59

extent and Ty rmati

On December 20, 1994, the IRS published notice of an amended Privacy Act
system of records: “Compliance Programs and Projects File - Treasury, IRS 42.021."
Based on comments received and media articles, the notice may not have adequately
distinguished among the various users and uses of the compliance system, as well as
the data it is to contain.

The system will not be used to support large scale data matching in order to
identity specific individuals for contact by IRS personnel. The IRS has developed
procedural safeguards to prevent data used in the compliance research programs and
projects that engage in large scale data manipulation techniques to determine levels
of compliance in particular market segments from being used for enforcement
purposes as to specific taxpayers.

The compliance research system is being redesigned to identity causes and
trends of noncompliance and to generate and test new approaches to increasing
voluntary compliance. The enhancements will not include maintenance of records
with individually identifying information. The personnel who use and access the
research system will not be enforcement personnel. The system will not be used to
select individuals for enforcement actions.

This system of records has always on a limited basis and with legal authority
contained information from various third-party sources. The enhancements to this
system will add more information from more sources. However, use of these
enhancements for the purposes of compliance research will adhere to the operating
principles of such research: it will be group-focused rather than individually focused
and not directly used to select individuals for enforcement actions.


123

our business over the phone rather than through the mail. Is there
something being done on this?

Ms, STATHIS. There are a number of things being done, but I am
not very hopeful that this is going to get better very soon. We have
a graph in our statement that shows the past several years the
number of phone calls coming in and the number that have been
answered. The demand of the phone calls coming in continues to
go up and the number of phone calls they are able to answer are
pretty static. That is why we are recommending in a draft report
that we have been talking with IRS about that they have to make
some drastic management changes to try to get more out of the re-
sources that they currently have.

The 1.3 million more calls that they say they will be able to an-
swer with the additional funds they are asking for in 1996 I fear
will do little. It may allow them to keep up—given that there will
be more calls coming in. I just don’t think that it will do a lot to
improve the record.

ir. HERGER. Would you concur that it does save us money to be
able to handle these questions by phone rather than through the
mail?

Ms. STATHIS. Conceptually, I think that that is probably a correct
understanding. Assuming that you can resolve the question on the
telephone, that should be more efficient than handling correspond-
ence.

Mr. HERGER. I believe you mentioned earlier that they are going
from 8 to 10 hours, and the public sector has perhaps 24 hours.

Ms. STATHIS. That is net 't. Most private companies that have
telephone operations offer that service 24 hours a day.

4 Mr. HERGER. OK. So there is a great more that we could be
loing.

Ms. STATHIS. Yes, there is a Ict to be done.

Mr. HERGER. Thank you.

Chairman JOHNSON. Mr. Hancock.

Mr. Hancock. Thank you, Madam Chairman.

Following up on Mr. Herger’s question about the $300 million on
two returns, I noticed on a report here that you have the data
through June 1994. I am assuming that the data for all of 1994

robably is available now, but just to make a statement, if you ana-
lyze that and take the $300 million out and then you aad’ back in
another 25 percent, it would appear that there has been very little
increase between 1993 and 1994.

Ms. STATHIS. For—

Mr. HANcock. For fraudulent returns.

Ms. SraTuis. Of fraudulent returns. I think that is correct. In
our statement we have the statistics for the entire year of 1994 and
the number of fraudulent returns in 1994 is actually slightly below
1993.

Mr. Hancock. OK, fine. Well, I didn’t see it. I made analysis of
it and that is the way it would calculate.

The question we have here, you know you were talking about the
fact that you can’t integrate the two systems, but I mean we are

utting data into a system that you say can’t be integrated, but as
long as we have the data in there, that data can be transferred into
the system that can be integrated; can it not?


25

advanced basis, taxpayers who are eligible for the Earned Income
Tax Credit can avoid potential refund delays and use the funds
during the year. They don’t have to wait until they file their
return to get the credit.

CONCLUSION

In conclusion, Madame Chairman, I stated at the outset that
FY 1996 is a pivotal year for the IRS as we continue with our
plans to acquire and implement major new systems. What happens
to our FY 1996 Budget will impact the tax administration system
of the future, shaping our ability to effectively administer the
tax law and collect all the revenue that is due. I have
highlighted for you today the progress the IRS has made in
changing the way we do business. TSM will influence most every
aspect of that business -- our processing capabilities and the
filing season, the effectiveness of our customer service efforts
and our compliance capabilities including fraud detection and
prevention. It is essential now that we have the funding needed
to capitalize on the progress that we have already made. Without
adequate funding, TSM will not simply be delayed. Only modest
incremental improvements in business processes could be achieved,
and the IRS would in any event have to begin replacement of
obsolete equipment that would otherwise fail over the next few
years. Investing in TSM makes good business sense and will
enable us to effectively meet the challenges of tax
administration in the next century.

In closing, I would like to reemphasize a point that I have
made with Chairman Archer and many of you in our recent meetings.
I realize that the 104th Congress is considering changes to the
Internal Revenue Code. One of my concerns is that the Department
be given an opportunity to advise you before legislation is
finalized of any burden possible changes may have on taxpayers as
well as the cost to the Service before legislation is finally
adopted. Particularly when the legislative changes occur later
in the year, the effect on the next filing season can be
significant, Some of the burden that is placed upon taxpayers
might be avoided if the Department is able to consult with you
during the formulative stages of the legislation.

Madame Chairman, I know that the members of the Subcommittee
have many questions to ask. If it fits your schedule, I would
now like to ask Mr. Westfall, our Modernization Executive, to
give you a brief overview of where we are going with TSM. We
then would be delighted to answer any questions you might have
for us. For your reference, I have included as an appendix a
summary of the 1996 Budget request.


154

STATEMENT OF ROBERT E. BARR, PRESIDENT
COUNCIL FOR ELECTRONIC REVENUE COMMUNICATION ADVANCEMENT

On behalf of the Council for Electronic Revenue Communication Advancement (CERCA), I
‘would like to thank the Chair and the members of this committee for the opportunity to express
the Council's views on the IRS budget request and on issues that have arisen to date im the current
filing season. CERCA is made up of software producers, telecommunications experts, financial
institutions, tax practitioner organizations and others committed to responsibly advancing the use
of electronic communications with government revenue agencies. In shor, this group has come
together to work with the federal government and the individual states on the construction and
maintenance of the "tax lane on the information superhighway.”

‘As you can see from the above description, CERCA represents a vertical market segment of the
tax industry, from the people who prepare the returns through the companies that empower the
preparers with software and the financial institutions that participate in the refund process, to the
state and federal agencies to which returns are sent. This unique combination of viewpoints
allows CERCA to speak from experience on a great variety of topics in the tax filing process,
CERCA would like to take this opportunity to express its support for full funding of the Internal
Revenue Service's Tax Systems Modernization (TSM) budget request and to note some concems
regarding the early stages of the current filing season

Imtemal Revenue Service Budget Request for Fiscal Year 1996
fall the items in the Internal Revenue Service budget request, the most critical to the American
taxpayer and to the return preparation and filing industries is the Tax Systems Modernization
(TSM) program. Last year, this program was budgeted for substantially less than the original IRS
request and frankly, this cannot be allowed to continue. The IRS needs these funds to more
effectively serve the honest taxpayer and to more efficiently track down the fraudulent tax filer.

TSM will improve service to honest taxpayers by enabling the Intemal Revenue Service to answer
inquiries in one phone call. The new system will more efficiently handle the volume of incoming
calls that flood the IRS on a daily basis. Once their calls have been answered, taxpayers will find
that the IRS employees answering the phone are better able to serve them with instant on-line
access to information that today takes weeks to gather and forward to Service personnel in the
ficld, This new capability will serve to greatly reduce the number of busy signals that taxpayers
receive when calling the IRS, a complaint that seems to arise every year under the current system.
‘Through better routing and access features, the technology will allow the Service to answer more
incoming phone calls, By reducing the number of second calls needed, the technology will also
serve to reduce the overall volume of incoming calls.

‘The fraudulent tax filer or tax evader, however, will find this new system substantially tougher to
get around. TSM will provide IRS collection employees with the data needed to more effectively
search for those failing to comply with the tax laws. ‘The new technology will allow the Service to
better target their resources to noncompliant taxpayers, through faster and more accurate
matching and a greater access to information about the taxpayer. In addition, the technology will
free up considerable numbers of fulltime employees who currently work on inputting paper
returns, allowing these individuals to instead review some of the incoming returns for indicia of
fraud . All of this together leads to an increase in the effectiveness of collections, which in tum
will increase the amount of taxes collected from those taxpayers who do not voluntarily comply
with the Intemal Revenue Code. The IRS estimates that for each percentage point increase in
voluntary compliance, the Treasury collects an additional seven billion dollars, Assuming that the
figure is accurate, the Service could more than pay for this program within a year of its full
implementation.

Asa final note on tax systems modernization, CERCA would like to address some concerns that
have been expressed regarding the Service's progress on TSM relative to the money spent to date
‘The Council's membership includes many software and systems developers who agree that the
costliest period for any system is the planning stage, ifit is done correctly. Unfortunately, this
stage of the process also produces the least short-term tangible benefits, Systems that are not
carefully planned or are rushed into implementation invariably fail to perform the tasks for which
they ave designed. Cautious progress is an indicator of quality systems design, and reducing the
funding for the program as a result would amount to punishing the Service for doing the right
thing the right way. While itis difficult now to continue funding of this program when few


149

the Commissioner. They come to my office and they come to the
H&R Block office and they yell and scream at their preparer say-
ing, why haven’t I gotten my refund check?

Chairman JOHNSON. I think your comments in your testimony
about the history of this issue were very, very instructive.

Mr. Martin. I think the IRS should take some of its TSM and
buy a historian so they don’t keep making the same mistake.

‘hairman JOHNSON. I assume you think the elimination of DDI
is a good thing so that banks do that checking themselves.

Mr. Martwv. I think so, yes. It complies with the law, though.
The code, as it currently says, a practitioner, a preparer cannot en-
dorse a taxpayer’s refund check. That is, in fact, a $500 fine. If I
would prepare your tax return, receive your refund check and de-
posit it right in my account, I would be fined $500.

The way the rapid refund or the refund anticipation loan works,
that check comes into the taxpayer’s bank account and then is elec-
tronically debited. It is only one step removed from the practitioner
actually endorsing the check. It is a system fraught with danger.

Chairman JOHNSON. Thank you.

Mr. MarTwN. The other thing that we suggested which I think is
a short-term solution is bonding. I mean this is—if we are talking
about running the government as a business, if I am dealing with
a contractor that is handling that amount of money, we have to re-
alize that most of the refund fraud has emanated not from the tax-
payer because they don’t have access to the system. It is emanating
from preparers who have access to the computer and the modem
and the EFIN number, so to these people it is only good business.

Chairman JOHNSON, Mr. Hancock.

Mr. Hancock. Thank you, Madam Chairman.

What percentage of your clients file their returns electronically?

Mr. MARTIN. Of mine?

Mr. HANCOCK. Well, both of you probably have about the same
percentage.

Mr. Martin. No. I don’t participate in electronic filing programs
at all, personally I do not. Many of our members, probably 50 per-
cent, a survey we did recently about 50 percent or more of our
members do participate in electronic filing programs and of then—
of those people, I am trying to remember the statistics, about 40
percent of the returns were filed electronically.

Mr. Hancock. Do your clients ask you to participate in it?

Mr. MaRTIN. No, sir.

Mr. HANcock. Do you have a particular client base of some type?

Mr. Martin. My client base is mostly professional upper income.
They are not getting refunds, and if they are getting refunds, they
are not worried about getting them in 2 weeks, 6 weeks, or 8
weeks. I personally have always had problems with the viability of
the system and I elected never to participate in it.

Mr. Hancock. OK. Mr. Buckley.

Mr. BUCKLEY. We transmitted last year over 7¥2 million returns
electronically. We transmit about 40 percent of the returns that we
actually prepare, and we also transmit several million returns for
people who have their returns prepared elsewhere or do it them-
selves.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Ilinois SAM M. GIBBONS, Florida
BILL THOMAS, California CHARLES B. RANGEL, New York

BE, CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ANDY JACOBS, JR., Indiana

JIM BUNNING, Kentucky HAROLD E. FORD, Tennessee

AMO HOUGHTON, New York ROBERT T. MATSUI, California
WALLY HERGER, California BARBARA B. KENNELLY, Connecticut
IM McCRERY, Louisiana WILLIAM J. COYNE, Pennsylvania
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan

DAVE CAMP, Michigan BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington

DICK ZIMMER, New Jersey GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia

SAM JOHNSON, Texas L.F. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts

MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP 8. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska

PHILLIP D. MOSELEY, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT
NANCY L. JOHNSON, Connecticut, Chairman

WALLY HERGER, California ROBERT T. MATSUI, California
MEL HANCOCK, Missouri SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio JIM McDERMOTT, Washington

JIM RAMSTAD, Minnesota
DICK ZIMMER, New Jersey

ap


119

Mr. LEvIN. But the systems that have been produced may well
deliver much more than they have so far?

Ms. STATHIS. No, I do not think so. I think——

Mr. LEvIN. So it is a criticism, then?

Ms. SraTHIs. We are hoping that the modernized environment
that IRS is planning will produce far more benefits than what has
been delivered to date.

Mr. LEVIN. Everyone acknowledges that they do. But the ques-
tion is, whether implicit, built into what they have been doing
there, are the potentialities for much more. That is the issue.

Ms. Epwarps. I think it is——

Mr. LEVIN. Strip away all the kind of fancy language. I mean, I
do not know how critical—it is hard to read this, how critical you
are and what you are criticizing. Sum up—my time is expiring—
what you are criticizing in terms of the TSM. You are criticizing
the transitional steps they took or that they failed to be sure that
it phases in easily enough into the ultimate product or somethin;
else? Sum it up for the people—some people do watch this, and
they may not all be like my children, born and raised with comput-
ers. What are you criticizing?

Ms. SraTHIS. Let me focus it in terms of what we think needs
to be done. The fiscal year 1996 budget asked for money to fund
41 projects. It is just a massive number of projects, some of which
will give a lot of benefit, some of which may not give much benefit
at all. We are saying prioritize those projects. Let us identify the
ones that are going to give us the biggest bang for the buck and
put our efforts on those.

I think that is our main issue, our main suggestion, for dealing
with this modernization at this point. It will get us closer to where
we want to be sooner.

Mr. Levin. All right. Well, I think that is a somewhat different
issue than we have just been talking about. I do not see that those
are——

Ms. STATHIS. It is——

Mr. LEVIN. Criticisms seem to run through your pages and it is
hard to separate out.

Ms. StaTHis. It is related, Mr. Levin, in this way. If you only
have so many people and so many resources to build a system, do
you spend more of your time improving the really old system that
you have, or do you devote more of your efforts to trying to produce
the system of the future? If you continue spending all of your time
and resources in improving this antiquated system that you have,
you may not get to where you want to be.

Mr. Levin. Unless you plug in the transition to the ultimate
product.

Ms. Epwarps. That is true, but, Mr. Levin, I think the point we
are making is that the transition to the ultimate product is not
clearly defined; that there is discussion about it, but that what is
happening and what we are seeing out of the current initiatives
being completed is that there are systems being completed that es-
sentially reinforce the current operation without giving those dra-
matic improvements that IRS speaks of and wants to get.

Mr. LEVIN. My time is up.

Chairman JOHNSON. Thank you.


68

1994 (cont'd)

Communication print products addressing overall accuracy, correct
SSN and refund delay message include:

+ Eighteen different Form 1040 series tax packages (forms and
instructions) made available to 86 million taxpayers, also available
through FEDWORLD on the INTERNET.

+ 1995 Tax Supplement (English and Spanish). This supplement is
carried by approximately 3,000 daily and weekly newspapers in its
entirety and portions of it are carried by approximately 7,000 other
newspapers throughout the filing season

+ 1995 Filing Season "Ask the IRS" question and answer columns
(English and Spanish), used year-round by approximately 10,000 small
newspapers as a regular column or filler.

+ Public service filing season print drop-in ads are carried by
approximately 10,000 newspapers and magazines and over 4300
billboard displays are available.

+ 1995 International Clipsheet placed with international companies and
overseas media.

+ Publication 910, "Guide to Taxpayer Services,” six million copies are
made available to taxpayers.

CAG Meeting stressed SSN validity and refund delay and discussed
emerging areas of fraud.

Presentation to the American Bar Association (ABA) of ELF changes to
Rev. Proc, 94-63.

Presentation to IRS field employees responsible for the Congressional
Affairs Program (local Congressional liaison) on Electronic Filing,
Suitability, Monitoring, Education and Outreach,

Commissioner Richardson, Deputy Commissioner Dolan, Chief
Taxpayer Service, and Electronic Filing Executive met with H&R Block.

AICPA meeting, IRS assisted in preparation of procedural guidelines
and addressed the removal of the DDI and SSN validity.


Shy

152

Bank One, Columbus, NA
Columbus Ohio 43271 1021

March 3, 1995

The Honorable Nancy L. Johnson, Chair
Subcommittee on Oversight

Committee on Ways and Means

1102 Long Worth House Office Bldg.
Washington, DC 20515

Dear Ms. Johnson’

Bank One, Columbus, is an affiliate of BANC ONE CORPORATION, located in
Columbus, Ohio, BANC ONE CORPORATION has assets of $88.9 billion and common
equity of $7.3 billion as of December 31, 1994. BANC ONE now operates 65 banks with
1408 offices in Arizona, Colorado, Illinois, Indiana, Kentucky, Ohio, Oklahoma, Texas,
Utah, West Virginia, and Wisconsin, BANC ONE also operates several additional
corporations that engage in data processing, venture capital, investment and merchant
banking, trust, brokerage, investment management, equipment leasing, mortgage banking,
consumer finance and insurance.

Bank One, Columbus, is a major stakeholder in the affairs of the Internal Revenue Service
(IRS). As such, we appreciate the opportunity to comment on IRS budget issues, 1995
filing season, and thank the Chairman and the committee members for this opportunity to
express our views. Bank One is a member of the Council for Electronic Revenue
‘Communications Advancement (CERCA) who has expressed its views to you but we
would like to add comments we have as an individual entity. Bank One uses its 1,400
nationwide Banking Centers as collection points for self prepared tax returns to be filed
electronically. In 1994, we processed over 25,000 electronic filings. In addition we offer
Refund Anticipation Loans (RAL) through some 6,500 independent tax preparers. Over 8
million individual taxpayers have availed themselves of these loans since we began
processing in 1989. The total RAL market approaches 20 million taxpayers. Many of
these taxpayers come back for our service year after year.


79

1995 (Con’t)

1995 Filing Season "Ask the IRS" question and answer columns
(English and Spanish), used year-round by approximately 10,000 small
newspapers as a regular column or filler.

Public service filing season print drop‘in ads arc carried by
approximately 10,000 newspapers and magazines and over 4300 billboard
displays arc available

1995 International Clipsheet placed with international companies and
overseas media.

Publication 910, "Guide to Taxpayer Services", six million copies are
made available to taxpayers.

CAG Meeting, stressed SSN validity and refund delay, and discussed
emerging arcas of fraud.

Presentation to the Amcrican Bar Association (ABA), ELF changes to Rev.
Proc. 94-63.

Presentation to IRS fidid employees responsible for the Congressional
Affairs Program (local Congressional liaison) on Electronic Filing,
Suitability, Monitoring, Education and Outreach.

Commissioner Richardson, Deputy Commissiorier Dolan, Chief Taxpayer
Service, and Electronic Filing Executive met with H&R Block.

AICPA meeting, IRS assisted in preparation of procedural guidelines and
addressed the removal of the DDI and SSN validity.

Electronic Filer's Report, ELF Executive provided responses to questions
posed by reporter Rob Hamel on RALs, EITC returns, DDI and split
refunds with the second payment by paper check.

Industry telephone contacts with NELCO, Drake, Electronic Filing
Coalition of America and Beneficial Corp.

