
IRS has not yet identified all of the data that enforcement staff
need to do their job.
IRS currently captures about 40 percent of the data provided by
taxpayers on their individual income tax returns. IRS' intent, as
part of modernization, was to capture, either through electronic
submission or imaging, 100 percent of the data. However, as part of
the TSM reassessment effort discussed earlier, IRS has decided that
it will continue capturing about 40 percent of the individual income
tax return data for at least the next 5 years, with the intent of
moving to 100 percent data capture sometime after that. If IRS is
going to continue capturing 40 percent of the tax return data, it is
critical that it capture the right 40 percent. IRS does not now know
if it is capturing the right data. According to IRS officials,
efforts are underway to validate IRS' business needs and to do a
line-by-line review of the individual income tax return (Form 1040)
to determine what is and is not needed.
It is also important that any data IRS captures, whether 40 percent
or 100 percent of the universe, be easily accessed by staff who need
it. In that regard, IRS officials told us that enforcement staff are
not able to readily access the data that IRS is now capturing. Like
Customer Service, IRS' enforcement functions should benefit from the
eventual replacement of the current master files with CAPS and WMS.
Data are also critical to IRS' new approach for researching ways to
improve compliance. IRS has traditionally responded to noncompliance
through audits and other enforcement efforts. Over time, IRS
concluded that enforcement was essential to pursue intentional
noncompliance but that improved taxpayer assistance and education,
rather than enforcement, might be more appropriate for correcting
unintentional noncompliance. With this in mind and concerned about
noncompliance levels, IRS created a compliance research and analysis
approach in 1993, with the intent of identifying noncompliant market
segments and appropriate enforcement and nonenforcement efforts to
address that noncompliance. IRS' major research tool is to be the
Compliance Research Information System (CRIS). Plans call for CRIS
to be an integrated network of databases containing a sample of
internal, external, and multi-year data, accessible to national and
district office personnel to support analyses of voluntary compliance
levels. CRIS is expected to enable IRS to develop working hypotheses
on the means to increase voluntary compliance, test hypotheses,
evaluate the results, and make decisions on how to implement the new
strategies.
IRS may not have objective compliance data available when needed for
its research efforts. In October 1995, IRS indefinitely postponed
TCMP due to budget and taxpayer burden concerns. TCMP has been IRS'
primary program for obtaining comprehensive and reliable taxpayer
compliance data since the 1960s. IRS has not done a TCMP of
individual income tax returns since 1988. With the postponement of
TCMP, IRS lacks current measures on compliance and does not have the
data it needs to determine which market segments to research on ways
to correct noncompliance. As we discussed in an April 1996 report to
the Commissioner of Internal Revenue, although IRS plans to mitigate
the data losses resulting from the postponement of TCMP, it has no
specific proposal on how to accomplish this.\12
IRS' original vision assumed that compliance efforts would be
enhanced by more timely issue identification and resolution,
facilitated in part by accelerating the matching of tax return data
with data provided by third parties, such as banks and employers.
The ultimate goal was to achieve up-front matching whereby data are
received and processed soon enough to allow matching with the tax
return while the return is being processed and before any refund is
issued.
IRS has been accelerating the matching process, but the first notice
to taxpayers advising them of any discrepancy is still not sent out
until about a year after the tax return was filed. According to IRS
officials, IRS eventually wants to be able to send out notices in the
same year the return was filed. Besides increasing the likelihood of
contacting the taxpayer and resolving the case, sending the notice
the same year the tax return is filed might help taxpayers avoid the
same mistake on the following year's return. It is not clear when
IRS will be able to do up-front matching.
--------------------
\11 Tax Administration: IRS Tax Debt Collection Practices
(GAO/T-GGD-96-112, Apr. 25, 1996).
\12 Tax Administration: Alternative Strategies to Obtain Compliance
Data (GAO/GGD-96-89, Apr. 26, 1996).
CHANGES IN STAFFING
ASSUMPTIONS MAKE ACHIEVEMENT
OF IRS' COMPLIANCE GOAL MORE
DIFFICULT
------------------------------------------------ Chapter STATEMENT:4.2
Data and the technology that provides it are critical, but so are the
people who are tasked with using the data. IRS already has tens of
thousands of staff who work in areas, such as taxpayer service,
examination, and collection, that can affect compliance levels.
Until recently, IRS had assumed that staff savings resulting from
modernization (such as the savings anticipated in the returns
processing function) would be reinvested to provide more of those
front-line staff, with a corresponding increase in revenues. That is
no longer the case, at least not to the extent originally
anticipated. According to IRS officials, one of the assumptions
surrounding its recent reassessment of TSM was that IRS would be
smaller and could not rely on reinvesting TSM savings.
We have not quantified the implications of this change in staffing
assumptions. It is clear, however, that IRS' success in increasing
compliance is directly related to the number of staff involved in
compliance-related activities and that any significant change in
staffing could significantly affect IRS' ability to achieve
90-percent compliance goal. IRS could mitigate that effect, at least
somewhat, by making sure that is has the right mix of staff.
