Managing IRS: IRS Needs to Continue Improving Operations and Service
(Testimony, 07/29/96, GAO/T-GGD/AIMD-96-170).

GAO discussed the Internal Revenue Service's (IRS) efforts to make its
organization, operations, and processes more effective and efficient and
improve customer service. GAO noted that: (1) during the past 4 years,
IRS has made some progress in modernizing its operations to reflect its
business vision; (2) although IRS has taken some actions to increase the
number of electronic returns filed, it does not have a comprehensive
strategy to reach its electronic filing goal by 2001; (3) IRS has
consolidated the processing of paper returns in those centers with the
Service Center Recognition Image Processing System (SCRIPS), but SCRIPS
is performing well below IRS original expectations; (4) IRS faces
several challenges in implementing its customer service vision; (5) a
key IRS goal is to resolve 95 percent of taxpayer inquiries after one
contact; (6) IRS strategy for improving customer service includes
consolidating work units, changing work processes, and implementing new
information systems; (7) IRS expects that 45 percent of all taxpayers'
calls will be resolved through interactive telephone systems by 2000;
(8) IRS has implemented a networking capability among its 10 service
centers for employees to gain access to taxpayer data nationwide; (9)
IRS must deal with its limited ability to collect delinquent taxes and
manage its accounts receivable; (10) IRS inventory of tax debt includes
delinquent taxes up to 10 years old; and (11) IRS must clearly define
its business needs and determine the most cost-effective means for
meeting those needs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD/AIMD-96-170
     TITLE:  Managing IRS: IRS Needs to Continue Improving Operations 
             and Service
      DATE:  07/29/96
   SUBJECT:  Reengineering (management)
             Tax administration systems
             Financial management systems
             Information resources management
             Delinquent taxes
             Government collections
             Customer service
             Telephone communications operations
             Information processing operations
             Accounts receivable
IDENTIFIER:  IRS Tax System Modernization Program
             IRS Service Center Recognition Image Processing System
             IRS Document Processing System
             IRS Integrated Data Retrieval System
             IRS Automated Underreporter System
             IRS Corporate Accounts Processing System
             IRS Workload Management System
             IRS Integrated Case Processing System
             IRS Enforcement Revenue Information System
             IRS Integrated Collection System
             TSM
             
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Cover
================================================================ COVER


Before the National Commission on Restructuring
the Internal Revenue Service

For Release on
Delivery Expected at
2 p.m., EDT, Monday
July 29, 1996

MANAGING IRS - IRS NEEDS TO
CONTINUE
IMPROVING OPERATIONS
AND SERVICE

Statement of Lynda D.  Willis
Director, Tax Policy and Administration
Issues, General Government Division

GAO/T-GGD/AIMD-96-170

GAO/GGD-96-170T


(268753)


Abbreviations
=============================================================== ABBREV

  CAPS - Corporate Accounts Processing System
  CFO - Chief Financial Officers
  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
  TSM - Tax Systems Modernization
  WMS - Workload Management System

MANAGING IRS:  IRS NEEDS TO
CONTINUE IMPROVING OPERATIONS AND
SERVICE
==================================================== Chapter STATEMENT

Chairman Kerrey and Chairman Portman and Members of the Commission: 

I am pleased to have this opportunity to assist the Commission in its
review on restructuring the Internal Revenue Service (IRS).  The
Commission's review should provide Congress with fresh insights for
resolving IRS' operational, financial, and information management
problems.  IRS faces formidable challenges to make its organization,
operations, and processes more effective and efficient and improve
service to taxpayers.  My statement today addresses some of those
challenges, which we have previously discussed in testimonies before
congressional oversight committees.  IRS has experienced problems in
fulfilling its business vision, which aims to make IRS' tax
processing, customer service, compliance, and collection activities
more modern and efficient.  IRS also has had problems addressing
management and technical weaknesses in its Tax Systems Modernization
(TSM) efforts and improving the reliability of the financial
management information used to account for hundreds of billions of
dollars in taxpayer monies.  Because of these problems, we included
IRS' financial management, accounts receivable, and TSM programs on
our list of government programs considered as high-risk areas because
they are especially vulnerable to waste and mismanagement. 

Our statement, which is based on previous and ongoing work, makes the
following points: 

  -- One of IRS' biggest problems has been the inefficient manner in
     which it processes most tax returns.  To improve its operations,
     IRS needs to develop an effective strategy to reduce the volume
     of paper returns. 