Numerous telephone conversations with outside stakeholders re: Revenue
Protection and general Electronic Filing. These external stakeholders
were primarily practitioners from across the country calling in regards to
the DDI decision.

IRS Executives briefed local Congressional Representatives on Revenue
Protection Strategy.


15

STATEMENT OF

MARGARET MILNER RICHARDSON
COMMISSIONER OF INTERNAI. REVENUE

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT
HOUSE COMMITTEE ON WAYS AND MEANS

FEBRUARY 27, 1995

Madame Chairman and Distinguished Members of the Subcommittee:

With me today are Mike Dolan, Deputy Commissioner; Larry
Westfall, Modernization Executive; Phil Brand, Chief Compliance
Officer; Bob Wenzel, Chief Strategic Planning and Communication;
and Judy Van Alfen, Chief Taxpayer Service. We appreciate the
opportunity to be here today te discuss the Internal Revenue
Service’s FY 1996 Budget request and the 1995 Filing Season

The United states currently has the best tax administration
system in the world. But government at every level is facing new
and different challenges. We at the IRS recognize that we can no
longer do business as usual. American taxpayers have a right to
fair and efficient tax administration from a customer service-
oriented organization. To provide this, the IRS must be able to
take advantage of technology and business system innovation to
effectively collect the revenue owed at the least possible cost
and with as little burden as possible for taxpayers. The
challenges facing the IRS today -- a growing population, rapid
changes in technology, a global economy, and increasing
sophistication in business practices ~- require innovative and
creative approaches to achieve efficient and effective tax
administration.

‘The IRS is at a crossroads, and FY 1996 is a pivotal year
for us. Our FY 1996 appropriation will not only shape the
agency's future, but, in my opinion, it will affect the quality
and effectiveness of tax administration in this country for many
years to come.

OUR BUSINESS AND THE NEED TO MODERNIZE

Madame Chairman, this morning, I would like to give you and
your colleagues a sense of the range of the IRS’s business and
what we are doing to operate more effectively and efficiently
today and into the next century. The progress toward a more
effective tax administration system today, including steps we
took to get ready for the 1995 filing season, will pale in
comparison to the potential the Tax Systems Modernization program
(TSM) will offer us when it is completed in a timely fashion,

Several years ago, with the strong bipartisan support of
Congress, the IRS embarked on a plan to update its technology and
change its business practices to meet the challenges of tax
administration for the rest of the decade and into the next
century. That plan, Tax Systems Modernization, is an integrated
program to upgrade the IRS’s technology and systems in ways that
most effectively and efficiently allow us to accomplish our
mission which is to collect the proper amount of taxes at the
least cost while reducing the burden on taxpayers.

TSM will revolutionize three central processes: 1)
data from tax returns and other documents as completely and
economically as possible; 2) storing and analyzing data to


128

Let me raise with you one last issue. You have said, or at least
implied, that the IRS doesn’t actually have the technical capability
that they need, the level of experience that they need in planning
and implementing this TSM system.

In their testimony, they mentioned that 75 percent of the money
goes out for equipment or consultants. It seems to me not only un-
wise, but probably impossible under our personnel rules to attract
the kind of people that you would need to put this kind of plan in
transition. Once you get it in place, you can buy sufficient capabil-
ity to keep it running and to upgrade. But, I am not sure that the
criticism, that the Department doesn’t have on board the people
who could manage a project of these dimensions, is fair when the
testimony was that we don’t have them on board. We contract to
get this expertise and that, indeed, makes more sense. Would you
care to comment?

Ms. Epwarps. Seventy-five percent of the resources being con-
tracted out, I think, refers to 1996 and what they plan to 0 for
1996. One of the recommendations that had been put forth to IRS
last year as part of the appropriations process was that they would
focus very seriously on how they used contractor support in order
to address this particular issue.

The point that you raise with regard to the likelihood of their
being able to attract enough people with the right kind of technical
skills, I think, is a very significant point. I would simply offer that
even to manage this kind of effort, there is a core of expertise that
is required within IRS to effectively manage the contractor support
in order to make sure that government gets value for the dollars
spent. IRS has hired some people, a few people with more technical
expertise in building integrated systems. I emphasize that because
IRS does have skill sets in building the stand-alone or stovepipe
systems we were talking about earlier, the ones that don’t pass in-
formation among them. But the integrated system requires a dif-
ferent skill level. Even to manage the development of an integrated
system requires a different level of skills. So the point of their ex-
pertise is to the management as well as their support of the imple-
mentation.

I don’t know if the chairman is aware or the subcommittee mem-
bers are aware, but IRS has somewhere in the vicinity of 2,400 peo-
ple dedicated to the TSM initiative and there is a range of skills
captured by that number. So, yes, there are a lot of people involved
with the modernization effort. We are emphasizing the importance
of bringing that critical core, if you will, of expertise into place.

Chairman JOHNSON. In your high risk report focusing on ac-
counts receivable of the IRS, yo claim their accounts receivable
have grown from $87 to $156 billion between 1990 and 1994. The
Commissioner indicated that that difference is primarily accounts
that will never be receivable, that are either bankrupt or for some
other reason are incapable of paying. Would you agree with that?

Ms. Statuis. IRS pointed to the change from a 6- to 10-year stat-
utory time on collections. We used to adjust those charts to show
the difference between the 6- and the 10-year growth to try to level
it out, if you will, or to adjust the growth for that. The information
is not there to do that very well. Any numbers that IRS has are
ballpark estimates. There are some accounts and a fair amount of


134

company owned locations to receive an EFIN number, so we could
transmit returns automatically. We did not receive numerous
EFIN numbers within the 45-day turnaround period as IRS
promised, causing a delay in transmitting returns in January.

© For the first time, we must keep copies of all W-2's and
supply a copy of the return when the clients signs the 8453
form, despite the fact that the taxpayer receives a copy two
days later. This is reducing the productivity level of our
tax preparers.

© HGR Block, as well as the rest of the tax preparation
industry, is experiencing an increase in the cost of doing
business which is attributable solely to changes in IRS
procedures. Along with the duties involved preparing our
clients returns, our tax preparers must spend additional time:
1) handling clients with problematic EIC returns for at least
6-8 weeks while they are waiting for their refund, 2)
explaining new IRS procedures to clients, 3) dealing with
clients' additional requests for information from IRS, and 4)
helping clients resolve name and social security number
problems on returns which have been rejected.

This year IRS has decided to cross-check all Social Security
numbers and names with the information on record with the Social
Security Administration. If a name and number on a tax return do
not match the name and number in the Social Security
Administration's records, the tax return is rejected by the IRS.
While this may be an excellent procedure to implement to
demonstrate IRS' commitment to combatting refund fraud, the message
of this change did not get effectively communicated to the American
public. As a result, taxpayers with legal changes in name (such as
maiden name to married name), who have successfully filed for
years, are having their tax returns rejected by the IRS due to a
name and number mismatch. Therefore, the refunds are being delayed
even though the taxpayers are using the same social security
numbers they have used in the past. This is effecting millions of
tax returns.

We have noticed two specific problems connected with the new
social security number verification procedures:

¢ The Social Security Administration is not prepared to
handle the volume of requests from taxpayers with Social
Security number problems. In some cases in which taxpayers
have lost their social security card, the wait for information
was up to 2 weeks.

* There have been numerous instances of wrong information
such as date of birth and spelling errors on last name of the
social security records. In many cases, taxpayers are being
penalized because of inaccurate data in the Social Security
Administration's systems.

We recommend that for those taxpayers who have not yet filed
their tax returns, electronic filing may offer a speedier solution
as the IRS alerts the tax filer to any social security problems
right away, eliminating a significant delay in processing the
refund. Unfortunately, there is only one solution for a taxpayer
who has already filed and has subsequently been notified by the IRS
of a social security number problem. That taxpayer must revise the
name with the Social Security Administration. An electronic return
must then be retransmitted, when the name change has been verified,
or in the case of a paper return, the taxpayer must respond to IRS
correspondence about the accuracy of the name and or social
security number.

HGR Block's customers with the greatest problem this tax
filing season are those taxpayers filing for the Earned Income Tax
Credit. Approximately 30% of the electronically transmitted


October

April

June

June

74

REVENUE PROTECTION STRATEGY

1992

Commissioner and Deputy Commissioner, Assistant Commissioners (RP)
and (Cl) and Chief Counsel! met with representatives from H&R Block,
Beneficial Corp., Jackson Hewitt, Mellon Bank, Greenwood Trust, NATP
and others to discuss plans to remove the Direct Deposit Indicator (DDI)
in the 1994 filing season. The Industry presented IRS with a briefing
document entitled, "The Direct Deposit Acknowledgement Issue and It’s
Relationship to Electronic Filing Fraud."

1993

Banks submitted a supplement to the October 1992 paper entitled
lectronic Filing: Industry Led Initiatives to Combat Fraud and Improve
Electronic Filing.”

Creation of the Council of Electronic Revenue and Commerce
Advancement (CERCA) to review security of data and privacy issues, and
inercase the value of @lectronic filing commerce with all agencies to
ensure consistent standards of software and data elements.

Deputy Commissioner, Assistant Commissioner (RP), Deputy Assistant
Commissioner (RP), Director, Office of Refund Fraud and members of
their staff met with industry representatives regarding the DDI issue.

IRS announced the decision to retain the DDI for the 1994 filing season
along with steps to strengthen fraud detection /deterrence and
expectations of the industry. Explained to industry that we will review
this decision each filing season based on ongoing trends.

1994

Presentation to CERCA on changes to Suitability, RAL advertising and
Form 8458 requirements.

Refund Fraud Strategy Approved by Treasury.

General Accounting Office briefed on fraud initiatives by the Director,
Office of Refund Fraud.


Compliance Initiative

In FY 1995, IRS worked with Congress on a
budget strategy that permitted funding of $405
million and 6,238 FTEs in additional
compliance programs. Tax revenues from
these initiatives are estimated at between $9
and $10 billion over the FY 1995-1999 period.
The budget strategy was to devote $405 million
in each of the next five years to these
compliance initiatives. The FY 1996 budget
again includes $405 million for the initiatives.
In addition, one-time costs in FY 1995, which

would normally be non-recurred, have instead

bringing the total FY
initiative FTE to 6,784.

1996 compliance

FY 1995-1999 COMPLIANCE INITIATIVES
Gin Billions)

(Dome Oot Camere Roe

‘The FY 1995 initiative is the first step in a
long-term strategy to improve voluntary
compliance by investing streamlining and
modernization savings. into front-line
compliance and customer service activities.

32

The key areas are:

- Income Tax Underreporting: Increase the
number of correspondence audits and
contacts; improve compliance by Federal
Government payers; correct wage reporting
by the military; and reduce the number of
unmatchable documents.

- Excise Tax Fraud/Pension Plans: Increase
resources dedicated to detecting motor fuel
excise tax evasion schemes, bankruptcy
fraud in pension plans, and insurance
fraud, and investigating refund fraud

Foreign Controlled Corporations: Expand
coordination and litigation, concentrate

resources on the development and
implementation of Advance Pricing
‘Agreements, and increase enforcement

based on identified market segments by
targeting foreign business activity in the
US.

- Underpayment/Non-Filing: Increase the
collection of delinquent accounts by
improving case selection and prioritization,
faster case assignment, and accelerated
taxpayer contact, and by obtaining
delinquent returns and collecting delinquent
taxes.

User Fees

In the FY 1995 budget, the IRS proposed
three user fees to raise $147 million to
supplement appropriated resources. The
Congress changed our approach, allowing us to
charge and collect any user fees that we were
otherwise authorized to initiate and to spend up
to $119 million of the collected fees to
supplement appropriations. For FY 1996, the
IRS budget proposes no changes to Congress"
direction


103

APPENDIX IT APPENDIX IT

IRS HAS TAKEN STEPS IN 1995
TO DEAL WITH REFUND_FRAUD

IRS has taken several steps in an attempt to reduce refund fraud
in 1995. For exampl

=- To better protect against unscrupulous tax return
preparers or transmitters participating in the electronic
filing program, IRS now requires new progran applicants to
provide fingerprints, that can be used to conduct criminal
history checks, and to submit to a credit check.’ It is

our understanding that IRS plans to decide, after this
filing season, whether to extend this requirement to
preparers and transmitters who are already in the program.
Implementation of this requirement is consistent with a
recommendation we made in 1992 that IRS check the background
of electronic filing applicants.

-- To better ensure the appropriateness of refund clains,
IRS has said that substantial efforts would be directed
toward identifying claims with missing SSNs, invalid SSNs
{ones that do not match Social Security records), and/or
SSNs that were already used by another taxpayer. IRS has
added controls that prevent returns with one or more of
those conditions from being filed electronically. If a
return with one of these conditions is filed on paper, IRS
has said that it will delay any refund until the matter is
resolved.

According to IRS, most of the refund fraud cases it has
detected in the past involved the EIC. With that in mind,
IRS is delaying refunds on many returns claiming the EIC to
allow time to better assure their validity. This action is
being taken on returns determined to be most problematical
based on an IRS study last year. Because the delay only
applies to that part of the refund attributable to the EIC,
some taxpayers may receive two refund checks~-one for the
nonEIC part of their refund and a second, several weeks
later, for the rest, assuming IRS determines that the EIC
claim is valid. The notice IRS is sending filers to advise
them of the delay says that the refund "may be sent to you
within eight weeks". IRS has estimated that about 7 million
filers will receive such a notice in 1995.

=- Recognizing that the ability of electronic filers to
obtain quick loans in the amount of their refunds (known as
refund anticipation loans) might increase the incentive to
submit fraudulent electronic returns, IRS took steps to
disassociate itself from those loans’ by no longer providing
the direct deposit indicator. The indicator, which signaled
that IRS would not be reducing the taxpayer's refund to pay
another federal debt of the taxpayer, was being used by
financial institutions as a basis for making the loans.

These changes, if implemented effectively, could help reduce the
number of fraudulent claims being submitted and help improve IRS’
chances of detecting fraudulent claims that are submitted. Over
the next several months, we will continue monitoring the
implementation of these changes. We have two observations thus
far about their potential effect on taxpayers.

First, IRS did not, in our opinion, provide taxpayers with
adequate notice of the change involving EIC claims and the
resulting delay in EIC refunds. We saw nothing in the Form 1040
tax package or in Publication 17 (Your Federal Income Tax) that
explained that refunds involving the EIC could be delayed for

“The fingerprint requirement does not apply to Certified Public
Accountants, attorneys, and enrolled agents.


39

As you have developed your system, have you worked from that
base of fraud schemes that the IRS identified early? How has that
work gone? Why is it that, in spite of that work, we should be up
to such extraordinarily high rates?

My understanding is that 43 percent of all fraud is committed
via electronic returns and that 90 percent of the EITC returns are
involved. I may not be remembering these figures accurately. I am
not claiming they weren’t given to me accurately. I may not be re-
stating them accurately, but the implications are certainly there.

Ms. RICHARDSON, I think, Madam Chairman, as we developed
TSM—and one of the reasons it is so important, I think, that we
move ahead with modernizing our system—is that it will provide
us the ability to prevent fraud and prevent fraudulent returns from
entering into the system.

We can come back to that in just a moment.

I think it is fair to say that not finding fraud does not mean that
it doesn’t exist. As your ability to detect it becomes more sophisti-
cated and better, you find more fraud and that is—so sometimes
finding more can be a good sign because it at least means your de-
tection capabilities are working.

Our goals, as we stated 1 year ago and will continue to be, were
to understand enough about fraud and the patterns of fraud so we
could build into our systems, as a stopgap from here to the end of
this decade, filters for screening out potentially fraudulent returns
questionable returns, and also to take steps that we could build
into our ultimate system the ability to prevent fraud.

Mr. Brown, who is with me today, is our refund fraud executive;
and I know he would be happy to answer more specific questions.
He has been a person who, for almost 2 years now, has overseen
our capabilities, not just working with each filing season, but also
working with our modernization people to assure that we have
long-term solutions to fraud built into our TSM plans.

airman JOHNSON. We will get into fraud issues more specifi-
cally later on, but——

Ms. RICHARDSON. I think the important thing to remember is
that it has really been the advent of electronic filing and electronic
processing of information that has allowed us to detect patterns of
fraud, and it is important that we continue being able to process
even those paper returns electronically, as Mr. Westfall was dem-
onstrating, so that we can detect patterns of fraud. We are much
better able when we have access to full return information to detect
and then ultimately prevent fraud.

Chairman JOHNSON. Later on, as we do get into a discussion
more specifically of fraud and prevention, it would be useful to us
to have more detailed information about what kinds of patterns
you have detected in the past. I would ask you about the work you
are doing now and tip off those who you might be after, but there
are a number of issues in the fraud area that we want to go into
in more depth. But, at this point, I am going to yield to my col-
league, Mr. Matsui from California.

Ms. RICHARDSON. I think the real important thing to remember
is with a more modern system and better capabilities built in
through the electronic filing and processing systems, we will be in
a better position to address fraud.


164

‘Our conclusion is that the TRS is attempting to strangle the RAI, banks out of business by
exposing them to unacceptable risk. ‘This strategy encourages tax cheats, deadbeat parents, and
other federal debtors to defraud the banks using the U.S. Tax System. The removal of the DDI
was only partially successful at eliminating refund loans. The IRS then instituted its EITC
withholding program, which delayed payment to millions of eligible EITC recipients, Our
examination of this program indicates that the IRS’ initial screening criteria consisted primarily of
two filters: a) the taxpayer claimed EITC, and b) the amount of the EITC was above a certain
dollar threshold. ‘This is hardly a program designed to assure that the honest claimant receives the
EITC he/she deserves. More importantly to the financial institutions, the delayed payment was
not directed into the taxpayer's account at the RAL bank, as the taxpayer requested.

Private industry knows well what's at stake if the fraud issue is not dealt with decisively. The sad
fact, to quote Mr. Noble, is that “EROs and ERTs have the potential to serve as eyes and ears in
the problematic refund prevention and detection effort.” Instead, the IRS has chosen to demonize
the financial institutions and more than 25,000 EROs who offer RALs to clients who appreciate
the service. Our experience would indicate that the IRS" Social Security Number verification
program is the only fraud prevention measure which was worth its expense and impact. The SSN
verification program was tremendously effective in driving most fraud from the system. We

ly believe the IRS has the right to delay any suspicious refunds, so long as the IRS has
Jegitimate reason to suspect that each return is problematic, the public is informed of any severe
or widespread impact, and the taxpayer’s original instructions are followed concerning where the
refund is directed.

i)

ISBN 0-16-047603-8

9°780160"47603

=——o
———O
———o
———O
—=a


July

August

September

64

1994 (cont'd)

General Accounting Office briefed on fraud initiatives by the Director,
Office of Refund Fraud.

IRS Nationwide Tax Forum - Baltimore (attendance 1,600).
Opening executive remarks emphasized refund delays related to
inaccurate SSNs. Seminar on 1995 Changes to the Electronic
Filing Program emphasized importance of TIN accuracy for both
paper and ELF. Seminar on Earned Income Credit - Advanced
Earned Income Credit emphasized educating the public,
compliance initiatives and future plans. Handout on preventing
fraudulent filing, prepared by Fraud Task Group, provided to
attendees. IRS Nationwide Tax Forum - Sacramento (attendance
4,150), same structure as Baltimore forum.

Issued News Release IR-94-73 announcing new fraud control
measures and need to verify the accuracy of SSNs prior to release of
refunds.

IRS Nationwide Tax Forum - Albuquerque (attendance 770), same
structure as Baltimore forum.

IRS Nationwide Tax Forum - Kansas City (attendance 1,200), same
structure as Baltimore forum.

Presentations to NAEA, ABA and NATP by the Director of Practice
discussing filing fraud initiatives, emphasizing DDI, SSN accuracy and
refund delays

Presentation to FTA Technology Workshop, including description of the
Revenue Protection Strategy, ERO requirements, SSN accuracy and
refund delays

Presentation to North Eastern Tax Officials Association. including a
brief overview of the Revenue Protection Strategy.

IRS Nationwide Tax Forum - Oriando (attendance 2.000), same
structure as Baltimore forum.