Staff mix is an issue, for example, in IRS' collection function.
While the private sector emphasizes the use of telephone collection
calls, IRS allocates a significant portion of its collection
resources to field offices where revenue officers visit taxpayers.
IRS has initiated programs and made procedural changes to speed up
its collection process, but historically IRS has been reluctant to
reallocate resources from the field to earlier, more productive,
collection activities. IRS' fiscal year 1997 budget request states
that, although traditional enforcement positions (which include
revenue officers) "comprise the lion's share of IRS' enforcement
efforts, they also represent on the margin the least efficient use of
IRS resources." In that regard, the budget request provides for an
increase in staff for IRS' telephone collection activities and a
decrease in revenue officers--a shift toward the kind of mix that we
have advocated in the past.
Another way to mitigate the effect of fewer-than-expected staff is to
improve staff productivity. In that regard, one of IRS' efforts to
improve compliance involves the automation of certain tasks done by
enforcement staff in IRS' district offices. These tasks, like many
in IRS, have for years involved the manual processing of paper, which
has resulted in enforcement staff spending significant amounts of
time on routine administrative duties. IRS has been implementing
systems that are designed to ease this burden and help make
enforcement staff more productive.
The Integrated Collection System (ICS) is a computer-based
information system that is intended to automate some of the
labor-intensive tasks performed by revenue officers. Although this
effort is not a major technological advancement, it should enable
revenue officers to spend their time more productively. According to
IRS, implementing this system in two pilot districts resulted in
increased collections, faster case closing, and less time spent on
each case. The system is currently operating in six districts, and
IRS plans to roll it out in three more districts this year.
According to IRS, further implementation depends on future funding
and final measurements of productivity.
IRS is also developing an automated inventory delivery system that is
intended to direct accounts, based on internally developed criteria,
to the particular collection stage where they can be processed most
efficiently and expeditiously. This system, which IRS plans to test
in July 1996, is intended to move accounts through the collection
process faster and cheaper than under the current system.
Another field system, the Totally Integrated Examination System
(TIES), provides automated tools to help IRS' Examination staff
capture data about their audits and compute tax liability, interest,
and penalties--tasks that previously had to be done manually. TIES
has been implemented in seven IRS offices. However, IRS recently
decided not to continue funding TIES through TSM. It is our
understanding that any future funding will be done outside of TSM.
According to IRS, the features of ICS and TIES will eventually be
incorporated into the Integrated Case Processing (ICP) system, which
will also provide IRS' compliance function with automated tools for
case assignment and tracking. However, as a result of the recent
reassessment of TSM, IRS has decided to delay that integration until
after the year 2000.
TSM INVESTMENTS REMAIN AT RISK
-------------------------------------------------- Chapter STATEMENT:5
In March 1996, we told the Subcommittee on Oversight, House Committee
on Ways and Means, that additional investments in TSM are at risk
given current managerial and technical weaknesses.\13 Those were
weaknesses that we discussed in our July 1995 report on TSM.\14 The
Department of the Treasury is expected to report to the Senate and
House Appropriations Committees on IRS' progress in dealing with
those weaknesses soon.
One of the managerial weaknesses discussed in our July 1995 report
that has significant programmatic implications was a lack of
integration of IRS' reengineering efforts and TSM projects.
Specifically, we said that IRS' reengineering efforts were not tied
to its TSM projects and that IRS lacked a comprehensive plan and
schedule defining how and when to integrate these business
reengineering efforts with ongoing TSM projects.
The reengineering efforts we referred to in July 1995 were put on
hold pending the outcome of IRS' reassessment of TSM. As a result of
the recent reassessment of TSM, IRS decided to reengineer "the tax
settlement process". IRS has defined that process as beginning at
the point taxpayers collect information necessary for the filing of
tax returns and ending when the current year tax account is satisfied
or enforcement action is initiated. IRS has identified 18 high-level
processes for this time period. One of those processes focuses on
IRS' tax return processing activity that we mentioned earlier.
We question IRS' ability to make sound investment decisions on TSM
until reengineering of important processes, such as tax return
processing, are sufficiently completed. Reengineering could result
in new business requirements that are not addressed by planned TSM
projects or that make those projects obsolete. For example, if IRS
decides that it is cost-effective to outsource paper tax return
processing, it will not need the scanning and imaging technologies
that DPS is being designed to provide.
In closing, Mr. Chairman, our main point is that until clearly
defined business requirements drive TSM projects, there is no
assurance that TSM projects will achieve the desired objectives and
result in improved operations. IRS must clearly define its business
needs and determine the most cost-effective means for meeting those
needs to ensure that it makes effective use of funds provided for
information technology projects.
--------------------
\13 Tax Administration: IRS' Fiscal Year 1996 and 1997 Budget Issues
and the 1996 Filing Season (GAO/T-GGD-96-99, Mar. 28, 1996).
\14 Tax Systems Modernization: Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
July 26, 1995).
------------------------------------------------ Chapter STATEMENT:5.1
That concludes my statement. We welcome any questions that you may
have.
*** End of document. ***