  -- IRS' strategy for improving customer service offers promise
     because 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.  IRS needs to
     develop a framework to overcome challenges in implementing the
     customer service aspects of its business vision. 

  -- Longstanding problems continue to undermine the effectiveness of
     IRS' collection programs.  To address these problems,
     significant changes are needed in the way IRS does business. 

  -- While IRS has made some progress in resolving the issues that
     have prevented us from expressing an opinion on the reliability
     of IRS' financial statements, serious financial management
     problems remain uncorrected. 

  -- IRS needs to develop the capacity to make sound investment
     decisions in information technology.  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. 


   IRS' BUSINESS VISION
-------------------------------------------------- Chapter STATEMENT:1

In 1992, IRS developed a new business vision for 2001 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, which are 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;

  -- taxpayers' 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 IRS' field
enforcement functions.  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. 
In many ways, IRS' business vision shares similarities with the
Commission's mandate of recommending options to make IRS more modern,
effective, and efficient. 

The new vision depends 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, 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 fewer staff to maintain existing work levels, it
anticipated investing the staff savings in 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. 


   IRS HAS MADE LITTLE PROGRESS IN
   ACHIEVING ITS TAX RETURN
   PROCESSING VISION
-------------------------------------------------- Chapter STATEMENT:2

One of the biggest problems facing IRS is its inefficient system for
processing tax returns.  IRS' strategy for receiving and capturing
data from tax returns was and still is a critical 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.  IRS
concluded that it had to (1) reduce the volume of paper returns by
expanding the use of electronic filing and (2) develop systems that
would allow it to more efficiently process the remaining paper
returns.  IRS has made little progress either in reducing the number
of paper returns it processes or in delivering the new systems it
said it needed to better process the remaining paper returns. 


      IRS LACKS A COMPREHENSIVE
      STRATEGY TO SIGNIFICANTLY
      INCREASE THE NUMBER OF
      ELECTRONIC RETURNS
------------------------------------------------ Chapter STATEMENT:2.1

One of the most important aspects of IRS' vision was its decision to
significantly increase the number of tax returns received
electronically 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. 

Although IRS has taken some steps to increase the number of
electronic returns filed, it does not have a comprehensive business
strategy to reach its electronic filing goal of 80 million filings by
2001.  IRS' projections suggested that as few as 39 million
individual and business tax returns may be submitted electronically
by 2001, less than half of IRS' goal and only about 17 percent of all
returns expected to be filed. 

IRS' strategy has focused primarily on taxpayers who use a third
party to prepare and/or transmit simple returns, are willing to pay a
fee to file their returns electronically, and are expecting refunds. 
Most of the returns filed electronically could be filed on forms
(e.g., the 1040EZ) that are among the least costly paper returns to
process.  By focusing on this limited taxpaying population, IRS
overlooked most taxpayers, including those who prepare their own tax
returns using personal computers, have more complicated returns, owe
tax balances, and/or are unwilling to pay a fee to a third party to
file a return electronically. 

In October 1995, we recommended 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.\1 Since then, IRS has performed an electronic filing
marketing analysis at local levels; developed a marketing plan to
promote electronic filing, and initiated a reengineering project with
a goal to reduce paper tax return filing to 20 percent or less of the
total tax return volume by 2000.  IRS also plans to complete an
electronic filing strategy in August 1996.  These initiatives are not
far enough along to determine whether they will result in a
comprehensive strategy that identifies how IRS plans to target
taxpayers that can file electronically most cost-beneficially. 


--------------------
\1 Tax Administration:  Electronic Filing Falling Short of
Expectations (GAO/GGD-96-12, Oct.  9, 1995). 


      IRS HAS HAD PROBLEMS
      DELIVERING THE SYSTEMS
      INTENDED TO PROCESS PAPER
      RETURNS
------------------------------------------------ Chapter STATEMENT: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 and to use
imaging and optical character recognition technologies to process
those documents. 

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
rollout of the Service Center Recognition Image Processing System
(SCRIPS).  However, SCRIPS is performing well below IRS' original
expectations.  Besides information returns and tax deposit coupons,
SCRIPS was expected to process all forms 1040EZ, 1040PC, and 941
(employment tax returns).  Instead, SCRIPS is processing about 50
percent of the form 1040EZ and none of the forms 1040PC and 941. 