IRS Nationwide Tax Forum - Salt Lake City (attendance 699), same
structure as Baltimore forum.


148

Chairman JOHNSON. I have seen their letter and it could have
been stronger. It could have been stronger in the sense of saying
there is a problem with your Social Security number. You are going
to have a hard time this filing season. Please check this and this
is what you are supposed to do to check it. But many of the people
you deal with have never read those directions. They count on you
to read those directions. Did you work with your clients to be much
more serious about Social Security numbers and about earned in-
come tax credit documentation?

Mr. BucKLEY. We have worked with our taxpayers on a daily
basis in many cases. The problem with the Social Security number
issue, as I mentioned, is that until we file electronically and it is
rejected, that is when we can tell them they have a problem. It is
a very difficult mission to try to tell somebody that there is a possi-
bility that these Social Security numbers are not correct.

Chairman JOHNSON. So it wasn’t really a problem for everyone
to pick up until the system spit out that yours was not a correct
Social Security number.

Mr. BUCKLEY. Right.

Chairman JOHNSON. Nonetheless, it is an important error to cor-
rect and will enable us to give a far better quality system. Next
season it shouldn’t be as much of a problem.

Mr. BucKLEY. I would hope not.

Chairman JOHNSON. Thank you. Mr. Martin do you have any-
thing you would care to add?

Mr. MaRTIN. Well, we—the press release that I saw from the IRS
announcing the dual refund system was dated, I believe, December
28. By December 28 most practitioners have already made plans,

ot our client letters out. Hopefully, our clients read our letters a
fittle bit more than they read the letter from the Commissioner
where we alert our clients to things like this. On December 28 our
letters are by and large already out. Taxpayers have their informa-
tion.

Chairman JOHNSON. But you were notified December 28.

Mr. Martin. The press release from the IRS that I saw was
dated December 28. Yes, ma’am.

Chairman JOHNSON. The IRS was not specific about that earlier,
so I was interested.

Mr. Martin. I know. The other thing that is possibly unfortunate
for one reason or another is that the tax press did not pick up on
that press release until around the first of February.

Chairman JOHNSON. That is interesting.

Mr. Martin. So most of us read some kind of a weekly journal
of tax happenings and when we pick that up, OK, we know there
could be a problem here. But, again, by early February we are al-
ready seeing clients and clients have een promised—there have
been promises. The service has been promising for 5 years what I
said in the written statement.

If you file your return electronically, you will have a very short
turnaround Or your refund. Now all of a sudden, just to turn off
that spigot, I think, does create a serious hardship, and it is a
hardship that the practitioner community has had to bear, because
the taxpayer doesn’t go to the IRS and yell and scream at the reve-
nue officer and they don’t have a chance to—they won’t scream at


35

Chairman JOHNSON. I certainly do want to hear from Mr.
Westfall, but I think we might as well hear from him in the context
of a first question. Because while you have quoted the GAO’s con-
cerns about the tax modernization system, I would like to quote
from their testimony more specifically because I think it is very im-
portant that the subcommittee get a better understanding of what
the problems are, what you are trying to do, and what you think
you are accomplishing versus some of those who are looking to see
what they think you are accomplishing or concluding.

The GAO does say that the IRS has realized only marginal im-
provements in its operations. They go on to say that the changes
are not built to be an integrated part of the comprehensive TSM
program and they have not delivered the large increases in capabil-
ity and customer service that the IRS hopes to be able to deliver
in the future. They then go on to say that the IRS has not defined
a consistent focus for making TSM investment choices.

In other words, they draw a picture of your not having a clear
road map of where you are going and of your expenditure of the
first $2 billion of the $8 billion allocated for tax modernization,
having spent those first $2 billion in ways that have resulted in
only marginal improvements, but almost more seriously they have
not been chosen in a way so that they then become building blocks
and pieces of the ultimate system.

So, Mr. Westfall, we do invite your comments and appreciate
your being here.

Ms. RICHARDSON. I would just like to say, before turning it over
to Mr. Westfall, that we do disagree with the General Accounting
Office in their assessment of where we are. I will say that we
would like to be providing even better customer service, and I think
that statement is one we do agree with, but we are at the begin-
ning of the process of modernization, and as I think Mr. Westfall
will be able to describe to you, we have made some significant im-
provements in the way we are able to serve taxpayers even today.
I think that, as I say, we do not agree with their characterizations.

So, Larry, you may want to—.

Chairman JOHNSON. Mr. Westfall, I have forgotten from Commis-
sioner Richardson’s testimony how long ‘ou have been on board.

Mr. WESTFALL. I have been assigned here in the Washington of-
fice on this tour for 4 years. I have been in the present position
as program manager for TSM since last June.

Chairman JOHNSON. Thank you.

Mr. WESTFALL. I think that there is perhaps a fundamental issue
associated with whether we are building a long-term unique new
system or are we transitioning the Internal Revenue Service
through a critical number of filing seasons that have to be success-
ful and headed toward a totally new way of operating in the future,
which we will reach at a point in time.

GAO has referred to a perceived marginal progress. We believe
that we have made substantial progress in beginning to take ac-
tions that transition us toward the system that we have to operate
in in the future. I will give you an example or two of that.

Essentially——

Chairman JOHNSON. Mr. Westfall, if you will yield for just a mo-
ment. It occurs to me that I think it would be useful to the sub-


January

67

1994 (cont'd)

IRS Executives briefed local Congressional Representatives on
Revenue Protection Strategy.

Tax Counseling for the Elderly sponsoring organizations were provided
a brief overview on revenue protection initiatives, emphasis on SSN
validity and refund delays.

The Commissioner's filing season media and public service
campaign kickoff; issuance of Fact Sheet 94-10, "Refund
Protection Procedures" and News Release IR 94-119 stressing
correct SSNs, refund delays, possibility of split refunds on returns
claiming refundable credits. This information was made available
on the ELF Bulletin Board and distributed to 43 representatives
from general print media, technical tax press, electronic media,
financial press and professional associations. Q&As, including
information on the split refund and second payment by check,
were made available on the ELF Bulletin Board (available to ELF
practitioners) and the Public Affairs Bulletin Board (available to
IRS offices nationwide). The press conference was attended by
41 media representatives, such as CNN, Cox Broadcasting, ABC,
NBC, CNBC, Fox-TV, U.S. News and World Report, Tax Notes, Tax
Analysts, New York Times, Washington Post, Associated Press,
Dow Jones News Service, Knight-Ridder Financial News, Standard
News Radio Network, McNeil/Lehrer and Scripps-Howard. The
conference and video news release were sent via satellite and
picked up in 47 major markets, with 67 stations within those
markets. The Commissioner also held interviews via satellite with
about 15 media markets nationwide.

A poster on SSN accuracy and refund delays was published in the
SSA/IRS Joint Reporter and distributed to 7 million employers

Notices issued to taxpayers with known invalid SSNs in the prior filing
period

1995
Commissioner's interview with freelance reporters for "Good

Housekeeping" and "Working Women" addressed SSN accuracy and
refund delays. Publication scheduled for April.


104

APPENDIX 11 APPENDIX IT

several weeks. Both documents told potential electronic filers
that “some refunds may be temporarily delayed as a result of
compliance reviews" to ensure that the returns are accurate.
Taxpayers who did not intend to file electronically--about 85
percent of the filers--were not even told that much. Also,
advising only potential electronic filers of possibie "compliance
checks", IRS may be giving the impression that electronically-
filed returns are more subject to audit--not the kind of message
that helps expand the use of electronic filing.

Second, some delayed refunds may not be resolved quickly and
could Gause additional taxpayer burden. When IRS identifies a
return with an invalid primary SSN, it puts a hold on the refund
and sends a notice (CP54B) to the taxpayer. That notice does not
make it clear that the taxpayer's refund will not be released
until the matter is resolved and, except in certain
circumstances, does not require the taxpayer to send anything to
IRS to help resolve the matter. This could result in additional
correspondence with taxpayers and a further delay in issuing
their refunds.

When we prepared this testimony, statistics were not available on
the number of fraudulent refund returns identified this filing
season. However, other indicators could be related to the new
fraud control procedures.

IRS had received 24 percent fewer individual income tax
returns electronically as of February 17, 1995 (6,720,000
compared to 8,872,000 during that same period in 1994}.°

About 1.5 million taxpayers had been sent notices as of
February 17, 1995, advising them that their refunds had been
delayed as a result of IRS’ fraud-related procedures.

At least 3 million reject notices sent out from the
electronic filing system as of February 20, 1995, were for
conditions that might indicate a questionable refund. Most
of the notices related to some problem with the name and/or
SSN of the taxpayer or a dependent. Because a return can be
rejected for more than one reason, the number of reject
notices may be greater than the number of returns rejected.
We do not know how many returns were rejected nor how many
of the rejected returns were corrected, resubmitted over the
electronic filing system, and accepted.

Before the filing season began, many of IRS‘ 10 service centers
expressed some concern about the impact of delayed refunds on
their workloads. ‘The only evidence of increased workloads we
have seen to date is a 64 percent growth in the workload of the
service centers’ Error Resolution Units as of February 10, 1995,
compared to last year. We do not know how much of the increase
is due to IRS' new fraud procedures or whether that workload has
become unmanageable. We will be following up on this issue
during our continued monitoring of the filing season.

“Some of the decrease in electronic filings has been offset by an
increase in returns filed on paper and an increase in returns
filed over the telephone as part of IRS' TeleFile program. In
total, however, the number of individual income tax returns filed
as of February 17 has declined, from 29,203,000 in 1994 to
28,019,000 this year.


126

Chairman JOHNSON. It is true that IRS does not at this time
have the capability of cross-checking wages and returns?

Ms. STATHIS. There is an experiment this year in one service cen-
ter in an attempt to use three-quarters of the wage data from one
State to see if that, in fact, will work.

Chairman JOHNSON. But it will be several years before they
would have the ability to cross-check wage data in a timely fashion
to determine refund, correct?

Ms. STATHIS. The so-called up-front matching is one of those ben-
efits that we are hoping to get out of the long-term tax system
modernization design.

Chairman JOHNSON. So would it be reasonable to restructure the
EITC so that the only benefit available under it was a wage-based
refund benefit with no lump sum possibility? Would that eliminate

fraud?

Ms. STATHIS. It probably wouldn’t eliminate fraud, but it might
help. One of the problems——

Chairman JOHNSON. Why would you say it only might help since
it only would go back out through the employer and through the
earnings system, and it is the earnings system that makes this per-
son eligible for this refund.

Ms. STATHIS. We did a report on the advanced credit as well and
it is not without its own concerns, without its own problems. Not
the least of which is that a person could work for more than one
employer, a person could have other sources of income, so that the
eligibility for the credit needs to be determined at the end of the
year taking into account all of the earnings and the situation of the
employee.

I don’t think there is a lot of verification up front that the chil-
dren really are qualifying children in compliance with the credit

rovisions. So there are a lot of those eligibility provisions that still
ave to be taken into account at the end of the year.

At the time we looked at it, there were also no controls in the
system that would prevent someone from getting the advanced
credit and then after the completion of that year also applying for
the full lump sum credit an getting it in addition. So there are
some problems with the advanced credit as well.

Chairman JOHNSON. Certainly, it does suggest that we should
not pass more refundable credits until we get the problem straight-
ened out with those that we have on the books.

Any recommendations you have in regard to changing the tax
law to make it more enforceable in the refundable credits area we
would be very interested in, since we will be working in that area
in the very near future. Second, we would be interested in any con-
crete recommendations you might have in terms of improving the
phone system and solving the problems of taxpayer access, because
I think it is fair to say that all members of the subcommittee be-
lieve significant progress needs to be made in that regard and in
the near future.

[The following was subsequently received:]


45

Chairman JOHNSON. Excuse me, Commissioner. Is that 90 per-
cent accuracy?

Ms. RICHARDSON. Correct. There are some areas, quite frankly,
that are gray.

Mr. HERGER. Is there a reason why—now 90 percent is certainly
far better than 66 percent, but yet is there some reason why a tax-
payer should not be able—is the system so complicated that we
can’t be answering correctly almost, say, 98, 99 percent?

Ms. RICHARDSON. Our goal—we would like to be able to answer
every single question accurately.

ad HerceEr. Is there some allowance that is given during
this——

Ms. RICHARDSON. I was going to say we published this year in
the tax package for the first time our customer service standards,
and if a taxpayer can demonstrate that any penalties or interest
are imposed because of an erroneous answer they have received
from us, we will be in a position to not charge them with that.

I agree with the premise of your earlier question. People
shouldn’t be penalized if we have made a mistake.

Mr. Dotan. Mr. Herger, if I might amplify slightly.

We have watched the quality of taxpayer service operation very
intensively for the last 4 or 5 years. I think we report to this sub-
committee and others quite regularly on a week-to-week monitoring
process where we wateh every site for their individual quality per-
formance.

We break it down into three particular areas: the technical tax
law answer, the quality of answers on procedural questions, and
the quality of answers on account questions, We give immediate
feedback to the sites who show any slippage. We have put in place
a very standardized probe and response guide so when you call in
to site 1 or site 13, you ought to be received the same way.

We go through, basically, the same algorithmic approach to get-
ting the right answer to the taxpayer; and we have tried to make
a passion out of offering a quality service.

As the Commissioner said, the last couple of years on the filing
season basically it averaged 90 percent. Last week’s results were
86 percent. We would like that to be higher, but we are also doing
a tremendous amount of reconfiguration this filing season and put-
ting our people to probably as much challenge as we have in the
last 4 or 5 years to be onsite and be prepared to give a quality an-
swer.

Mr. HERGER. Thank you.

Chairman JOHNSON. Mr. Hancock, we will have to try to move
along because there are a number of other issues to cover with the
Commissioner.

Mr. HANCOCK. Just a real brief question—I think it will be brief,
anyway.
noticed in the testimony that on the accounts receivable and
uncollectibles, the percentage that you are collecting hasn’t been

‘oing up very much. I also noticed in 1990 you had roughly 87 bil-
fon accounts receivable, now there are 156 billion, which is an 80-
percent increase. As a small businessman and a business advisor,
accounts receivable is one of the things that you look at real quick-
ly.


87

not taxable because benefits provided to all members indicated
that dues were not clearly attributable to participation in the
insurance programs.

Shortly after issuing the 1982 TAMs, the IRS considered
associate member dues paid to labor unions and concluded in LTR
8344001 that such associate member dues were taxable. In that
situation, associate members were employees outside the
collective bargaining unit. They received union bulletins and
ancillary benefits from the union’s lobbying on workplace
matters, but could not vote in any union election or be
represented by the union. The union argued that lobbying and
other unspecified work-related activities were sufficient to
create a nexus between the dues and the exempt functions of the
organization. The IRS disagreed.

The IRS took a similar position in then-pending postal union
cases. Two of these cases were resolved by United States Courts
of Appeal. In i Work: FL= i
925 F.2d 480 (D.C. Cir. 1991), associate members received no
benefit other than access to health insurance. In Nati
Association of Postal Supervisors v, United States, 944 F.2d 859
(Fed. Cir. 1991), associate members could attend meetings and
serve on committees in an advisory capacity. Educational
programs on lobbying, writing and speaking skills were also
available to the complete membership. In both cases (Postal
Union Cases), dues income from associate members was held to be
taxable because access to insurance was found to be the only
benefit associate members received in exchange for dues.

As a result of American Bar Endowment and the Postal Union
Cases, IRS agents in certain on-going examinations have taken the
position that farm bureaus are required to include in unrelated
business taxable income the dues received from associate members
attributable to the right to purchase insurance.

1994 L_ADV?

The National Office of the IRS was asked again to consider
farm bureaus and associate member dues in 1994. This resulted in
the issuance of the 1994 TAM. The facts of that case were
similar to the 1982 TAMs, in that associate members could
purchase insurance and had all the rights of regular membership
except the right to vote and the right to serve as voting
delegates or board members. The IRS viewed the facts as
indicating that the farm bureau used the associate member
category to boost sales of insurance. The dues income appeared
to be a method by which the farm bureau could derive a benefit
from its marketing of insurance. Consistent with the development
of the case law subsequent to the 1982 TAMs, and in particular,
the Postal Union Cases, the 1994 TAM considered (1) whether
associate members were bona fide members (that is, whether they


8

Future tax systems modernization improvements planned specifi-
cally to help the IRS better interact with taxpayers include adding
interactive capabilities with our telephone system, which will pro-
vide taxpayers with secure, self-help account information capabili-
ties, much like those available today with other financial institu-
tions in the private sector.

For example, taxpayers will be able to use their telephone
keypad 24 hours a day to access their accounts, to determine any
outstanding balances, receive refund status, or arrange for a tax
payment plan, in addition to being able to file their tax returns
using their touch tone telephones, as some taxpayers in 10 States
can actually do this year.

In making our tax administration system as effective and as effi-
cient as possible, we understand that it is not enough just to mod-
ernize our information systems and business systems without up-
dating our 40 year old structure. We are beginning to consolidate
the returns processing operations that are now done in 10 service
centers into 5 submission processing centers, and we are consoli-
dating the 44 locations where we had 70 phone and correspondence
operations into 23 customer service centers. We will be operatin;
with 3 computing centers instead of 12. We are very close to final-
izing recommendations about the number and primary functions of
our district offices.

The combination of organizational streamlining, business change,
and state-of-the-art technology will move us from a paper-based,
labor-intensive system to an electronic filing and payment system.

In addition to our financial services and processing lines of busi-
ness, the IRS is also charged with enforcing the law, both civil and
criminal, and collecting taxes that are not paid voluntarily, Al-
though it is only one of our lines of business, our compliance func-
tion is probably the best known part of what the IRS does. We esti-
mate that about 83 percent of the taxes due are paid voluntarily,
another 3¥2 percent, or a total of 86.5 percent, is collected annually
through compliance and enforcement efforts.

In fiscal year 1994, total enforcement revenue collected by the In-
ternal Revenue Service was $33.7 billion, of which $23.5 billion was
a direct result of IRS collection efforts. Total revenue collected last
year through compliance was more than four times as much as our
entire bud;

We also w that examinations, collection actions, and criminal
investigations are, and I fear always will be, essential to dem-
onstrate to those who do comply with the tax law that those who
do not comply will be caught. The IRS is continuing to improve its
compliance efforts to maximize the revenue collected. Enhancing
our research capabilities, the linchpin of future compliance efforts,
will enable us to measure voluntary compliance levels nationally
and locally to identify broad market Segments in industries that
are noncompliant and affect taxpayer behavior through a combina-
tion of information, education, and enforcement.

Research is helping our compliance employees select the most
productive cases for examination, and it is increasing their effec-
tiveness during those examinations, improvements which will not
only produce additional revenue but will also reduce taxpayer bur-
den caused by an inefficient audit process.



IRS BUDGET PROPOSAL FOR FISCAL YEAR
1996 AND 1995 TAX RETURN FILING SEASON

MONDAY, FEBRUARY 27, 1995

House oF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in room
B-318, Rayburn House Office Building, Hon. Nancy L. Johnson
(chairman of the subcommittee) presiding.
[The advisory announcing the hearing follows:]

@


150

Mr. Hancock. OK. Now, what do you mean you transmit. They
complete their own return and bring it in to you and you transmit
it electronically, is that correct?

Mr. BUCKLEY. That is correct.

Mr. HANCcocK. Do you have any idea how many of these clients
apply for the refund anticipation loan, what percentage of your cli-
ents?

Mr. BUCKLEY. I would say certainly a majority of them, maybe
75 percent.

Mr. HANCocK. Wait a minute. Are you talking about the one that
is filed electronically? Seventy-five percent of them ask for these
loans.

Mr. BUCKLEY. Approximately.

Mr. Hancock. What percentage of your profitability is deter-
mined by your fees that you charge on these loan ap ications?

Mr. BUCKLEY, We don’t—we receive a very small fee off the ac-
tual loan. We charge a transmission fee whether you get the loan
or you don’t get the loan. In other words, for the clients who want
to come in and just file electronically, they would pay the same
price transmission fee as a client who comes in and wants the loan
as well,

Mr. HaNcock. What is that transmission fee?

Mr. BUCKLEY. We charge $25 transmission fee if the return is
prepared by H&R Block and $35 if the return is prepared by them-
selves or someone else.

Mr. HANCOCK. Do you have any idea about the default rate on
these, anticipation loans, do you have any information at all on
those?

Mr. BUCKLEY. No, sir, that is strictly done by the bank. The
banks provide those loans.

Mr. HaNcock. In December 1994 when they announced that
there was going to be a slow down because they were going to be
checking into fraud, did your organization take any major steps to
start telling people that they might be subject to the slow down on
the earned income tax credits?

Mr. BUCKLEY. Starting when we opened our offices in January,
at that time even we did not know who or had no idea as far as
the filters and screens that were going to be in place this year to
be able to tell anybody that their returns could be delayed. In fact,
when the first IRS money came back, it appeared to us that none
of the clients had been—that none of the EITC had been stripped.

The second week when refunds started to hit, at that time we
were notified by the bank who handles our refund anticipation
loans that they were seeing refunds—the refunds not containing
the earned income credit.

At that time, we immediately provided every customer who has
earned income credit a letter which told them of the four possibili-
ties that could exist if they were filing a return containing earned
income credit, and we continue to do that today.

Mr. Hancock. Well, let me just ask the question. How exactly
are you all associated with the Beneficial National Bank?

'r. BUCKLEY. Beneficial National Bank provides the refund an-
ticipation loans for our offices. For clients requesting refund antici-
pation loans, those loans go through Beneficial Bank.


42

Mr. WESTFALL. We are extensively using contract resources and
consulting expertise outside of government, probably on a dimen-
sion that is pretty comparable to what the large defense agencies
use in connection with some of their larger technology pursuits.
The 1996 resource estimate that we make is that an excess of 75
percent of the budget in TSM would be expended for products and
services that are contractor based.

This ranges from the fact that the Commissioner consults with
the National Research Council on a personal basis to have them
monitor and provide her consulting assistance relative to the pro-
gram to the fact that the TRW Corporation acts as our integration
support contractor on a long-range contract, the fact that the Illi-
nois Institute of Technology serves us from a research and develop-
ment consulting expertise, and then down to such things as a very
large image and character recognition contract that will facilitate
our paper processing for the future has been awarded to the Grum-
man Corp.

There are just a host of very, very large corporate entities that
have various roles in the overall program. Yes, Loral Federal Sys-
tems is also involved in our document processing system develop-
ment.

Mr. Marsul. Thank you.

Chairman JOHNSON. Thank you.

Mr. Herger.

Mr. HERGER. Thank you very much, Madam Chair.

Commissioner, if you could tell us—now that the 1994 filing sea-
son year is 1 yer old, could you tell us perhaps what the profile
was for the refund fraud during 1994?

Ms. RICHARDSON. I guess one of the things that we are reluctant
to do is to be too specific, because many of the filters and screens
that we built into our system this year were based on what those
profiles were.

About this time last year I think we testified to a number of dif-
ferent types of schemes in which people were engaging, but the
specific profile I would be reluctant to talk about other than in a
closed session because that really is how we determined what our
filters would be for this year.

Mr. HERGER. Could you perhaps give us an idea of how much
was involved with the paper returns and those filed electronically?

Ms. RICHARDSON, I am going to ask Mr. Brand if he might join
us at the table. He is our chief compliance officer and I think has
most of those numbers probably committed to his memory many
times over.

The one thing I would like to say, though, a lot of the concerns
did involve use of duplicate Social ecurity numbers, erroneous So-
cial Security numbers, inaccurate Social Security numbers. So that
has been a main focus of ours for this filing season, to encourage
taxpayers—to urge taxpayers to use accurate Social Security num-
bers, not just for themselves and their spouses but also for their
dependents.

Mr. Brann. I might be able to size this a little bit for the sub-
committee.

First off, last year during 1994 we believe what we identified
were 77,000-plus fraudulent—actually fraudulent returns. I will


161

to perform these additional checks. In fact, we wholeheartedly support the IRS in these
critical efforts. We ask only that the Service recognize the role that the tax practitioner plays
as a liaison between the taxpayer and the tax system. By informing practitioners early about
these new procedures, practitioners can in turn inform their clients and improve their
understanding of the filing process. When practitioners are left to find out over the course of
filing season what changes are affecting thei clients, taxpayers are left feeling victimized by a
system that they cannot understand.

Finally, the National Society would like to address the very sensitive issue of matching social
security numbers. In this case, it really seemed as though the system was working. As early
as last June, Commissioner Richardson made clear to everyone involved with the system that
social security numbers should be double-checked by practitioners. NSPA reminded its
members no fewer than four times throughout last summer and this fall through newsletter
articles.

Nevertheless, the severity of the checks has surprised the preparer community this year.
Electronically filed returns that were accepted without question last year are being rejected this
year because, among other reasons, middle initials are missing and because married individuals
‘Who have filed jointly for years are finding that the Service has no record of a name change
after their wedding. “These screens are currently causing problems primarily for electronically
filed returns, since those returns are typically filed early in the season and the taxpayer finds
out more quickly that the return has been rejected. Once the paper filing season picks up.
appears likely that these new procedures will substantially slow the processing of those returns
as well. Practitioners are now being forced away from using the mailing label which the [RS
provides the taxpayer, an important tool for IRS processing. Under the current system, the
information on that label could fail to match the social security numbers on file for the
individual, due to missing middle initials, married names and other similar circumstances. In
order to protect clients from these potential pitfalls, practitioners are mailing the returns with
taxpayer names and identification numbers printed by computer onto the form.

In closing, NSPA would like to note that the Internal Revenue Service has gone to great
Jengths this year to comply with the mandate from this Subcommitice that the flow of
fraudulent refund money out of the Treasury be stopped. Nothing in this statement is
intended to imply that the steps taken by the Service are improper or unwarranted, although in
the case of social security matching, the Society would submit that the system could have been
more taxpayer friendly. The members of NSPA would like to point out, however, that these
critical steps could have been more effective for the IRS and less burdensome to taxpayers and
tax practitioners around the country if the Service had been more forthcoming with details.

‘Throughout the fall, NSPA was told by key Service personnel that, "If we tell you everything
we are doing to protect the tax sysiem, we cannot effectively protect the tax system.” While
that statement is true to some extent, the Society respectfully submits that if the IRS does not
tell tax practitioners what it is doing to administer the tax system, the Service will hinder its
ability to effectively administer the tax system, We ask this Subcommittee to take an active
role in making sure that this critical information reaches practitioners and taxpayers in a more
timely manner in the future.

On behalf of the National Society of Public Accountants, I would like to thank Madam Chair
for providing us with the opportunity to submit comments on these topics which are so critical
to our members. NSPA wishes you success in your efforts toward overseeing the tax system,
and we hope that you will consider the Society as a valuable resource in support of those
efforts.

Tr William Stevenson
Chairman of Federal Taxation
National Society of Public Accountants


73

quire funds. The document processing system needs to be funded
for rollout. That project has already been contracted. It may not be
capable of being rolled out if funding is not authorized.

The largest single hardware acquisition in the system, the serv-
ice center support system that provides the corporate hardware
platform for the new database environment, is scheduled to be let
very soon and is dependent upon funds that would be authorized
in the 1996 budget.

Chairman JoHNSON. Thank you.

As to the tax filing season questions specifically, could you clarify
for the record exactly when you did inform the public and the tax
return preparers of your activities and your plans to curb fraudu-
lent returns? Particularly your decision to be very strict about re-
quiring accurate Social Security numbers. Did you inform clearly
about that early?

Ms. RICHARDSON. I believe we did, Madam Chairman, and I can
get you the specific chronology of when the announcements were
made and what we said. That was clearly part of the tax package
that went out to all taxpayers.

Chairman JOHNSON. I want to see if it was highlighted, since it
was 3 change and since it was so important to our efforts to reduce
fraud.

[The following was subsequently received:]


82

practitioners, financial industries, others who are involved in this
issue. What we had said as an organization from the outset was
that we would continue to reevaluate both from filing season to fil-
ing season and within filing seasons.

One of the things the industry did in response to a meeting in
1993 was to suggest that the upstepped measures they would take
in an industry-financed fraud service bureau would ir. fact elimi-
nate the issues that the IRS had problems with. We said we would
evaluate that. We said we would on a continuing basis determine
what effects that other kinds of external stimuli might have had
on the fraud.

Probably the time we had the most comprehensive picture of the
fact that many of these cures, albeit well-intentioned, had not had
the desired outcome was when we were able to do the two statis-
tically valid studies that ran concurrent with the early months of
the last filing season. It was coming out of that experience that we
were convinced some of the anecdotal evidence and some of the
suggestions that systems that had been interposed were going to
make a difference in fraud had really not, that we made the judg-
ment that the DDI was as integrally connected to what we were
finding as we did.

Chairman JOHNSON. So are you saying that the original decision
by the IRS to eliminate the DDI for the 1994 tax season—because
this letter to my predecessor, Mr. Pickle, is very specific. It says
we plan to eliminate the DDI beginning in the 1994 filing season.
Later on it says to provide the time necessary for the discussion
with the stakeholders, with other people involved in the system, we
will not make the change in the DDI until the 1994 filing season.

So, clearly, this is going on well in advance of that filing season
because they are delaying the decision in order to have the discus-
sion with other people involved. With all of that preparation it did
not go forward.

Now, you appear to be telling me that information gained from
that very filing season indicated that maybe the DDI was not ex-
actly the problem and maybe there were other answers that would
be more effective. But that does not explain why the decision was
derailed in apparently late 1992-93.

Mr. Dotan. I am not sure, Madam Chairman, I can speak to all
the circumstances that might have been behind the assertion that
Commissioner Peterson made in that letter, I do believe that what
had been going on and has gone on up until very recently is an ac-
tive dialog among all the players in this arena with, we believe, the
common objective of reducing the amount of fraud.

At almost every juncture steps were taken both by the IRS and
by the many, many people in the industry to attempt to minimize
the fraud. But on the heels of all those efforts, and given the addi-
tional information that came in last year, we believed that the Sec-
retary made the right decision when he concluded, based on our ad-
vice, that the correlation was so strong. I think that additional in-
formation that came about as a result of early last filing season
was. what I think carried it over the top, at least from my point
of view.


IRS BUDGET PROPOSAL FOR FISCAL YEAR 1996
AND 1995 TAX RETURN FILING SEASON

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

FEBRUARY 27, 1995

Serial 104-11

Printed for the use of the Committee on Ways and Means

oe

U.S. GOVERNMENT PRINTING OFFICE
90-652 CC WASHINGTON : 1995

ant Printing Office
les Office. Washington, DC 20402

Z


108

APPENDIX IV APPENDIX IV
TELEPHONE ACCESSIBILITY

An important indicator of filing season performance is how easily
taxpayers who have questions or who want to order forms and
publications are able to contact an IRS assistor on the
telephone. In reports on past filing seasons, we discussed the
difficulty taxpayers had in reaching IRS by telephone (i.e.,
accessibility"). Although IRS answers millions of calls each
year, even more calls go unanswered. Many taxpayers receive busy
signals, face long on-hold times, or simply give up.

To determine whether accessibility was a problem during the early
part of this filing season, we conducted two tests. One test was
to determine the accessibility of the toll-free assistance for
taxpayers who have questions about their account, the tax law, or
IRS procedures. The second test was to determine the
accessibility of the toll-free system that IRS tells taxpayers to
call if they want copies of tax forms and publications, Results
of both tests indicated that again this year taxpayers are having
problems reaching IRS by telephone. We plan to repeat both tests
later in the filing season.

‘To conduct the tests, we placed calls at various times during
each work day from January 30 through February 10, 1995. We made
our calls from seven metropolitan areas--Atlanta; Chicago;
Cincinnati; Kansas City; New York; San Francisco; and Washington,
DC. If we received a busy signal, we hung up, waited 1 minute,
and then redialed. If after four redials (five calls in total)
we had not reached IRS, we considered the attempt unsuccessful.
If we reached IRS but were put on hold for more than 7 minutes,
we abandoned the call.

DIFFICULTIES ENCOUNTERED _IN TRYING
TO ACCESS TOLL-FREE TELEPHONE ASSISTANCE

In all, we made 344 attempts to contact IRS' toli-free telephone
assistance this year. We succeeded in reaching IRS on the first
try 79 times. In 20 cases, however, we abandoned the call after
being on hold for more than 7 minutes. Thus, in only 59 (17
percent) of the 344 attempts were we successful in reaching an
IRS assistor on the first try. In another 97 cases (28 percent),
we successfully reached an assistor after one to four redials--an
overall success rate of 45 percent. Our 344 attempts to reach an
assistor required a total of 1,166 calls. Of those 1,166 calls,
we reached an assistor 156 times--a 13-percent accessibility
rate. IRS' own data show a nationwide accessibility rate of 12
Percent during the same 2-week period.

In conducting our test, we did not ask questions of the assistors
because it was not our intent to assess the accuracy of their
assistance. IRS does its own test of accuracy, and we have
assured ourselves in the past about the reliability of IRS'
methodology. IRS' test data for 1995 showed an accuracy rate of
about 86 percent as of February 11. ‘That compares to a rate of
about 89 percent for the same period in both 1994 and 1993.

LESS DIFFICULTY ENCOUNTERED IN TRYING
TO_ACCESS TOLL-FREE FORM ORDERING SYSTEM,
BUT ACCESSIBILITY STILL LOW

One way taxpayers can obtain tax forms and publications is to
place an order through IRS' telephone form ordering system. The
order will then be filled by one of IRS' three forms distribution
centers. As with the first test, our intent was to determine how
easy it is to reach IRS over the telephone. We did not order any
materials. We followed the same redialing and on-hold procedures
as described in the toll-free telephone assistance test.

"See, for example, GAO/GGD-94-65 and GAO/GGD-95-5.


131

of 8,000 signatures for our compan -owned locations to receive
their EFIN numbers so we could file electronically.

This year the IRS has decided to cross-check all Social Security
numbers and names with the information on record and if a name
and Social Security number don’t match, then that certainly does
create a problem.

In addition to that, the most people that have been severely ham-
pered this year have really been the people who are receiving the
earned income tax credit. Our numbers would indicate that ap-
proximately 30 percent of the electronically transmitted returns are
having the EITC portion of their refund held for an additional pe-
riod of time.

I also have some other recommendations enclosed in my testi-
mony, Madam Chairman, that will talk about some of the rec-
ommendations we have to prevent fraud as well as the administra-
tion.

Chairman JOHNSON. We will have time to come back to those,
Mr. Buckley.

[The prepared statement and attachment follow:]


159

to the proper desk within the Service will provide taxpayers with better information on the first
call. Making taxpayer information available via computer to the person answering the
telephone will provide Service employees with the ability to resolve the question during the
course of the first call, rather than having to request paper copies of returns from central filing
locations and waiting weeks to receive them,

Because TSM will mean a more efficient Internal Revenue Service, better able to catch the
fraudulent filer and the tax evader and better able to serve the honest taxpayer, NSPA
respectfully requests that this Subcommittee take whatever steps possible to support the
Service's request as the budget process continues over the next few months,

Current Filing Season Concerns
‘The Internal Revenue Service has gone to great lengths this year to curb refund fraud and the
tireless efforts of the individuals charged with developing new safeguards are to be
commended. However, NSPA would like to bring to light several concerns that have arisen
with these safeguards and with unintended consequences that may affect honest taxpayers and
practitioners as well as those that the safeguards were designed to apprehend. These concerns
‘center first around procedures that the Service has implemented which place additional burdens
‘on practitioners during busy season and second around steps that the Service could take to
more effectively communicate some of the nonconfidential aspects of the revisions made to the
return filing system this year.

Practitioner Concerns
NSPA recognizes that some of the fraud problems that have come to light in tecent years have
been caused by unscrupulous practitioners exploiting weaknesses in the tax system that they
may have discovered in the course of their practices. Nevertheless, the Society's members
have expressed a growing concern that the Service’s efforts to stop fraudulent practitioners are
increasingly hampering the ability of honest practitioners to conduct their practices during busy
season. The clearest example of this problem is a procedure known as an “electronic filing
compliance check,” under which a practitioner who has been accepted to transmit returns
electronically to the Service is examined for compliance with the rules governing electronic
filing detailed in Revenue Procedure 94-63.

Ideally in an electronic filing (ELF) compliance check, Service personnel will come into a
practitioners office, review the signature documents and'W-2 forms which the practitioner is
required to keep on file, briefly review security measures regarding the use of the electronic
filing identification number (EFIN) and leave the practitioner's office in a relatively short
period of time. This year the Service has taken several steps toward improving this practice,
‘most notably scheduling appointments with practitioners where no suspicion of criminal
activity exists, as opposed to last year's practice of performing all of these visits unannounced.

‘Two remaining steps are needed in order to make this program fair to the practitioners who are
forced to undergo these checks. The Internal Revenue Service needs to publish a clear list of
the documents that an agent is allowed to request in these checks and establish a time limit
after which Service personnel should have to show reasonable cause for continuing the check.
Itis only fair that a practitioner undergoing an exam of this nature should be told what he or
she is expected to produce and the amount of time allowed for the exam under normal
‘circumstances. If the exam shows signs of fraud that require deeper investigation, a
Practitioner should be informed of the problem before the exam extends past the designated
time.

NSPA does not dispute the Service's right to perform these checks and the Society
acknowledges the need to perform them unannounced in certain circumstances. What we need
the Service to understand is that practitioners are already swamped at this time of year and the
intrusion must be kept to a minimum. If the IRS agents performing these exams have a
specific checklist of what to look for and the practitioners know what to produce, these
procedures don’t need to take more than a few moments. Instead, different Service personnel
ask for different documents and some practitioners lose substantial amounts of time to these
‘exams at a time of year when they can least afford it. We ask for this Subcommittee's




109

‘APPENDIX IV APPENDIX IV

Of 240 attempts to contact the distribution centers, 137 (57
percent) were successful on the first try and 81 (34 percent)
were successful after one to four redials--an overall success
rate of 91 percent. Our 240 attempts to contact the distribution
centers required a total of 465 calls. Of those 465 calls, we
succeeded in reaching an IRS representative 218 times--a 47-
percent accessibility rate.

We did not assess how well the distribution centers filled orders
for tax forms and publications or whether IRS walk-in sites were
adequately stocking these materials because (1) our checks in
recent years showed that IRS was doing a good job in those areas,
(2) IRS contracts for its own test of distribution center
performance, and (3) our prior review of the contractor's
methodology resulted in changes that have improved its
reliability. The contractor's results as of January 27, 1995,
showed that the distribution centers filled 96 percent of the
test orders correctly.

IRS' REQUEST FOR ADDITIONAL RESOURCES
TO_IMPROVE TELEPHONE SERVICE WILL NOT
APPRECIABLY INCREASE ACCESSIBILITY

The administration's fiscal year 1996 budget request includes an
increase of 239 FTEs and $17.4 million to enable IRS to answer
1.3 million additional telephone calls for assistance. Although
the increase, if approved, will help, it will not make an
appreciable difference in'the large and growing gap between the
number of calls coming into IRS (which we refer to as “received")
and the number it answers, as shown in figure IV.1.

Figure IV.1: Comparison of Total Calls Received and Total Calls
Answered for Fiscal Years 1989 Through 1994

‘write
ted Ps
10
wo
300
0 ow
®
”
»
eIkiE .
»
rote snot et ana sued ee
fe sino

Source: IRS data.

We believe that more taxpayers could get through to an assistor
if IRS adopted some of the management practices used by other
organizations that operate large telephone assistance programs.
To maximize the number of calls answered, the four private
companies we contacted and the Social Security Administration
commonly established (1) challenging program goals for answering
as many calls as possible based on customers’ needs; (2)


process this additional workload without
jeopardizing timeliness, quality, or customer
service. our budget includes an increase of
$12 million and 243 FTEs.