IRS had intended to eventually replace SCRIPS with the Document
Processing System (DPS)--a more sophisticated system that could be
used to process all paper tax returns.  IRS began designing DPS in
1988 and, according to IRS records, had spent about $270 million on
DPS through fiscal year 1995.  However, the future of DPS is now in
doubt because, according to IRS officials, it is uncertain whether
the benefits of DPS outweigh the costs.  According to those
officials, IRS is reevaluating its need for an imaging and
data-capture system.  This evaluation is to include a determination
of how much tax return data IRS needs and whether data needs vary by
type of return.  This analysis was not done when DPS initially was
planned. 


   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 and improve its efficiency in using resources.  IRS expects
these improvements to contribute to a higher level of compliance with
tax laws.  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
because it is designed to improve taxpayers' ability to get
assistance from IRS and to provide IRS employees easy access to
information.  However, our work shows that IRS faces many challenges
in implementing that strategy.\2


--------------------
\2 Tax Administration:  IRS Faces Challenges in Reorganizing for
Customer Service (GAO/GGD-96-3, Oct.  10, 1995). 


      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 IRS offices
rather than those they initially contacted.  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 prototype customer service centers (Nashville, TN, and Fresno,
CA) 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 were scheduled to close, 6 are closed.  The remaining
offices are to 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 making it easier for taxpayers to reach IRS and
resolve their problems by telephone. 

The Fresno prototype customer service center has experience in
converting from 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, IRS' 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 other offices, 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.  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 has 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 that would 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.\3 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 is to 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. 


--------------------
\3 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.  The
inaccessibility of 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, mailed it to the location that had
access to the information, and the staff of that location 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 systems that are not linked to IDRS. 
For example, an IRS employee using IDRS might 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.  Only by going into that system could an
assistor find such information as the amount of unreported income and
the source (e.g., an interest payment to the taxpayer that was
reported to IRS by a financial institution 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. 

In the interim, IRS plans to use Integrated Case Processing (ICP) to
gain access to and integrate information from each of the IRS
functional databases that contain taxpayer information.  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.  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. 

IRS plans to deliver ICP in several software increments.  The first
increment consists of computer hardware and software that eliminates
the need for IRS' employees to use multiple workstations to access
data on individual taxpayers from different information systems.  As
of June 1996, the first increment of ICP was partially deployed in 14
of the 23 customer service centers.\4 We are currently reviewing ICP
and believe the success of ICP will depend to some extent on IRS'
ability to address many of the management and technical weaknesses we
have reported on in the past. 


--------------------
\4 IRS' plans call for purchasing 16,000 ICP workstations through
2000.  IRS has already purchased about 2,500 of those workstations. 


      MANAGERIAL, TECHNICAL, AND
      HUMAN RESOURCE CHALLENGES
      REMAIN
------------------------------------------------ Chapter STATEMENT:3.4

IRS' strategy for improving customer service offers promise because
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 (1) 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; (2) develop the information
systems necessary to support the accomplishment of its vision,
including interactive telephone systems that are easy for taxpayers
to use; and (3) determine the scope of responsibilities for those
staff employed at customer service centers and provide the requisite
training for that staff. 

Until recently, IRS had assumed that staff savings resulting from
modernization (such as savings anticipated in the returns processing
function) would be reinvested to provide more front-line staff, with
a corresponding increase in revenues.  That appears no longer to be
the case, at least to the extent originally anticipated.  According
to IRS officials, on the basis of a reassessment of TSM, IRS would be
smaller and could not rely on reinvesting TSM savings.  Thus, changes
in staffing assumptions can make achievement of IRS' compliance goals
more difficult.  This is because IRS' success in increasing
compliance is directly related to the numbers of staff involved in
compliance-related activities.  IRS could mitigate such effects, at
least somewhat, by making sure that it has the right mix of staff. 
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.  The key to evaluating
the success of improvements, however, lies in developing reliable
performance measurement tools, something IRS currently lacks. 


   LONGSTANDING PROBLEMS IN
   ACCOUNTS RECEIVABLE
-------------------------------------------------- Chapter STATEMENT:4

While most taxpayers voluntarily pay their taxes on time, some
taxpayers are unable or unwilling to do so.  It is this latter group
that IRS must deal with in its efforts to collect delinquent taxes. 
In doing so, we have found that IRS faces several significant
challenges that have limited its ability to collect tax debts and
manage its accounts receivable.\5 These challenges include (1) the
need for better information on the debt and the effectiveness of IRS
collection tools, (2) the age and nature of tax debts, (3)
out-of-date collection processes, and (4) antiquated computer
systems. 