RETURNS PROCESSING WORKLOAD
in 000s)

Initiatives

In addition to labor and non-labor cost
adjustments to ongoing operations, our
FY 1996 budget also includes $533 million of
real program growth.

Tax System Modernization (TSM)

‘The FY 1996 budget includes an increase for
TSM of $421 million and 95 FTE, bringing the
total TSM request to over $1 billion. The
increase will be used to:

provide automated tools for our front-line

compliance and customer service staff.
These tools allow us to close cases up to
ten weeks sooner while improving revenue
results ($118 million);

30

~ provide imaging and scanning equipment at
‘our processing centers to process paper tax
returns by making a digital image of the
document. This will significantly reduce
the staff needed to process tax returns
while capturing 100 percent of the
document data (versus 40 percent today)
(S85 million);

FY 1996 TSM PROGRAM INCREASE BY PROJECT
(6421 Millioa and 95 FTE)

-- acquire hardware and software applications
to store and analyze data captured through
electronic filing and imaging of paper
documents. This will enable us to identify
and resolve all relevant issues in a single
contact with taxpayers ($138 million);

build the hardware and telecommunications
infrastructure necessary to support. TSM
and to protect the systems against
violations of taxpayers’ privacy and
fraudulent returns ($80 million),



89

REVENUE PROCEDURE 95-21
SECTION 1. PURPOSE

The purpose of this revenue procedure is to establish when
associate member dues payments received by an organization
described in section 501(c)(5) will be treated by the Service as
gross income from the conduct of an unrelated trade or business
under section 512.
SECTION 2. BACKGROUND

An organization exempt from tax under section 501(a) as an
organization described in section 501(c)(5) is subject to the
unrelated business income tax imposed by section 511(a). Section
501(c) (5) organizations often receive dues payments not only from
members that are accorded full privileges in voting for the
directors of the organization but also from associate members that
are accorded less than full or no voting privileges. Whether
associate member dues payments are treated as gross income from the
conduct of an unrelated trade or business under section 512 is
determined in accordance with the following section.
SECTION 3. TREATMENT OF ASSOCIATE MEMBER DUES PAYMENTS

The Service will not treat dues payments from associate
members as gross income from the conduct of an unrelated trade or
business unless, for the relevant period, the associate member
category has been formed or availed of for the principal purpose of
producing unrelated business income. For purposes of this revenue

procedure, unrelated business income is income from the sale of, or


84

and where there is in fact need and you change your service on a
yearly basis depending on where in fact the need exists.

Mr. JOHNSON of Texas. Well, there are a lot of small countries
where there are not any Americans, and I would say we should
look at that program. Do you respond just because some Ambas-
sador asks you to come?

Mr. BRAND. No, sir. I think the context here is IRS has been of-
fering overseas assistance at this minimal amount for some 20-plus
years. We respond based on where the U.S. Ambassador pleads
there is demand, where we see demand, where our own historic
record demands exist, and based on where the number of U.S. serv-
ice people are stationed or where there are other Americans for
various——

Mr. JOHNSON of Texas. Well, it seems to me if this thing has
been around for 20 years, maybe you should look at that. I notice
you have a request from the Ambassador in Haiti to send people
down there. Is that a necessity?

Mr. BRAND. I don’t know about the request, Mr. Johnson. I would
have to take a look and see about a request to Haiti. But, in fact,
there is a sizable military Presence in Haiti right now.

Mr. JOHNSON of Texas. But the military helps you with their own
people. I have been in the military, and I know. I never talked to
an IRS person. They never helped at all.

Mr. BRanpD. I understand. I hope that is not the case, but, in fact,
in our interaction with the military, we are not there to do the di-
rect assistance. We are there to train the individuals who act as
volunteers to do the assistance.

Mr. JOHNSON of Texas. Then most of them are in the finance
area of the military or the State Department, for that matter. So
they rotate back to the United States on occasion. It would seem
you could grab them then.

Thank you for your response.

Chairman JOHNSON. Commissioner, in October, you notified the
public about the elimination of the DDI. Did you also notify them
about the bifurcated return system of the refunds that were going
to be electronically filed?

Ms. RICHARDSON. Madam Chairman, I will have to get you that
for the record, I am not sure of the precise dates of that.

Chairman JoHNsON. I want to be sure that the notification in Oc-
tober was to all three points.

Ms. RICHARDSON. I am sorry, no, it was to the direct deposit indi-
cator. That was when it was withdrawn in October.

Chairman JOHNSON. But it did not go to the whole system of re-
forms that you were going to apply to this tax filing period, and
to the bifurcation of the refund in the electronic area and also to
the second check going directly te the taxpayer. Was that informa-
tion out there publicly in October?

Ms. RICHARDSON. [ don’t know exactly when it was out there. I
know it was out there by the end of the year. I will get you the
precise dates. I have to apologize because we had met with the in-
dustry and talked to them about what we were doing.


12

phisticated screening techniques than we have today. Obviously,
we cannot discuss the specific screens without compromising the ef-
fectiveness of these new tools.

This filing season we are carefully reviewing all returns, paper
and electronic, to ensure that only those taxpayers who are entitled
to refunds receive them. We have spent a lot of time, both before
the filing season began and since it got under way, urging tax-
payers to use accurate Social Security numbers for themselves and
for their dependents, because we are verifying those numbers on all
returns.

If you think about an ATM machine at the bank, you cannot get
your money out if you do not use the correct PIN number and re-
funds should be subjected to the same kinds of scrutiny.

We are, as we have repeatedly said we would be doing, slowing
down the process to allow us additional time to verify claims before
we issue refunds. We estimate that as many as 8 percent of all re-
funds may be delayed this year. Although some refunds are being
delayed in whole or in part, the vast majority of the refunds
claimed to date have been paid, and I want to emphasize that they
have been paid within the customer service standards that we
spelled out in our tax packages: 21 days for electronically filed re-
turns and 40 days for paper returns.

We regret that for some taxpayers, perfectly legitimate refunds
will be delayed this year because the initial screening criteria will
flag their returns. But I want to emphasize that taxpayers who are
entitled to refunds will receive them and those refunds will be sent
out as soon as possible. When we have delayed a refund in whole
or in part, we are letting taxpayers know why. Our notice explains
that the full refund or remaining refund amount will be sent with-
in 8 weeks unless we determine additional contact with the tax-
payer will be necessary to verify the claim.

I also want to point out that for true hardships we have our
problem resolution program, which is available to provide assist-
ance to taxpayers.

At our hearing before this subcommittee last February, we out-
lined our four-part refund fraud strategy. First, we felt we needed
to develop a better understanding of patterns of fraud and our
work with the Los Alamos National Laboratory is an example of
this. They are using the same kinds of pattern ‘detection techniques
that they did in developing some of the Star Wars technology.

Second, we wanted to prevent recurrences of error or fraud.
Checking the accuracy of the Social Security numbers and tighten-
ing our policies and procedures for screening electronic return
originators are examples of fraud prevention.

‘ird, we wanted to detect fraud before refunds are paid.

Fourth, we wanted to take vigorous action when we uncover
fraud. Working with the Department of Justice and the U.S. Attor-
neys, we are actively pursuing criminal violations. As I state, we
have spent a lot of time this filing season urging taxpayers to be
very careful to file accurate returns using correct Social Security
numbers for themselves and for their dependents.

In addition to including this cautionary information in our tax
packages and all of our filing season publicity, we also worked ex-
tensively with the tax preparer community, with financial institu-


54

Mr. RamsrTaD. So, really, you are not willing at this point to cor-
relate the increased expenditures, increased appropriations for
computers to at some point seeing a reduced work force.

Ms. RICHARDSON. I am sorry. We can do that. We have done that.
We will give you the precise numbers of exactly what we can save
as a result of what we have done and what we will be doing.

[The following was subsequently received:]


96

the value such systems could add to the current environment. But
we believe that focusing on progress in such systems as part of

‘TSM shifts agency and oversight attention away from the critical
path of actions necessary to achieve the ultimate TSM objectives.

IRS made some encouraging progress in the last year in correcting
deficiencies in its management and technical infrastructure for
TSM. However, we remain concerned that future systems
development efforts are still at risk because of a number of
factors, These factors include (1) the lack of sufficient
technical and management expertise and skills to implement TSM;
(2) continued development of systems for TSM without taking into
account changes that could occur because of process improvements;
and (3) the lack of system development priorities or fully
established technical guidelines. Without addressing these
factors, IRS risks continuing business as usual, and the
opportunity to realize greater service improvements and cost
reductions could be lost.

To focus the TSM effort, we believe that IRS should first direct
its attention to a small number of projects that address critical
gaps in mission performance and are part of the TSM vision. The
mission-critical projects include those that would help create a
paper-free environment and make taxpayer data uniformly available
agencywide. IRS should then devote the full range of its
available TSM resources (managerial, technical, financial) to
successfully completing these projects within a short period--
perhaps 12 to 18 months. By limiting its attention to a few
critical projects, IRS could gain control over many of the TSM
risks and could begin to move incrementally toward the TSM
vision. In light of the need to refocus TSM, IRS may not be in a
position, in fiscal year 1996, to effectively use all of the
funding it has requested.

These issues are discussed more fully in appendix I.

REFUND FRAUD.

As discussed in appendix II, IRS has taken several steps this
year in an attempt to better control refund fraud and 1s asking
for additional resources to do more in 1996. This emphasis is in
response to serious concerns raised in several GAO reports’ and
congressional hearings and in reports by an IRS consultant and a
task force established by the Secretary of the Treasury. These
actions, if implemented effectively, could help reduce the number
of fraudulent claims being submitted and help improve IRS'
chances of detecting fraudulent claims that are submitted.

Some of IRS’ new controls are directed at giving IRS more time to
ensure the validity of the taxpayer and the claimed refund. As a
result, IRS has already delayed the refunds of at least 1.5
million taxpayers and will delay the refunds of many more before
the filing season is over. Those delays affect taxpayers who
claim the EIC or who do not use valid Social Security Numbers
(S8N).

If accounts in the news media are an indication, these delays
have caused much confusion and anger among taxpayers and tax
return preparers. IRS might have mitigated some confusion and
anger if, as discussed in appendix II, it had done a better job
of (1) giving taxpayers adequate advance notice of the potential

‘fax Administration: _IRS Can Improve Controls over Electronic
Filing Fraud (GAO/GGD-93-27, Dec. 30, 1992); Tax Administration:
Increased Fraud and Poor Taxpayer Access to IRS Cloud 1993 Filing
Season (GAO/GGD~94-65, Dec. 22, 1993); Tax Administration:
Electronic Filing Fraud (GAO/T-GcD-94-89, Feb, 10, 1994); and Tax
Administration: Continuing Problems Affect Otherwise Successful
1994 Filing Season (GAO/GGD-95-5, Oct. 7, 1994),



July

August

September

75

1994 (Con’t)

IRS Nationwide Tax Forum - Baltimore (attendance 1,600)

Opening executive remarks emphasized refund delays related to
inaccurate SSN. Seminar on 1995 Changes to the Electronic Filing
Program emphasized importance of TIN accuracy for both paper and
ELF. Seminar on Earned Income Credit-Advanced Earned Income Credit
emphasized cducating the public, compliance initiatives and future plans.
Handout on preventing fraudulent filing, prepared by Fraud Task Group,
provided to attendees. IRS Nationwide Tax Forum - Sacramento
(attendance 1,150), same structure as Baltimore forum.

Issued News Release IR-94-73, announcing new fraud control measures
and need to verify the accuracy of SSNs prior to release of refunds.

IRS Nationwide Tax Forum - Albuquerque (attendance 770), same
structure as Baltimore forum,

IRS Nationwide Tax Forum - Kansas City (attendance 1,200), same
structure as Baltimore forum

Presentations to NAEA, ABA and NATP by the Director of Practice,
discussed filing fraud-initiatives, emphasizing DDI, SSN accuracy and
refund delays.

Presentation to FTA Technology Workshop, including description of the
Revenue Protection Strategy, ERO requirements, SSN accuracy and
refund delays.

Presentation to North Eastern Tax Officials Association, including a brief
overview of the Revenue Protection Strategy.

IRS Nationwide Tax Forum - Orlando (attendance 2,000), same structure
as Baltimore forum.

IRS Nationwide Tax Forum - Salt Lake City (attendance 690), same
structure as Baltimore forum,

Briefing of SSA by the Director, Office of Refund Fraud and staff
outlining filing fraud initiatives and potential impact on SSA, stressing
coordination efforts.

Advance notification of ERO changes to states with joint electronic filing
and national practitioner associations.


36

committee if after you finish, we all question you on the issue of
the tax systems modernization program. Then we can go on as a
subcommittee to some of the other issues because there are some
equally important issues, but this one is complicated. So after you
have finished, we will proceed in that way.

Mr. WESTFALL. Madam Chairman, if you do not mind, I would
like to stand and answer this first question from an overhead.

With the Commissioner’s indulgence, I may put this smack in
front of her for purposes of presentation—perhaps the easel will
work better here.

Chairman JOHNSON. Actually, if you put it over there, it is all
right or even back further where you have more room.

ir. WESTFALL. You are saying work from back here?

Mr. Levin. We are using the same old systems here.

Ms. RICHARDSON. We are sympathetic to that.

Chairman JOHNSON. If we were state of the art, you would be
able to press a button and it would have gone overhead and we
would have screens on both sides of the room.

Mr. WESTFALL. That is exactly what this is, a state-of-the-art
presentation.

I think people sometimes get confused about TSM. They think it
is too long, too complicated, and not happening. We keep building
something which people have difficulty understanding is taking

lace. at I want to do is just take a couple of minutes from a
usiness standpoint to communicate to you what TSM is, first of
all, as a backdrop against which to answer the question.

Through a series of projects over a number of years, what we
seek to do is take a very large paper-based and old batch-oriented
operation into the future. It is very simple. It simply involves a
business terminology seeking to capture data, to store and analyze
data, and to distribute and use data in this large information sys-
tem in a state-of-the-art environment, instead of the environment
that we are in today.

It goes to four or five fundamental business objectives. You have
to understand that we seek to operate as much like a business as
we can in the future. We are one of the largest, if not the largest,
information organizations in the world and we cannot find our in-
formation many times.

You made the point, Madam Chairman, of the paper trailing the
world, and that paper-based environment causes us to be ineffec-
tive and inefficient in serving our customer, the taxpaying public
in this country. The objectives of the system go like this.

The first one, just as a large bank or other financial institution,
a credit card company or a large insurance company, we seek to
take our business, to the extent that we can in the future, elec-
tronic. They are going electronic. It is an electronic commerce that
exists in the business environment of information today, and we
need to become electronic as well.

So as the first major phase of change for the future, we seek to
take returns electronic, to the extent possible; to take remittances
electronic, to the extent possible. Electronic in this context goes be-
yond just electronic transmission in the form of computer to com-
puter, It also addresses the issue of things like tax returns bein,
filed by telephone. That is a major component, to take as much of


48

Chairman JOHNSON. Just to pursue that, what about the more
recent years? I mean, there is a way of factoring out—you have the
6- to 10-year problem. In the last 3 years have you increased the
amount of uncollected taxes you have been able to collect?

Mr. BRAND. Let me give you a little bit of overview.

Chairman JOHNSON. This also goes to the figures that we have
before us about erratic audit numbers.

Mr. BRAND. Let me give you a bit of overview, if I can, of the
accounts receivable that Mr. Hancock referred to. About $79.5 bil-
lion of that is currently under active collection. The other portion
of that has been determined as uncollectible. It has either been ad-
judicated as bankrupt, the taxpayer is deceased, we have contacted
the taxpayer and determined there is some type of hardship or
some type of reason not to make the collection—a whole variety of
reasons there.

Over the past 3 years our collections, in fact, declined. However,
we are really pleased about the fact that during 1994 and so far
for the first 5 months in 1995, we had a substantial turnaround in
terms of the portion of the accounts receivables that we are, in fact,
collecting dollar amounts.

I think there is another thing to keep in mind when you look at
accounts receivables and that is the fact that the percentage of ac-
counts receivables to the total net revenues deposited to the Treas-
ury of the United States has remained constant. We have been
someplace in the area of 6 to 7 percent.

Accounts receivables in and of themselves are neither good nor
bad. I think Mr. Hancock asked the magic question of what is the
age of them and what is the collectibility of them, and those are
the types of questions that we should provide for the record for you.

[The following was subsequently received:]

AGE AND COLLECTIBILITY OF ACCOUNTS RECEIVABLE

Our RACS (Revenue Accounting Control System) does not currently allow the IRS
(Internal Revenue Service) to age the accounts receivable inventory. However, RACS
is currently being redesigned to provide more accurate information about the nature
of the accounts making up the receivables inventory. The IRS will begin implement-
ing the redesigned system in fiscal year 1996.

t the end of fiscal year 1994, the active accounts receivable inventory was $79.5
billion. After taking into account an allowance for doubtful accounts, IRS estimates
that $26.7 billion is potentailly realizable.

Ms. RICHARDSON. Madam Chairman, I think one of things that
we can attribute the increased collections to is the fact that we ap-
plied additional staffing now to the issue. We have also taken some
management steps which we can provide you for the record. As I
mentioned in my testimony, from 1991 until the fiscal year we are
in now, we actually have declined in staffing; and so some of that
really has had its impact on the collections as well.

[The following was subsequently received:]


117

systems that have been delivered to date, those systems, ICS as an
example, do not integrate.

Mr. JOHNSON of Texas. Thank you very much. Thank you,
Madam Chairman.

Chairman JOHNSON. Ms. Edwards, I am far from a computer ex-
pert. I am embarrassed at my ignorance in this area. But in prepa-
ration for this hearing I had some discussions with businesspeople
and computer people, and we are soon going to be able to link far
more cheaply and effectively.

So it seems to me if you improve the collection system down the
road apiece, as you improve other parts, you link them all together,
and the integrated system comes from linking access to the infor-
mation. The Finking capability that is part of the larger project does
not in any way compromise the improvement of the collection sys-
tem. I do not understand why IRS is not right in saying, look, we
fix this and later on as we get down the road and we can link to-
gether, we have better stuff to link.

Ms. Epwarps. The distinction, the disconnect, if you will, is that
the system that they are building today, the one that they pointed
out specifically, will not—that system, that physical system, will
not be able to link, as you say. They will essentially be forced to
rewrite the system. To take the idea, but to redevelop the system,
will cost additional moneys.

The point that we are making is that while we are aware of that,
right now, let us collectively figure out how to identify the needs
within the business and then to identify the systems that are going
to be essential to support those needs——

Chairman JOHNSON. Ms. Edwards, are you saying when they
modernize the collections program, presumably, they could have re-
written the program at that time so that it would be a part of the
larger system?

Ms. Epwarps. Yes.

Chairman JOHNSON. Now, did they not do this because they are
not far enough along in the planning about the major system?

Ms. Epwarps. I believe-——

Chairman JoHNson. Did they not do it because they did not have
time, because it is a much bigger project than tweaking the system
that they have? Why did they not do it?

Ms. EDWARDS. There probably are a host of reasons why the sys-
tems were not built that way. The ones that have been delivered,
at any rate to date, were not built that way.

Some of those systems originated in the field in functions where
users decided they needed to have a capability and they started to
build a capability to satisfy a current need. Somewhere along the
line those systems were adopted as part of the TSM umbrella. The
specifics of how the systems were built or how they were going to
link together were not modified. So the TSM became a collection
of initiatives, if you will.

Chairman JOHNSON. Thank you. You have been very helpful. Mr.
Levin.

Mr. LEvIN, I think this has been useful. One of the frustrating
aspects of these hearings is we hear these things seriatim, so there
is nobody here who testified before, right?


53

vocating a flat tax. Our Majority Leader, Mr. Armey, advocates flat
tax. It is gaining momentum here in the Congress.

If the flat tax becomes law, a simplified card like this is used to
file our taxes, and everybody does it at 11:30 on the evening of
April 15, what about the computer resources? I mean, isn’t this ex-
penditure going to go for naught?