--------------------
\5 Tax Administration:  IRS Tax Debt Collection Practices
(GAO/T-GGD-96-112, Apr.  25, 1996). 


      BETTER INFORMATION NEEDED
------------------------------------------------ Chapter STATEMENT:4.1

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 alternate collection
strategies, and develop programs to help keep taxpayers from becoming
delinquent in the first place. 

Without reliable information on the accounts they are trying to
collect and the taxpayers who owe the debts, IRS agents generally do
not know whether they are resolving cases in the most efficient and
effective manner and may spend time pursuing invalid or unproductive
cases.  IRS data show that of the approximately $200 billion
currently in IRS' accounts receivable inventory, approximately $63
billion represent taxes that, although they have been assessed, may
not be valid receivables but rather "place markers" for compliance
actions. 

For example, under IRS procedures, when IRS identifies a taxpayer who
received a Form W-2 but did not file a tax return, it creates a
return for the taxpayer.  Generally, this is done using the standard
deduction and single filing status and often results in the taxpayer
owing taxes.  IRS then sends balance due notices to the taxpayer
reflecting the amount of taxes owed as calculated by IRS--to
encourage the taxpayer to file a return with the correct tax amount
owed.  If the taxpayer does not subsequently file the return, IRS
records the amount it calculated as taxes due and generates a
receivable.  However, when contacted by IRS collection staff, the
taxpayer may demonstrate that either no tax or a lesser amount of tax
is actually owed.  To more efficiently account for and collect money
actually owed to the government, IRS would have to be able to
differentiate these IRS-calculated accounts from those where there is
an acknowledged balance due. 

In addition, IRS does not have reliable data on the effectiveness of
its collection activities and programs.  Consequently, it is unable
to target its efforts specifically to the taxpayer and tax debt in
question.  IRS is currently trying to capture these data on its
Enforcement Revenue Information System and other computerized
systems.  However, IRS has noted in the past that there are questions
regarding the accuracy of the data produced by these systems. 


      AGE OF TAX DEBTS
------------------------------------------------ Chapter STATEMENT:4.2

The age of the debts in IRS' accounts receivable inventory is also
problematic.  IRS' inventory of tax debt includes delinquent debts
that may be up to 10 years old.  This is because there is a 10-year
statutory collection period, and IRS generally does not write off
uncollectible delinquencies until this time period has expired.  As a
result, the receivables inventory includes old accounts that may be
impossible to collect because the taxpayers cannot be located or are
deceased or the corporations are defunct. 

Of the over $200 billion total receivables inventory as of September
30, 1995, IRS data show that about $38 billion were owed by either
deceased taxpayers or defunct corporations.  Out of a total of 460
accounts receivable cases that we reviewed in our audit of IRS' 1995
financial statements, IRS identified 258 as currently not
collectible; 198 of these cases represented defunct corporations,
while the remaining 60 cases represented entities that either could
not pay or could not be located.  These cases represented $12 billion
of the $26 billion included in accounts greater than $10 million. 

The age of the receivable only reflects the length of time that has
elapsed since the debt was assessed.  It does not reflect the
additional time it took for IRS to assess the taxes in the first
place.  Enforcement tools, such as IRS' matching programs and tax
examinations, may take up to 5 years from the date the tax return is
due until IRS finally assesses the additional taxes.  This reduces
the likelihood that the outstanding amounts will be collected. 

The age factor significantly affects the collectibility of the debt
because, as both private and public sector collectors have attested,
the older the debt, the more problematic collection becomes.  Because
of these and other factors, IRS considers many of the accounts in the
inventory to be uncollectible.  Specifically, IRS has estimated that
only about $46 billion of the $200 billion inventory of tax debt as
of September 30, 1995, was collectible. 


      OUT-OF-DATE COLLECTION
      PROCESSES
------------------------------------------------ Chapter STATEMENT:4.3

Because of convention, IRS follows a collection process introduced
several decades ago, and although some changes have been made, the
process generally is costly and inefficient.  The three-stage
collection process--computer-generated notices and bills, telephone
calls, and personal visits by collection employees--generally takes
longer and is more costly than collection processes in the private
sector.  IRS had a reengineering effort ongoing to redesign its
collection process, but it was suspended in November 1995.  According
to IRS, the suspension was related to the need to rescope priorities
brought on by fiscal year 1996 budget reductions.  IRS subsequently
initiated another broad reengineering effort that is to focus on
processes beginning from the point taxpayers collect information
needed to file tax returns until their accounts are satisfied.  Thus,
the collection process may be included in this effort. 

While the private sector emphasizes the use of telephone collection
calls, a significant portion of IRS' collection resources is
allocated to field offices where personal visits are made by revenue
officers.  IRS' fiscal year 1997 budget request states that, although
"these [revenue officer] positions still comprise the lion's share of
IRS' enforcement efforts, they also represent on the margin the least
efficient use of IRS resources." IRS has initiated programs and made
procedural changes to speed up its collection process, but,
historically, it has been reluctant to reallocate resources from the
field to the earlier, more productive collection activities.  Due to
budget cuts, however, IRS temporarily reassigned about 300 field
staff to telephone collection sites to replace temporary employees
who were terminated. 


      ANTIQUATED COMPUTER SYSTEMS
------------------------------------------------ Chapter STATEMENT:4.4

Modernized systems are also needed to facilitate IRS' collection
programs.  Modernized systems would also help provide the management
information needed to evaluate the effectiveness of collection tools
and the ability to adopt flexible and innovative collection
approaches.  Existing IRS computer systems do not provide ready
access to needed information and, consequently, do not adequately
support modern work processes. 

Although TSM is not expected to be completed any time in the near
future, IRS has started to automate some collection activities.  For
example, IRS is currently developing an automated inventory delivery
system that is intended to direct accounts, on the basis of
internally developed criteria, to the particular collection stage
where they can be processed most efficiently and expeditiously.  This
system, which IRS plans to test this summer, is intended to move
accounts through the collection process faster and cheaper than under
the current system. 

Another effort under way involves the automation of certain field
collection tasks.  These tasks, like many in IRS, have for years
involved the manual processing of paper, which has resulted in IRS
field collection employees spending significant amounts of time on
routine administrative duties.  The Integrated Collection System
(ICS) is a computer-based information system that is intended to
automate some of the labor-intensive tasks performed by field revenue
officers.  While this effort is not a major technological
advancement, it should help IRS employees be more productive by
allowing them to spend their time on more effective and efficient
collection-related activities.  Basic automation is a given in
today's business environment, and if IRS is to operate like a private
sector business as it says, systems that automate basic work
processes are a must. 

According to IRS, implementing ICS in two pilot districts has
resulted in increased collections, faster case closings, and less
time spent on each case.  IRS employees using the system were also
very supportive of it and enthusiastic about its benefits.  The
system is currently operating in six districts, and IRS plans to roll
it out in three additional districts this year.  According to IRS,
further implementation depends on future funding and final
measurements of productivity. 

To stay competitive in today's business environment, IRS must
continually strive to improve collections by testing new and
innovative approaches.  Private collectors and states that engage in
collection activities similar to IRS' may also provide some
best-practice examples for IRS to use in benchmarking its efforts. 
On the basis of our survey conducted several years ago, many states
used private collectors to supplement their own collection programs,
thereby taking advantage of private sector capability in managing
receivables, gaining access to better technology, or avoiding the
expense of hiring permanent staff.  Although many states--including
33 of the 43 states that responded to our survey--had used private
collectors, their experiences varied widely.\6

IRS soon plans to test the use of private collection companies in
collecting some delinquent accounts that are classified as currently
not collectible--primarily old accounts that have been previously
worked by IRS staff.  Using the experience of states in our survey as
an indicator, IRS could expect some additional collections, but not
necessarily a significant windfall.  Although the test results may
not be directly comparable to IRS, IRS may benefit and learn from the
private companies' collection techniques and use of technology. 

IRS faces significant challenges in collecting tax debts.  As we have
previously recommended, because the problems are pervasive across all
IRS activities and processes, IRS needs to develop a detailed and
comprehensive long-term plan to deal with the major challenges it
faces and their interrelationships.\7 With such a plan, IRS could
better ensure itself and Congress that it is on the right track and
thereby better position itself to obtain the support it needs. 


--------------------
\6 Tax Administration:  State Tax Administrators' Views on Delinquent
Tax Collection Methods (GAO/GGD-94-59FS, Feb.  2, 1994). 

\7 High-Risk Series:  Internal Revenue Service Receivables
(GAO/HR-95-6, Feb.  1995). 