Ms. RICHARDSON. I don’t think so. The reason is, no matter what.
system we have, whether it is an income tax, a consumption-based
tax, and whether the income tax is flattened out or whatever,
someone in some organization has to administer it. What we are
doing today to bring us really into the 20th century—maybe not
even into the 21st—is going to be vital no matter what kind of tax
system you enact.

One of the biggest concerns I have, quite frankly, is that our sys-
tem cannot be responsive enough to try to make the quick changes
that we may be called upon to do. I think that—as I have encour-
aged everyone, both on the subcommittee as well as your staff, to
join us at one of our service centers, especially this time of the
year, I think you would really be amazed at how well the system
works, not that we do have a few errors. I think it is important
that we continue with this project because, whatever happens in
terms of the tax law, we will need that upgraded and updated
equipment to administer it.

Mr. RaMsTaD. For some reason, I am not surprised you didn’t say
we are spending too much money on computers.

Ms. RICHARDSON. Those postcards will be coming in. We will
have to process those, too.

Mr. RamstapD. Let me ask you about the work force person power
there. Now there are over 113,000 employees, and 5,000 additional
employees were funded last year as I recall—$405 million per year
for 5 years to fund 5,000 new agents to improve compliance and
collections.

In view of the resources that we put into the computer system,
are we at some point going to see a dividend in terms of decreased
employees? Isn’t there some correlation? The more you automate,
shouldn’t we see the need for employee decrease?

Ms. RICHARDSON. Absolutely. One of those charts that Mr.
Westfall was showing indicates that from fiscal year 1992 through
1995, we have productivity savings of 11,000 PTE that we have
given up as a result of tax systems modernization.

Now we have been given backstaffing, and I might add that
5,000 was on top of a 109,000 base, I believe. So we are now, I
think, around 114,000 FTE,

It wasn’t 5,000 on top of the 113,000 or 114,000. But, in 1992,
we had 117,000 full-time equivalents. We have been able to en-
hance our productivity, and we will continue to do that.

But our customer base is growing, we hope. As we are taking on
additional workloads with more filings, the population increases,
and we need to be working on some of those compliance issues we
talked about. We need to address the accounts receivable issue. So
some of the increase in staffing that we would be looking to—not
increase in staffing but some of the productivity savings we would
like to reinvest in compliance-related positions.


138
Chairman JOHNSON. Mr. Martin.

STATEMENT OF MICHAEL MARTIN, ENROLLED AGENT,
NATIONAL ASSOCIATION OF ENROLLED AGENTS

Mr. MartIN. Thank you, Madam Chairman. My name is Michael
Martin. I am an EA (enrolled agent) practicing in the Washington,
D.C., area. I am representing the National Association of Enrolled
Agents of about 9,000 members, all of whom are licensed by the
Treasury Department to represent taxpayers before the IRS. If I
can digress in this written comment a little bit, I think we can save
some time.

I don’t think anyone here was on this subcommittee in 1978. I
happened to testify before this subcommittee in 1978 when the tax
preparer penalties came into being, and they came into being for
exactly the reason we are talking about now, and that is refund
fraud. What was happening then is financial institutions were of-
fering loans based on a potential refund to taxpayers and it was
found out through audit that the tax preparers were inflating the
number of exemptions, inflating itemized deductions, claiming
dogs, parakeets, and everything else on tax returns in order to get
a bigger refund and write a bigger loan. That whole process was
stopped in 1978 with the passage of the Internal Revenue Code,
section 6694 through 6696 and 6701.

In the nineties, the IRS was desperate to find some way to en-
courage people to use the electronic filing, and I think that is some-
thing you have to realize. There is no benefit to the taxpayer to file
their return electronically, per se. It costs them more money. They
are charged a fee to file their return electronically.

If they get their refund back faster, that is great. That is the
benefit. The industry came to the IRS and proposed the idea of the
refund anticipation loan with the direct deposit indicator. So we see
that the IRS has come full circle, I think, in stopping what was in
1978 the refund anticipation loan, to in the nineties early nineties
encouraging it.

It has gone, so far as it came to my attention last year, that one
district office of the IRS sent out a letter to all real estate agents
in that district encouraging them to become electronic filing cen-
ters. They said the only thing you have to have is a computer and
a 2400 baud modem. You don’t need to know anything about taxes
or have any licensings or anything. Just send us your application
and you can file tax returns electronically.

We think there are two solutions to this problem long term. One
is the tax system modernization. But I have to tell you, I am ap-
palled to hear that the IRS is looking at a system that doesn’t talk
to each other. I have to deal with this system every day, a system
that doesn’t talk to each other.

There is a system called the IDRS, the Information Document
Retrieval System, and the ACS system, Automated Collection Serv-
ice, which is the accounts receivable system. They don’t talk to
each other. They are not even on the same computer, not on the
same terminal. If I am talking to a revenue officer on the telephone
and they are in front of the ACS computer, if they can’t find my


49

MANAGEMENT STEPS CONTRIBUTING TO INCREASED COLLECTIONS;
ARDI STAFFING STATISTICS

For the three years prior to FY 94, collection yield had declined between 4%
and 6%. Aithough some of this decline was attributable to a decrease in front-line
collection staffing, it was also the result of a decline in productivity. In FY 94,
however, IRS’ collection yield increased 3% with over a 9% decrease in front-line
collection staffing. Through the first quarter of FY 95, collection yield has continued
to increase by 3.8% over the first quarter of FY 94. When the hiring and training of
the additional collection staff from the FY 95 Compliance Initiative is completed, the
increase in yield should grow.

Management changes under way to improve collection include:

# Enhanced cooperation with state taxing authorities. The State Income
Tax Levy Program invotves agreements with states (Maryland, Virginia,
North and South Carolina) whereby they accept IRS levies on state
income tax refunds. This resulted in collections of $108 million from FY
92 to FY 94,

* Proper use of certain collection tools. In FY 92, the Offer in Compromise
policy and procedures were streamlined resulting in additional collections
of $281 million in FY 94 by enabling field personnel to finally resolve
many accounts that previously would have remained uncollected. The
use of seizures in appropriate situations. In FY 94, $125 million was
collected from over 10,000 seizures, a 5.6% increase in seizure activity
over FY 93, Effective use of levies resulted in $2 billion in revenue in FY
94. Expanding installment agreement authority to all contact employees
increased the dollars secured through installment agreements from $2.28
billion in FY 92 to $4.75 billion in FY 94.

4 Decreasing the number of notices, shortening the notice period and
instituting earlier intervention by telephone. During FY 94, the IRS
tested “early intervention” in two Automated Collection System (ACS)
sites with positive results. In January 95, using 770 staffyears of the
FY 95 Compliance Initiative in ACS sites, early intervention was
implemented nationwide. We project, based on the experience during
the pilot, that early intervention will results in additional revenues of $3
billion over 5 years.

¢ Increasing emphasis on and monitoring of payment of agreed tax
assessments at the conclusion of the examination process. In FY 92,
Examination secured payment of 8.1% of agreed tax assessments. In
FY 94, as a result of the emphasis on payment at the conclusion of the
examination process, Examination had secured payment of 31.7% of
agreed tax assessments.


January

78

1994 (Con’t)

‘The Commissioner's filing season media and public service campaign
kickoff, issuance of Fact Sheet 94-10, "Refund Protection Procedures"
News Release IR 94-119 stressing correct SSNs, refund delays, possibility of
split refunds on returns claiming refundable credits. This information
was made available on the ELF Bulletin Board and distributed to 43
representatives from general print media, technical tax press, clectronic
media, financial press and professional associations. Q&As, including
information on the split refund and sccond payment by check, were

made available on the ELF Bulletin Board (available to ELF practitioners)
and the Public Affairs Bulletin Board (available to IRS offices

nationwide). The press conference was attended by 41 media
representatives, such as CNN, Cox Broadcasting, ABC, NBC, CNBC, Fox-
TV, US. News and World Report, Tax Notes, Tax Analysts, New York
Times, Washington Post, Associated Press, Dow Jones News Service,
Knight Ridder Financial News, Standard News Radio Network,
McNcil/Leherer and ScrippsHoward. The conference and video news
release were sent via satellite and picked up in 47 major markets, with 67
stations within those markets. The Commissioner also held interviews via
satellite with about 15 media markets nationwide.

A poster on SSN accuracy and refund delays was published in the
SSA/IRS Joint Reporter and distributed to 7 million employers.

Notices issued to taxpayers with known invalid SSNs in the prior filing
period.

1995,

Commissioner's interview with freelance reporters for "Good
Housekeeping" and “Working Women” addressed SSN accuracy and
refund delays. Publication scheduled for April

Communication print products addressing overall accuracy, correct SSN
and refund delay message include:

+ Eighteen different Form 1040 series tax packages (forms and
instructions) made available to 86 million taxpayers, also available
through FEDWORLD on the INTERNET.

1995 Tax Supplement (English and Spanish) This supplement is
carried by approximately 3,000 daily and weekly newspapers in its entirety
and portions of it are carried by approximately 7,000 other newspapers,
throughout the filing season.


88

were provided anything of substance other than the right to
purchase goods or services from the exempt organization); and (2)
whether associate members could or were likely to avail
themselves of the exempt functions of the organizations. The
1994 TAM concluded that the associate member class was used for
the purpose of marketing access to an unrelated trade or business
(icez, auto insurance) and, as a result, dues from that
nembership class were taxable to the organization. The
organization described in the TAM did not provide evidence of
significant exempt activities directed at non-farners.

IMPACT OF 1994 TAM

A technical advice memorandum is requested by either the
taxpayer or by an IRS field office and relates only to the facts
of the specific case. As such, it is not precedential in nature.
The impact of the 1994 TAM is to treat the associate member dues
of the farm bureau in that case as unrelated business taxable
income. Farm bureaus with similar facts may be similarly
impacted, although the facts and circumstances of each case will
have to be considered.

PUBLICATION OF REVENUE PROCEDURE 95-2]

In response to questions raised about the 1994 TAM, the IRS,
in conjunction with the Office of the Assistant Secretary for Tax
Policy, published a revenue procedure. Rev. Proc. 95-21 (copy
attached) indicates that the IRS will only treat dues paid by
associate members as taxable if the associate member class was
formed or otherwise availed of for the principal purpose of
selling or providing access to goods or services unrelated to the
exempt purposes of the organization.

The impact of the revenue procedure on a particular
organization will depend upon the facts of that case. In this
regard, the Service will look to the purposes and activities of
the organization and not the intentions of its members.

This revenue procedure restates and clarifies the IRS
position with respect to this issue and will be helpful in
explaining that position to section 501(c)(5) organizations that
have established associate member categories.


43

come back and talk about the difference a little bit between fraudu-
lent and erroneous. About 33.6 thousand of these were ELF re-
turns; 42.2 were, in fact, paper. So you see the spread between the
types of—and, again, I am talking about outright fraudulent re-
turns here. There was $160 million claimed in this amount.

Additionally, we disallowed another $450 million of questionable
refunds. We haven’t made a determination that they are fraudu-
lent, but they are at least problematic because of some instance on
the return or some result of correspondence. So we are talking
someplace in the neighborhood last year of $567 million or $0.5 bil-
lion of this range that I talk about between fraudulent and erro-
neous that we, in fact, deleted last year.

There were 413 prosecutions last year for refund fraud that were
actually prosecutions that occurred and, obviously, a number of
starts of prosecution cases that will continue to occur as we come
through the year. So that is sort of the way we sized what our part
is. The problem is, about fraud, you only know what you detect, of
course. You don’t know what you don’t detect.

Mr. HERGER. Well, knowing what you did detect, is there any-
thing in hindsight that you feel we might have been able to have
done differently?

Mr. BRAND. I think in hindsight what we tried to do, I guess, is
take the hindsight and apply it to 1995.

One of the things we know to be very problematic, as the Com-
missioner mentioned, is this whole area of Social Security num-
bers—making sure that the Social Security numbers are present
and they are correct, that they match up with the taxpayer, et
cetera. So that is one of the areas that we have paid close attention
to for this coming year.

‘ain, a number of the lessons that we have learned we would
be glad to share with you, furnish you that in closed session be-
cause it does impact on the way that we detect fraud and also just
abuse.

Mr. HERGER. OK. Maybe one other question.

Chairman JoHNsoN. Certainly.

Mr. HeRGER. A different issue, has to do—on page 9, Commis-
sioner, in your testimony you stated that taxpayers should be able
to get through to the IRS on the first call. I think it also mentions
about how expensive it is through correspondence. Evidently, you
are alluding to the fact that it is less expensive to be able to take
care of these questions by phone rather than through correspond-
ence.

Ms. RICHARDSON. Our goal is for people to be able to get through
on the first call and, ultimately, to handle 95 percent of the account
inquiries in that telephone call on the first call.

Right now, if you were to receive a letter from us that said we
have a question about a deduction that was claimed or something
may have been omitted, we would send you a letter. You could
write back to us. Perhaps before you got back to us a second letter
might have gone out. So, in the meantime, interest and penalties
might be building up on an amount. The correspondence crosses in
the mail; a check crosses in the mail because we don’t have the ca-
pacity today to do online posting of accounts.


129

the dollar growth attributable to the change in the statute. But I
wouldn’t say that it is the bulk of the growth.

Chairman JOHNSON. That is interesting. Your report did show
that their collection of delinquent taxes has declined in dollar
amounts.

Ms. StaTuis. It has slightly declined. It has been relatively flat
over a period of years, but actually down a little bit since 1990.

Chairman JOHNSON. We have put new resources into this. We
have really focused on it. Why hasn’t it gone up?

Ms. STATHIS. Actually, the compliance resources between 1990
and the end of 1994 went down. Even though there have been some
proposals to increase the staffing, it really did not increase and
that is why the 1995 compliance initiative was important to im-
proving the enforcement posture of the IRS.

Chairman JOHNSON. Thank you. If there are no other questions,
thank you very much for your testimony, and we look forward to
working with you in the months ahead and thank you for your at-
tention.

We will next have Mr. Buckley, the president and CEO of H&R
Block. I would like to call Mr. Martin also to the table and we will
hear both witnesses.

Mr. Buckley, if you will start.

STATEMENT OF HARRY W. BUCKLEY, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, H&R BLOCK TAX SERVICES, INC.

Mr. BUCKLEY. Madam Chair and members of the subcommittee,
my name is Harry Buckley and I am president and chief executive
officer of H&R Block Tax Services, Inc. I appreciate the opportunity
to appear before you today to present H&R Block’s views on the
1995 tax filing season, IRS’ efforts to combat refund fraud and re-
form of the earned income tax credit.

H&R Block is headquartered in Kansas City, Mo., and we are the
Nation’s largest income tax preparation firm. We serve approxi-
mately one out of every seven U.S. taxpayers. We have over 8,000
company-owned and franchised offices throughout the United
States and employ over 89,000 people during the tax filing season.

Last year, we prepared 12 percent of all individual U.S. tax re-
turns for a total of over 13 million returns. We also transmitted
over half the returns filed electronically last year with the Internal
Revenue Service.

I would like to begin my testimony by stating that H&R Block
would recommend the subcommittee support IRS’ fiscal year 1996
budget request for both tax systems modernization and funding to
combat fraud. After the subcommittee’s hearing last year on tax re-
fund fraud, we were pleased to see that the IRS’ budget request in-
cluded additional funding for staffing of refund fraud detection.

We encourage Congress to strong] y consider making the invest-
ment IRS has requested for the purchase of computer software and
hardware. Both refund fraud elimination and tax systems mod-
ernization efforts are extremely important investments in future
IRS operations and their service to the American taxpayer.

In the 40 years we have been serving America’s taxpayers, this
is without a doubt the most difficult tax season in terms of our in-
ternal preparations and customer dissatisfaction. At H&R Block we


113

Chairman JOHNSON. Thank you very much.

On the efforts that the IRS has made to reduce fraud, you do not
appear to be in disagreement; that they are right to focus on the
validity of the Social Security number.

Ms. STATHIS. That is a very well-placed effort on their part.

Chairman JOHNSON. Appears to be long overdue as well.

Ms. STATHIS. That is correct.

Chairman JOHNSON. If they had notified as part of the packet to
taxpayers that this is a very important matter, frankly, what more
is the government required to do? What is the complaint against
the IRS in this regard?

I don’t care how many times you tell your own children, some-
times they do not listen. Taxpayers are going to figure out that
they have to get their Social Security number right when taxpayers
do not get their refunds and do not get their filing accepted because
they do not have the numbers right.

Ms. STATHIS. Mrs. Johnson, we believe that the IRS has done a
very good job of informing people that they have to have a correct.
Social Security number. That is not an issue. But there are many,
many people whose earned income credit is going to be held up who
have a valid Social Security number. They are going to be held up
because they are caught in one of the predictive rofiles that comes
out of IRS’ study of last year. They appear to be problematic, so
the refunds are going to be held.

Chairman JoHNSON. But, again, they are going to wait 2 months.
Relative to the billions of dollars that people got last year that they
should not have gotten, that were fraudulent, is 2 months a real
hardship?

Ms. STATHIS. Well, we do not think so.

Chairman JOHNSON. Or are you saying that the predictive
screens were too rigorous and, therefore, were imposing a hardship
unnecessarily or irresponsibly?

a Ms. STATHIS. No, we are not in disagreement with what IRS is
loing.

Chairman JOHNSON. OK. -

Ms. STATHIS. In terms of the refund fraud cases, in fact, I think
they may have to go beyond where they are and we will see how
these work this year. But we may have to go to a system, for exam-
ple, where we encourage people to get the earned income credit on
an advanced basis, to get the 60 percent they can get in their pay-
checks, and have 40 percent left. We may have to go to a process
where they do not get that until May, perhaps. That would allow
the entire filing season for IRS to examine all of the patterns that
they have.

Chairman JOHNSON. I think we are going to have to take a look
after this filing season at even the validity of a lump sum reim-
bursement when this is actually an income expansion and, logi-
cally, should be closely connected to the wage reporting. We do not
have the computer capability to do that for several years. So in the
interim we may want to really change the system.

But you do not think they are too tough in their screens?

Ms. STATHIS. No, we do not.

Chairman JOHNSON. You agree they absolutely have to screen in
order do reduce fraud.


122

Mr. HERGER. Productivity savings.

Ms. STATHIS. If it is productivity savings only, I cannot speak to
that number. As each of these systems has been tested in a par-
ticular location, IRS has tried to estimate from that what the pro-
ductivity savings will be. Generally the IRS budget will reflect the
savings that they hope to achieve when those systems are going to
be implemented.

Mr. HERGER. I think the numbers that we have are total cost of
$6.683 billion and total benefits of $9.166 billion.

Ms. STATHIS. I suspect that comes from a new cost-benefit study
that was just made available to us on Thursday of last week. I be-
lieve that those benefits include more than productivity savings. I
think they include efforts to redeploy resources into new compli-
ance functions and all of the benefits that they think might accrue
from that.

Mr. HERGER. In another area, GAO published a report in October
1994 titled, “Continuing Problems Affect Otherwise Successful 1994
Filing Season.” On page 25 of that report you have a chart on
fraudulent refund claims. A footnote to this chart states, “This fig-
ure includes two returns claiming refunds totaling about $300 mi
jon.

Would you please elaborate on this footnote and what type of re-
fund claims could result in such significant amounts of $300 mil-
ion.

Ms. STATHIS. I believe both of those were gas tax refund claims.
Those refunds are probably more problematical than the earned in-
come credit in that there is not a limit on them, so you can have
really huge claims for refunds.

Mr. HERGER. Could you tell me were these identified by the IRS
and were they stopped?

Ms. StaTHIS. They were identified by the IRS and I believe they
were both stopped.

Mr. HERGER. Do we have any indication of what happened to
these individuals who submitted these fraudulent returns?

Ms. Sratuis. I do not have that information, but I can seek it.

Mr. HERGER. We would be very interested—were they brought to
trial? Were they convicted?

Ms. StaTHIs. I know there have been a number of prosecutions
of fraudulent gas tax refund claims.

{The following was subsequently received:]

According to IRS, this is still an active investigation. They were reluctant to pro-
vide further details.