   SERIOUS FINANCIAL MANAGEMENT
   PROBLEMS REMAIN UNCORRECTED
-------------------------------------------------- Chapter STATEMENT:5

As part of a pilot program under the Chief Financial Officers (CFO)
Act of 1990, IRS began preparing annual financial statements showing
the results of its operations starting with those for fiscal year
1992.  CFO Act implementation has (1) led to IRS top managers' having
a much better understanding than ever before of IRS' serious and
pervasive accounting and reporting problems, (2) provided information
on the magnitude of IRS' tax receivables collection problems, and (3)
identified the need for stronger controls over such areas as payroll
operations.  The CFO Act's requirements also have provided the
impetus for efforts to improve IRS operations and address the
substantial problems identified by our financial audits. 

We reviewed IRS' financial statements for fiscal years 1992 through
1995 and identified fundamental, persistent problems that remained
uncorrected.  This situation has prevented us from expressing an
opinion on the reliability of IRS' financial statements for those 4
years.  The persistent weaknesses and problems include the inability
to (1) verify or reconcile total revenue and tax refunds to
accounting records; (2) substantiate amounts reported for various
types of taxes collected (such as social security, income, and excise
taxes); (3) determine the reliability of estimates relating to valid
and collectible receivables; (4) verify a significant portion of IRS'
nonpayroll operating expenses; and (5) reconcile appropriation
expenditures with records maintained by the Department of the
Treasury.\8

IRS worked to resolve these issues during our most recent financial
statement audit and made some progress.  We are continuing to work
with IRS to develop a plan and strategies for addressing these major
weaknesses. 


--------------------
\8 Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/AIMD-96-101, July 11, 1996); Financial Audit: 
Examination of IRS' Fiscal Year 1994 Financial Statements
(GAO/AIMD-95-141, Aug.  4, 1995); Financial Audit:  Examination of
IRS' Fiscal Year 1993 Financial Statements (GAO/AIMD-94-120, June 15,
1994); and Financial Audit:  Examination of IRS' Fiscal Year 1992
Financial Statements (GAO/AIMD-93-2, June 30, 1993). 


   TSM INVESTMENTS REMAIN AT RISK
   UNTIL IRS DEVELOPS THE CAPACITY
   TO MAKE SOUND INVESTMENT
   DECISIONS
-------------------------------------------------- Chapter STATEMENT:6

Part of the solution to the many problems discussed above lies with
improved technology.  However, in March 1996, we told the
Subcommittee on Oversight, House Committee on Ways and Means, that
additional investments in TSM are at risk given IRS' current
managerial and technical weaknesses.\9 Those were weaknesses that we
discussed in our July 1995 report on TSM.\10 On May 6, 1996, Treasury
reported to the Senate and House Appropriations Committees on IRS'
progress in dealing with those weaknesses.  According to Treasury's
report, IRS has not made progress on TSM as planned because systems
development efforts have taken longer than expected, cost more than
originally estimated, and delivered less functionality than
originally envisioned.  Treasury's report concludes that significant
changes are needed in IRS' management approach and that it is beyond
the scope of IRS' current ability to develop and integrate TSM
without expanded use of external expertise.  As we reported on June
1996, although IRS has initiated a number of actions and is making
some progress in addressing our July 1995 recommendations, many of
those actions are incomplete and do not respond fully to any of our
recommendations.\11

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 2001
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 fiscal
year 1997 TSM funding levels proposed by the House and Senate--which
are more severe than the 1996 cuts--will require even further
reassessment. 

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, 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
subprocesses within that process, one of which 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 lags well
behind the TSM effort, whereas it should be ahead of it--defining and
directing the technology investments needed to support new, more
efficient business processes.  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 are being
designed as a TSM project. 

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. 

We look forward to working with the Commission as it examines IRS'
organization and operations to identify and recommend actions to
expedite the implementation of TSM and improve service to taxpayers. 
With the Commission, Congress has created an excellent opportunity to
bring about long-term, fundamental organizational and management
changes at IRS.  The Commission's work could help provide the added
impetus necessary to develop an effective implementation strategy for
IRS' business vision, build a strong technical foundation for TSM,
and ensure the reliability of financial information and systems. 


--------------------
\9 Tax Administration:  IRS' Fiscal Year 1996 and 1997 Budget Issues
and the 1996 Filing Season (GAO/T-GGD-96-99, Mar.  28, 1996). 

\10 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156,
July 26, 1995). 

\11 Tax Systems Modernization:  Actions Underway But IRS Has Not Yet
Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June
7, 1996). 


------------------------------------------------ Chapter STATEMENT:6.1

This concludes my statement.  We will be glad to answer any
questions. 


*** End of document. ***