Mr. HERGER. Just maybe a quick followup to an earlier question
that came up, and it had to do with the telephone calling—whether
or not we are 13 percent successful or closer to 50 percent. Is this
temporary? Are we correcting it?

Even at 50 percent—even if we move up from 13 percent to, I
don’t know what you had, 45 percent I believe, I don’t believe that
is acceptable to anyone who is making calls, paying accountants to
make calls, or doing the public taxpayer themselves.

Are there any moves that are being made to move this up to a
more acceptable level? Particularly in the testimony I understood
from the IRS was that it is a savings to us to be able to conduct


127

Based on a recently completed review of the accessibility of IRS’
toll-free telephone service, we concluded that IRS top management
had not exercised its authority to establish and enforce policies
necessary to build an effective nationwide telephone assistance
program. While acknowledging that more funds would enable IRS to
provide more service, we made several recommendations that
focused on maximizing service with existing resources.

Specifically, we recommended that the Commissioner of Internal
Revenue direct the Chief, Taxpayer Service, in coordination with
other appropriate IRS officials, to lead an aggressive effort to
(1) identify and define the appropriate telephone assistance
program operating practices for IRS that would allow it to
optimize the number of calls it can answer and (2) work with the
leadership of the National Treasury Employees Union to reach
agreement on implementing those practices on a nationwide basis.
Those practices should include, although not be limited to, the
following:

-- challenging program goals for increasing the number of calls
answered that are based, at least in part, on taxpayers’
needs;

-- standards for the amount of time assistors should be
available to answer taxpayers’ calls;

-- hours of operation that offer taxpayers greater opportunity
to reach IRS assistors; and

~ uniform reporting definitions for the number of calls
answered and other performance measures.

We also recommended that the Commissioner direct the Chief,
Taxpayer Service, to take the steps necessary to (1) fully
implement the features of IRS' existing call routing technology
and (2) pursue opportunities for more effective call routing
through IRS' telecommunications vendor.


151

Mr. Hancock. Do you have any joint ownership or joint board of
directors?

Mr. BUCKLEY. No.

Mr. Hancock. Thank you, Mrs. Chairman.

Chairman JOHNSON. Thank you and thank both of you for bein;
with us today. I appreciate your comments and your insights, an
we hope by the next season that some of these problems will be
straightened out and some of your comments will be included.
Thank you.

Mr. Martin. Thank you for inviting us.

Chairman JOHNSON. The hearing is officially adjourned.

(Whereupon, at 1:49 p.m., the hearing was adjourned.]

{Submissions for the record follow:]


155

tangible results can be shown, it will be far more expensive to spend years fixing a system that
‘was rushed into use.

For these reasons, the Council for Electronic Revenue Communications Advancement respectfully
asks the members of this committee to take whatever steps are necessary to ensure the fall
funding of Tax Systems Modernization as the budget request makes its way through the approval
process in the House of Representatives. While this program may seem expensive now, the cost
of inaction or inadequate action could be far higher.

Filing Season Concems
Because CERCA represents such a broad spectrum of what the IRS considers its “stakeholder
community,” its members have seen several different types of problems with this filing season and
the mouths that led up to it. Beginning with indecision on the direct deposit indicator (DDI) in
the fall and moving forward to the current confusion on earned income credit refunds and
taxpayer identification issues, the Service has made a great many changes to the filing system that
have inconvenienced many taxpayers this season. While CERCA wholebeartedly agrees that the
system must be protected from the fraudulent filer, the Council would like to make this
subcommittee aware of some of the consequences, intended or otherwise, that have arisen as a
result of actions taken to curb fraud. In addition, the Council would like to make several
recommendations for legislative or administrative actions which could remedy the current
situations

Direct Deposit Indicator

Since the inception of electronic filing, the Internal Revenue Service has provided an electronic
filer with two valuable pieces of information when it receives a retumn electronically. First, the
Service acknowledges acceptance of the retum, which tells the taxpayer and the electronic retum
originator (ERO) that the taxpayer's obligation to file a return has been met, Second, prior to this
filing season, the Service provided a direct deposit indicator on claims for refunds filed
electronically. The DDI told the ERO that the taxpayer could expect to receive a full refund
because no federal obligations existed that would reduce it. This indicator enabled the ERO's
‘who provided refund anticipation loans (RAL's) to show the leading bank that the loan could be
made based on the full refund.

For the last two years, rumors have run rampant that the IRS would no longer be providing the
DDI. In 1993, the Service announced that it would no longer provide the indicator shortly after
April 15, Within a matter of months, the Service had responded to stakeholder concerns and
agreed to issue the DDI for the '94 filing season. These rumors arose again in 1994 out of
concern that the IRS had associated the DDI with the filing of fraudulent returns.

On October 6, 1994, Under Secretary of the Treasury Ronald Noble stated before this very
subcommittee that in fact the DDI should remain in place for the °95 filing season, While
expressing some concem that the speed with which refunds were provided to electronic filers
might limit the Service's ability to properly review the claims, the task force which the Under
Secretary headed could not find a direct link between provision of a RAL and the filing of
fraudulent returns. In fact, the task force reported that, "[T]he DDI may offer some potential for
increased fraud control and for increased ELF filing by genuine taxpayers." Mr. Noble went on to
state before this committee that the DDI should be studied during the 1995 filing season in order
to weigh its benefits against its potential for facilitating fraudulent refund claims,

This position led to the formulation of plans for the '95 filing season based on the availability of
the DDI, Advertising campaigns were planned, financial institutions prepared for the influx of the
loan applications, approximately 25,000 practitioners readied themselves to provide the RAL
service to clients and millions of taxpayers prepared to receive RAL's

Within three weeks, then-Secretary of the Treasury Lloyd Bentsen announced that the DDI would
not be available for the 1995 filing season, stating that "a very high number of EITC fraud
schemes involve refund anticipation loans, and those loans are based on the direct deposit
indicator." Asa result, two of the four financial institutions that previously made refund
anticipation loans refused to provide the Service this year. The top price of a RAL rose from $34


CONTENTS

Advisory of February 18, 1995, announcing the hearing ....

WITNESSES

Richardson, Hon. Margaret Milner, Commissioner, Internal Revenue Service;
accompanied by Michael Dolan, Deputy Commissioner; Larry Westfall,
Modernization Executive; Phil Brand, Chief Compliance Officer; Bob
Wenzel, Chief Strategic Planning and Communication; and Judy Van Alfen,
Chief Taxpayer Service

Stathis, Jennie S., Director, ni 68, US. Gen-
eral Accounting Office; accompanied by Lynda Willis, Associate Director,
Tax Policy and Administration Issues, and Hazel E. Edwards, Director,
Information Resources Management/General Government Issues ,

Buckley, Harry W., H&R Block Tax Services, Inc ....
Martin, Micheel, National Association of Enrolled Agents

SUBMISSIONS FOR THE RECORD

Bank One, John R. Galvin, letter . -
Council for Electronic Revenue Communication Advancement, Robert E. Barr,
statement ....
National Society o
Universal Tax Systems,

lic Accountant ‘illiam -venson, statement
Inc., Steve J. Safigan, statement ...

qa



145

SUMMARY:

This proposal has evolved after numerous meetings and
extensive discussion and study. We recognize that the
individuals covered by this proposal provide a vital service to
the public. As a result, this program is not intended to limit
or reduce the number of available tax return preparers. We have
eliminated the second level of CRP which appeared in our
proposal presented at an earlier CAG meeting. It became obvious
that the second tier of Advanced CYRP posed many problems
including setting limits and/or assigning different
responsibilities to each level. We reached a unanimous
conclusion that eliminating the Advanced CTRP would enable the
program to achieve its goals, simplify its administration and
minimize the disturbance to the present system.


106

APPENDIX IIT ‘APPENDIX IIT

EIC CONTINUES TO CAUSE PROBLEMS FOR IRS AND TAXPAYERS

Even excluding the problems with fraud discussed in appendix II,
the EIC continues to be a source of many taxpayer errors and
additional IRS work.

In 1994, 14.8 million families received over $15 billion in BIC
benefits--an increase over the 14.1 million who received $13
billion in 1993. IRS expects that about 6 million more persons
will be eligible to receive the credit in 1995 due to provisions
in the Omnibus Budget Reconciliation Act of 1993. Individuals
without a qualifying child are now eligible for the credit if
they (1) are at least 25 but less than 65 years old, (2) are not
a dependent of another taxpayer, and (3) have earned income and
adjusted gross income of $9,000 or less.

‘This expansion has created additional work for IRS. During the
processing of returns, IRS' computer system identifies taxpayers
without qualifying children who appear to be eligible for the EIC
but did not claim it. IRS suspends processing of those returns
until they can be reviewed by a tax examiner. If an examiner
determines from information on the return and by researching
Social Security data (to determine the taxpayer's age) that the
taxpayer is eligible for the EIC, IRS will calculate the amount
and correct the taxpayer's return.

IRS told us that about one-half of the taxpayers whose returns
had been suspended in the first few weeks of this filing season
were determined to be entitled to the EIC. According to IRS data
as of February 10, 1995, failure to claim the EIC has been the
most frequent error made by taxpayers and preparers on this
year's returns. The second most frequent error involves mistakes
in calculating the ETC when it is claimed.

WHAT COULD BE DONE 0 MAKE
THE EIC LESS OF A PROBLEM?

Refundable credits, like the BIC, pose a challenge for tax
administrators. In addition to the concerns about fraud, there
are equally important concerns that not all those eligible for
the EIC are receiving it. We have made several recommendations
in the past that could help to make the EIC less of a problem for
TRS and taxpayers.

In September 1993, we recommended that IRS take certain steps
that we thought would make the EIC easier to administer’.
Specifically, we recommended that IRS (1) modify the Forms 1040
and 1040A to'collect the data now required by Schedule EIC, thus
eliminating the need for taxpayers to complete and IRS to process
a separate schedule, and (2) clarify taxpayer instructions on the
need to provide complete information for determining EIC
eligibility. IRS continues to require the Schedule EIC but has
simplified it by moving EIC computations to a worksheet. IRS‘
Schedule EIC instructions, in our opinion, are still not clear.

IRS objected to modifying the Forms 1040 and 1040A and
eliminating the Schedule EIC. It believed that such a change
would confuse taxpayers because of differences between the
definition of a qualifying child for purposes of claiming the EIC
and the definition of a dependent for purposes of claiming a
dependency exemption. A key difference in the two definitions is
the requirement, for purposes of claiming a dependency exemption,
that the taxpayer provide over 50 percent of a dependents
support (referred to as the "support test"). ‘There is no support
test in the definition of a qualifying child for EIC purposes.

"Tax Policy: Earned Income Tax Credit: Design and

Administration Could Be Improved (GAO/GGD-93-145, Sept. 24,
1993).



66

1994 (cont'd)

November Commissioner Richardson met with AICPA, discussed Rev. Proc. 94-

December

63 with emphasis on DDI

Presentation to Texas Society of Certified Public Accountants
(TSCPAY/IRS Liaison on changes to Rev. Proc. 94-63, and Revenue
Protection Strategy with emphasis on SSN accuracy and refund delays

Meetings with NATP, NAEA, NSPA - changes to Revenue Procedure
94-63 and filing fraud initiatives discussed SSN accuracy and refund
delays emphasized

Discussion with H&R Block, requested clarification on Responsible
Official signature and suitability checks.

Discussion with Bank One on extension of Filing Form 8633.

Fraud Service Board met with Office of Refund Fraud representatives
to discuss screening criteria for potentially problematic refunds

SSA and IRS issued an article on SSN accuracy and refund delays in
the "SSA Courier" which is distributed to 14,000 organizations.

Sixty second public service radio spot on SSN accuracy and refund
delay provided to over 8,800 radio stations. Through February 20 this
spot was aired 92,910 times, by 1,495 outlets, in 828 markets, and 51
states/possessions.

Presentation to American Institute of Certified Public Accountants
(AICPA) on changes to Rev. Proc. 94-63 and Revenue Protection
Strategy, emphasis on SSN validity and refund delay

Federation of Tax Administrators (FTA)/Commissioner’s Liaison
Meeting discussed Revenue Protection and Electronic Filing, emphasis
on SSN accuracy and refund delays and new ERO rules

Meetings with H&R Block and Bank One.

Instructions for tax packages revised to include SSN accuracy and
refund delay messages

Statistician from Office of Refund Fraud met with FSB to discuss
statistical data in developing screening criteria.


52

Westfall does to get into these matters. We want it to work. We
want it to work well. I think we will be working with the GAO to
try to find out how we can make this system work.

Mr. LEVIN. Do you report back to the Chair after your discus-
sion?

Ms. RICHARDSON. Most definitely.

Chairman JOHNSON. We may get ourselves all together to talk
about that after they have discussed it.

Ms. RICHARDSON. The other thing I would like to say is that part
of the disagreement may well be in whether or not you are here
in the Dark Ages and have people using a pen and paper to do
their work when you know that the ultimate system is going to
look somewhat. different in the year 2001. But there are tools such
as these laptops that can make our people more Productive, more
effective, raise additional revenues. Should we sit here doing noth-
ing for the next 5 years or for the last 10 years doing nothing until
we have an ultimate system in place?

I guess we felt that any prudent businessperson would say no.
We have got to keep enhancing our productivity and enhancing the
collections as we move along.

What we have tried to do is assure that the decisions we make
are not decisions that are irrevocable or would mean that we have
to throw out something altogether and start over. We are
transitioning, as Mr. Westfall said, to our new system. You just
aren't going to turn the switch on one day and have a whole new
tax system. It is something—it is a massive system, and we have
to transition to it. I think that is where a lot of the disagreement
es.

The idea about focusing more effectively is one that we do agree
with, We do know we have to focus, and that is one of the reasons
I did appoint Mr. Westfall to be the project manager—not just for
the technological side but for every single thing in our organization
that has to do with modernization.

The operations people report to him on this issue. The technical
people do. We did not want a system that when it was built nobody
could use, it didn’t meet the requirements of our business people.
That happens very often I think in the private sector as well as the
public sector, and we didn’t want that to happen.

Chairman JOHNSON. Thank you, Commissioner.

Mr. Ramstad.

Mr. Ramstap. Thank you, Madam Chair.

Commissioner, I appreciate your coming to my office.

Chairman JOHNSON. I am sorry. I was leaning forward, and I
thought our colleague from Texas had left.

n Mr. RamstaD. I would be glad to yield to my good friend from

‘exas.

Mr. JOHNSON of Texas. Go ahead.

Mr. RamstaD. I am not going anywhere, and I am sorry I was
late because of a flight.

Let me just ask you, Commissioner, I know we have spent
zillions of dollars in upgrading the computer capability at the IRS.
If some of our colleagues have their way—I know the distinguished
Minority Leader, Mr. Gephardt, was here a couple of weeks ago ad-


101

APPENDIX 1 APPENDIX I

this regard by initiating process improvement studies to
streamline the tax return processing and customer service
functions. However, IRS does not know how the results of these
projects will be incorporated into the ongoing systems
development efforts for these areas. As a result, IRS could end
up with systems that do not meet the requirements of the
streamlined or redesigned processes. In such a case, systems
that have been developed may have to be retrofitted or scrapped.

Successful organizations prioritized their development projects
using an explicit set of criteria that assess the mission
benefits, risks, and costs of each project. IRS has not set
priorities for any of its development projects, instead it
considers all projects to be equally important. Priorities are
essential for allocating scarce resources, as well as to
establish program and project contingencies. The NRC noted in
its report that IRS was unable to respond quickly and effectively
to the reduction in TSM funding for fiscal year 1995 because it
lacked contingency plans.

Finally, successful organizations ensured that they had a
technical framework of standards and guidelines in areas such as
data management, telecommunications, and security, that enable
project teams to build systems that connect together, operate
smoothly, and exchange information. Guidelines are also
important because systems developed without guidelines may have
to be changed or redesigned later, usually at a higher cost. In
the last year, IRS has described its technical approach to
integrating its information systems and revised guidance to its
‘sm system developers that further defines the technical and
functional design of TSM. For successful integration of all of
the TSM systems, IRS must now establish management controls to
ensure that all projects use these guidelines.

One long-standing critical gap in IRS' technical guidelines is
security. Technical guidelines for security are particularly
important because the TSM environment of on-line access will make
taxpayer data even more susceptible to unauthorized access and
disclosure. Last year, IRS received a draft security
architecture from its Integration Support Contractor, but decided
not to accept it and began an effort to develop its own security
guidelines. To date, IRS has issued a security policy and a
draft of high-level security requirements. IRS has also engaged
another contractor to perform a data sensitivity analysis and
identify which data elements should be given specific levels of
security. IRS expects to issue initial security guidance to TSM
project teams by April 1995.

‘The challenges of completing a complex modernization involving
large integrated systems are great, and it is easy to lose sight
of the ultimate goal. Therefore, it is important that IRS focus
management attention and resources on those opportunities that
can best improve mission performance. By working on a wide
variety of TSM projects simultaneously, IRS has not had such a
focus. As a result, while IRS has invested significant funds in
modernization, it is still far from its vision for TSM.


26

| Internal Revenue Service

BUDGET OVERVIEW
FY 1996



22

The Chief Financial Officer has established a new Office of
Economic Analysis to certify annual budget estimates for TSM
oversee an independent cost analysis for TSM, and develop a new
economic analysis process for determining TSM costs and benefits.

‘THE FILING SEASON - MAKING COMPLIANCE EASIER

I would like to turn to this year’s filing season. The
filing season begins with taxpayers filling out their returns and
sending them to the IRS. I have already described to you the
things the IRS is doing to process these returns more
efficiently. I would also like to describe some steps we have
taken to make filling out forms and complying with the law less
burdensome for taxpayers.

An easier filing season starts with simpler, more
understandable forms and instructions. We have concentrated
especially on making improvements in forms for small businesses.
Examples of improvements to date include a new streamlined
Schedule C-EZ for sole proprietors and a much simpler Form 940
(Federal Unemployment Tax Return) that can be used by two-thirds
of all Form 940 filers. Last year, T created an Office of Small
Business Affairs, run by Barbara Jenkins who is with me here
today. This Office is working with small businesses to address
paperwork and regulatory problems and looking for opportunities
to apply technology and increase communication.

We are also working with the Social Security Administration
and the states to simplify the tax and wage reporting system
This concept calls for all federal and state wage and employment
taxes to be reported to a single point which will distribute
information, eliminating the need for multiple reporting. Last
year, the Social Security Administration extracted wage
information from the W-2s submitted from 12 states and
redistributed this information to IRS and the states eliminating
the need for employers to send paper W-2s to those states. This
filing season, 28 states have enrolled in this program.

Reducing a taxpayer’s burden in meeting his or her tax
obligations is one of our three business objectives -- along with
improving compliance and enhancing productivity. We want to make
it easier for taxpayers to get the information they need to file
accurate returns; we want to make the returns themselves easy to
understand and file; and after taxpayers file, we want to make it
simple to resolve account problems.

Wherever we can, we are using technology to get information
to taxpayers as quickly and easily as possible. For example, we
now can provide the public with a CD-ROM version of tax forms,
publications and instructions. This means that copies of forms,
publications and instructions -- even seemingly hard to find ones
=~ can be printed on demand without leaving your office. We are
also making forms and instructions as well as up-to-date
information available on the Information Superhighway. Tax forms
are now available electronically on FEDWORLD, an electronic
bulletin board service operated by the National Technical
Information Service, an agency of the Department of Commerce.
This service gives the public direct dial-up access to files of
official IRS tax forms, instructions and publications which they
can download onto a computer for printout.

Taxpayers must be informed if they are going to file
accurate and complete returns. This year, we expect to respond
to 70 million taxpayers through our phone centers. Our telephone
assistors will respond to 36 million taxpayer inquiries over the
toll-free system, but this is still only 52 percent of the
customers who will request the services of an assistor -~ we
would like to be able to serve the other 48 percent, too. The FY
1996 Budget will allow us to answer an additional 1.3 million
callers -- still far short of demand.


105

APPENDIX 11 APPENDIX IT

IRS' BUDGET REQUEST FOR 1996 INCLUDES
ADDITIONAL RESOURCES TO FIGHT REFUND FRAUD

‘The administration's fiscal year 1996 budget request for IRS asks
for 323 FTEs and about $28.3 million for a “cross-functional
effort to combat tax refund fraud". IRS says that the additional
resources will be used, among other things, to help it (1) detect
and stop fraudulent refunds, (2) identify and refer for
examination those EIC cases with audit potential, (3) handle the
rapidly increasing inguiry calls associated with these cases, and
(4) investigate and prosecute the most egregious cases.

IRS said in its budget estimates that, based on the results of
past years' refund fraud efforts, the level of resources being
requested should enable it to detect fraudulent refund clains
amounting to $474.3 million in fiscal year 1996. That estimate
is significantly overstated. Using the average results per staff
year that IRS achieved in 1993 and 1994, the expected results in
1996 would be about $210.6 million.

However, an official in IRS‘ criminal investigations function
told us that the ideal result would be for the amount of detected
fraudulent refund claims to go down. We said that IRS hopes to
achieve that goal by targeting additional resources on prevention
rather than detection. We agree with that focus because it is
less costly and more efficient, in our opinion, to stop a
fraudulent return from being filed than it 1s to identify and
deal with the fraud after the return is filed.


162

HOUSE WAYS AND MEANS OVERSIGHT COMMITTEE HEARING - Monday, February 27, 1995

STATEMENT OF STEVE J. SAFIGAN, PRESIDENT
UNIVERSAL TAX SYSTEMS, INC.

Address: 6 Mathis Drive, NW
Rome, Georgia 30161

Telephone no (706) 232-7757

‘The attached statement responds to certain comments made by IRS Deputy Commissioner
Michael Dolan during The House Ways and Means Oversight Committee hearing on Monday,
February 27, 1995 convened to address Tax Systems Modernization and the 1995 tax filing
season. More particularly, Mr. Dolan’s comment that there is “statistically valid” data showing
the DDI to be material in causing fraud contradicts the findings of the Task Force appointed by
the Treasury Department that addressed the DDI under the direction of Under Secretary of the
Treasury Ron Noble.

During Mr. Noble’s testimony to this Subcommittee on October 6, 1994 as to whether the IRS
should abolish the DDI, he stated that The Department of the Treasury was not concerned that
the DDI would cause fraud losses to the IRS. Rather, he testified that the DDI could play a role
in improving fraud detection and that banks offering refund anticipation loans, rather than the
IRS, would be at risk of loss. Mr, Noble also stated that now was not the time to remove the
DDI, but rather the impact of the DDI should be continued to be examined during the 1995 filing
season.

Despite the above findings, on October 26, 1994 Secretary of the Treasury Lloyd Bentsen
announced the elimination of the DDI.

‘The actions taken during the current filing season regarding the DDI have simply not
accomplished the same nor acceptable goals as communicated by the IRS. Nor does the current
preemptive EITC withholding program attempt to prevent innocent and honest taxpayers from
being unnecessarily and negatively affected.


34

‘surgange re6pnq meu 120uei 0) parenipe $66) Ad PUR PE6S Ad :010N

oe ze ves ane v66'9 99k z99'9 ak WSL-HON
‘ oy wst eo’ oe eee tug WSL -
€ w sere one's core eats co's anes RSFSR
" os cys eee eLe's otk mio hee MoueBeusy seouncsey -
€ 0 ns or 495 oc - - eousydwog «
we 9 gece teh rset | | Ob ver't cu BumpveN jewun20g -
oe w ts9'8t 606 zos'eh see eee = ese ‘wopreyoD -
z n oe 9 na zw sm rr] pmesey eouspduomi0s
o 9 “oct ont olez wth cert (tk. owda -
a “ z's ate sess aor ose's ate peeunos +
9 oe e105 OM cos MP soy ty press xeL ~
z ry a9 ow 9 ” 965 wy uopeuseny -
tHe 99 sez'ez—st9't sto'z —oss's essz wea vopaqumeg -
ze on sete sy eres Lee woes Bey PT ATT EY
0 e soz ne see 902 eet a6 muowabeuey seosnosey -
a“ s ose one 106s sae veh 8 sespaues neunbousy -
a t werk ab o's ob suck Ob wopsedsiy =
ez we ose = ze cite L8 902'e 0c s2ass sehedae, -
ee Ges'z ote g9e'kz ak seeoz LL Bupsssccig eusyey -
Lee sot ees'ec 08's beet pol’ secee meat ROY TENTY COURT TOTS

“ae Wetter is S890 Se TS

au uns) [aud da ais is
Ad 96.44 wad
(suoypus uy $)
AdvVAWNS

NOISSINGNS TWNOISSZYONOD 9664 Ad


115

things that we found companies that depended on the telephone to
do their business were routinely implementing right now.

Chairman JOHNSON. Were your calls made before IRS adopted
some of these policies, because they reported today that now they
have adopted some of these policies for this filing season?

Ms. WILLIS. The calls that we made were made during this filing
season. The recommendations that we have made have not been
implemented. IRS has expanded its hours this season to 10, as op-
posed to 24 at the companies that we looked at—on a per day

asis. We would expect that based on the improvements IRS has
made that accessibility should go up over the entire filing season,
and should compare better than last year; but it is still not going
to be enough to close the gap.

Chairman JOHNSON. The key thing is using the equipment that
they have for more hours than they are currently using it.

Ms. Wiuis. Right, and possibly putting more people on the
phone.

Chairman JOHNSON. Last, in terms of the modernization issue,
it is difficult from the general description to determine, in a sense,
the merit of what you are saying versus the merit of what the IRS
is saying. They di give us some very interesting examples of old
processes that they have modernized and in the course of mod-
ernizing it, not only gotten more taxpayers to pay up but also tax-
payers to pay more accurately the amount they owe resulting also
in increased collections.

Now, that does matter a lot. Why is that not worth doing?

Ms. EpwarbDs. The issue, Madam Chairman, is not that that
function is not worth doing; the issue is whether that function rep-
resents a part of TSM, which is the objective of providing informa-
tion on a taxpayer within IRS such that it is the same in’ formation,
such that it is consistent, such that it is available quickly, and get-
ting rid of paper processes for the broad agency operations within

When you look at each of those systems, let us go to ICS, which
is the integrated collection system, the specific system Mr. Westfall
pointed to. The points that he makes are absolutely correct in
terms of what that system does in today’s environment, in the cur-
rent environment. However, it is important to understand that that
system is an automation of the final process in the collection chain,
and the gains that have been identified apply to that very specific
component where the revenue officers are engaged.

But the other more significant point about that system is that it
is a stand-alone system and does not connect to anything else,
which means the information in that system is not available to a
tax assister who is answering a question from a taxpayer calling
in about their account. The essence of TSM must be to provide uni-
form information to anyone within the IRS so that they can re-
spond to taxpayers in a way that is reasonable, accurate, and con-
sistent.

I think if there is one thing we have heard, and I am sure you
have heard as well from your constituencies, is that there are in-
stances when people call into IRS and they might call on several
different occasions.

Mr. JOHNSON of Texas. Madam Chair.


136

10, 1994 hearing on tax return fraud, Block updated our fraud
prevention plan, Because H&R Block shares the IRS' concerns, we
have shared our detailed plan with them and are pleased to see some
of our suggestions have been implemented. Our recommendations
focus on four major points of implementation:

© impose higher standards on Electronic Return Originators;

* produce a cooperative public relations campaign between the
IRS, CID, and Electronic Return Originators;

* require additional process controls by Electronic Return
originators; and

* enhance IRS system checking.
SUGGESTIONS FOR EASIER ADMINISTRATION OF EIC AND FRAUD REDUCTION

As you requested in your letter Representative Johnson, I
would make some specific recommendations to simplify the
administration of Earned Income Tax Credit and to reduce fraud
within that program.

® Accounts (SSNs) for taxpayers whose EIC is delayed but
ultimately paid, either through back end verification by IRS
or acceptance of Form 9598, should be flagged in the IRS
system as "good accounts." Based on this "flag," in future
years the IRS would accept Schedule EIC as filed, thus
eliminating EIc stripping and the requirements to complete
Form 9598 and/or refund delays for these taxpayers.

*® Advance EIC -- guarantee no delays in processing FIC
portion of refund for taxpayers who receive advance payments
of EIC from their employers.

© To avoid refund delays while preventing false claims, the
IRS could require all taxpayers who are claiming EIC, head of
household status, and dependents for the first time to file
applicable documentation with their returns. This could
include (as applicable) a dependency support worksheet, head
of household worksheet, and EIC Questionnaire, as well as
copies of proof documents. The confirming data could then be
entered in the IRS computers. Once a taxpayers gets a "clean
bill of health," he or she should be required only to reaffirm
the personal data (and any changes) on a simple, one-page
declaration form that would be filed with the return each
year.

® Require submission (electronically or in paper format) of
Earned Income Credit Worksheet or revise the EIC Form to
include that information (similar to a form H&R Block designed
and proposed to IRS).

coucnuszoy

I would like to close my remarks by offering H&R Block’s
technical expertise in tax return preparation to the members of the
Subcommittee and Administration. As I have stated, H&R Block is
committed to eliminating tax refund fraud, and is available to
assist you in these efforts. Thank you.


58

taxpayers are not going to be allowed to keep their records
straight?

Ms. RICHARDSON. I can also tell you that that article was erro-
neous. There is—it was filled with significant amounts of erroneous
information. I would be happy——

Mr. JOHNSON of Texas. But somebody in the IRS gave the press
those reports.

Ms. RICHARDSON. Well, I think there is even dispute about how
that was handled, quite frankly, but we are not collecting individ-
ual taxpayer information as they suggested. I can give you the spe-
cifics of what we are doing.

I had long conversations with Senator Pryor, and I know he is
satisfied that we do have concerns about taxpayer's rights of pri-
vacy and the information we collect. I would be delighted to provide
you with precisely what we were doing. The article was inaccurate
in many, many ways——

Mr. JOHNSON of Texas. OK.

Ms. RICHARDSON. Not the least of which is——

[The following was subsequently received:]


112

APPENDIX V APPENDIX V

the prospects that IRS would implement the fiscal year 1995
compliance initiatives.

IRS' fiscal year 1996 budget does not include any funding for new
initiatives or additional funding for the fiscal year 1995
initiatives. It does, however, show an annualization of the 1995
initiative for an additional 546 FTEs. According to IRS
officials, funds that were used for support costs associated with
hiring the new employees in fiscal year 1995, but not needed for
that purpose in fiscal year 1996, will be used instead to "buy"
additional FTEs for 1996.

The fiscal year 1996 budget also requests a change to the
restriction that was imposed in the 1995 appropriation act on the
use of compliance initiative funds. In lieu of the language that
prohibits any transfer of funds from the Tax Law Enforcement
appropriation, IRS is proposing language that would allow funds
to be transferred if IRS obtains the advance approval of the
House and Senate Appropriations Committees. We believe that the
restriction imposed in the fiscal year 1995 appropriations act
should be retained to better ensure that IRS uses the compliance
initiative funds as Congress intended and to protect against
erosion of IRS' enforcement base as occurred in prior years.

IS THE BUDGETED INCREASE FORA FEDERAL
EMPLOYEE PAY RAISE SUFFICIENT?

The President's fiscal year 1996 budget provides for a 2.4
percent federal employee pay raise. For IRS that percentage
increase equates to $92 million. Tt is uncertain whether this
amount will be sufficient to cover an across-the-board pay
increase and locality pay. IRS' fiscal year 1995 budget provided
for a 1.6 percent federal pay raise that was not adequate to
cover locality pay. As a result, according to IRS budget
officials, IRS needed to absorb an additional $50.7 million for
locality pay. If Congress authorizes locality pay for fiscal
year 1996 to the levels outlined in the Federal Employees Pay
Comparability Act, IRS may need to absorb an additional 2.4
percent average pay increase--$92 million more than the amount
provided for in the fiscal year 1996 budget.


October

November

76

1994 (Con't)

National press contacted and News Release (IR-94-100) issued, addressing
ERO changes, SSN‘accuracy and refund delays.

Tax Symposium - Ogden, Utah, brief overview of the Revenue Protection
Strategy, emphasized SSN accuracy and refund delay.

Meeting with Commissioner's Advisory Group (CAG) members discussed
gencral issues on filing season strategies, including potential for wo.
payments and potential refund delays due to additional filters

Under Secretary Noble, testified before the Oversight Subcommittee -
recommended IRS take the time necessary to review refunds before
issuance.

CERCA meeting discussed Revenue Protection Strategy.

Meeting with representatives from the Fraud Service Bureau (FSB) to
discuss Revenue Protection issues.

Press Conference conducted by Treasury Secretary Lloyd Bentsen, Under
Secretary for Enforcement, Ronald K. Noble, and IRS Commissioner
Richardson regarding EITC and DDI.

Calls made to industry stakeholders explaining reasons for climination of
ppl. -

Correspondence mailed to notify EROs of changes and application
procedures.

FTA Board of Trustees Meeting, discussed ELF strategies, emphasis on
DDI and Revenue Protection Strategy, emphasis on SSN validity and
refund delay.

A news release on SSN accuracy and refund delays, developed jointly with
SSA, was distributed to 1300 SSA field offices for local use

Commissioner Richardson met with AICPA, discussed Rey. Proc. 94-63
with emphasis on DDI.

Presentation to Texas Society of Certified Public Accountants
(TSCPA) /IRS Liaison on changes to Rev. Proc, 94-63, and Revenue
Protection Strategy with emphasis on SSN accuracy and refund delays.


PY 1996 BUDGET DECREASES
(1,008 FTE)

Labor Costs

Labor costs are the single largest component
of the IRS budget, representing almost 70
percent of the FY 1996 request. Adjustments
to labor costs for FY 1996 total over $235
million.

LABOR VS. NON-LABOR COSTS

Annualization of FY 1995 Pay Raise

Because the FY 1995 pay raise took effect in
January 1995, the base budget includes only

28

enough resources to fund those pay raises for
three quarters of the year. it will cost the IRS
an additional $32 million to pay the FY 1995
pay raises for a full year in FY 1996,

FY 1996 Pay Raise/One More Day's Pay

The Administration estimates that there will
be a 2.4 percent pay raise effective in January
1996. For three quarters of the year, this pay
raise will cost the IRS $92 million, FY 1996
has 261 workdays, one more than FY 1995,
The Service requires an additional $20 million,
the average daily labor cost.

Benefits

‘The FY 1996 budget includes $11 million for
projected changes for the government's share
of health insurance, retirement, and workers
compensation,

Non-Pay Raise Labor Costs

While the budget process regularly addresses
the labor cost changes discussed above, the
Service also experiences other cost growth
resulting from promotions, step increases, and
upgrades. These costs can be offset if there is
a high turnover in the workforce. However,
the low attrition rates of the last few years
have given the Service a workforce with more
seniority, requiring an additional $79 million
for higher salaries and benefits.

Other Adjustments

The FY 1996 budget includes some non-labor
cost adjustments which modify our ongoing
operations rather than support new or expanded
programs. These are a net reduction of $28
million and 67 FTE.


94

season is over. Those delays affect taxpayers who claim the earned
income credit or who do not use valid Social Security numbers.

We believe that IRS could have done a better job of giving tax-
payers adequate advance notice about the earned income credit re-
funds being delayed, and we think they still need to do a better job
of telling people who have invalid Social Security numbers what
they have to do to resolve that problem.

We also have some of our recommendations in here that deal
with earned income credits, something you asked us to provide be-
cause so many of the refund fraud cases involve the earned income
credit.

The third area of our testimony is with telephone assistance,
which we believe is an important indicator of the service IRS pro-
vides during the tax filing season. This year we tested the access
over a 2-week period. We made more than 1,000 phone calls, and
we reached IRS 156 times.

With that, I will be pleased to answer your questions.

(The prepared statement and attachments follow:]


9

We also have other tax systems modernization projects under
way to increase compliance and reduce taxpayer burden. In addi-
tion to automation and compliance efforts, carefully crafted statu-
tory changes relating to the administration of the tax law can also
dramatically affect the amount of revenue collected by the IRS.

For example, the 1993 tax legislation changed the point of tax-
ation for diesel fuel from the distributor to the terminal and au-
thorized the dyeing of tax-exempt diesel fuel which reduced fraud
and increased dramatically the amount of excise taxes collected.
Through the first three-quarters of calendar year 1994, the tax dol-
lars from taxable diesel fuel sales reported on excise tax returns in-
creased by 34.6 percent over the same period in calendar year
1993, even after adjustment for the recent rate increase. That was
an additional $1.09 billion.

Although some of the increase in sales reported may be attrib-
utable to improved economic conditions, we believe that almost all
of the increase is due to greater compliance achieved by moving the
collection point from the distributor to the terminal rack, from the
dyeing of diesel fuel used for nontaxable purposes, and from great-
er enforcement efforts.

We could increase collection of excise taxes even more with your
help. Diesel fuel fraud, particularly when it involves organized
crime, must be addressed through undercover operations that are
initiated by our criminal investigation activity. As I testified before
this subcommittee last October, undercover fraud operations, par-
ticularly diesel fuel fraud investigations, are expensive and cur-
rently they must be paid for with appropriated funds.

The Department of Treasury supports giving the IRS authority
to use the proceeds of undercover operations to finance them. We
had this so-called “churning” authority at one time but the statute
lapsed and we think it needs to be reinstated. We are currently the
only Federal law enforcement agency without this authority.

Last year with the support of this subcommittee, Congress fund-
ed a 5-year compliance initiative for additional compliance pro-

ams that have afforded us the first opportunity since 1991 to un-

lertake a multiyear effort to collect the revenue that is owed. Over
a 5-year period we estimate conservatively that tax revenue from
this initiative will be $9 to $10 billion. This initiative is focused
heavily toward the collection of delinquent accounts, with special
emphasis on reaching taxpayers quickly by telephone if we have an
indication of a delinquency.

I should add that even with the additional compliance initiative
staffing in 1995, in the fiscal year we are in now, we are operating
with about 3,800 FTE (full-time equivalent) positions fewer than
we had in 1992. So we actually have come down over the years in
staffing.

We have set an ambitious goal to increase overall compliance to
90 percent by the end of 2001, a goal that will provide an addi-
tional $40 billion in tax revenues by 2001 and every year there-
after. With your continued support of the 1995 compliance initia-
tive and tax systems modernization, we are convinced that we can
achieve this goal.

I would like now to turn briefly to this year’s filing season.


December

vi

1994 (Con’t)

Mectings with NATP, NAEA, NSPA - changes to Revenue Procedure 94-63
and filing fraud initiatives discussed SSN accuracy and refund delays
emphasized.

Discussion with H&R Block, requested clarifi
Official signature and suitability checks.

tion on Responsible

Discussion with Bank One on extension of Filing Form 8633.

Fraud Service Board met with Office of Refund Fraud representatives to.
discuss screening criteria for potentially problematic refunds.

SSA and IRS issued an article on SSN accuracy and refund delays in the
‘SSA Courier” which is distributed 10 14,000 organizations,

Sixty second public service radio spot on SSN accuracy and refund delay
provided to over 8,800 radio stations. Through February 20 this spot was
aired 92,910 times, by"I,495 outlets, in 828 markets, and 51

states/ possessions,

Presentation to American Institute of Certified Public Accountants
(AICPA) on changes to Rev, Proc. 9463, and Revenue Protection
Strategy, emphasis on SSN validity and refund delay,

Federation of Tax Administrators (FTA) Commissioner's Liaison Mecting
discussed Revenue Protection and Electronic Filing, emphasis on SSN
accuracy and refund delays and new ERO rules.

Meetings with H&R Block and Bank One.

Instructions for tax packages revised to include SSN accuracy and refund
delay messages.

Statistician from Office of Refund Fraud met with FSB to discuss statistical
data in developing screening criteria.

IRS Executives briefed local Congressional Representatives on Revenue
Protection Strategy.

Tax Counseling for the Elderly sponsoring organizations were provided
brief overview on revenue protection initiatives, emphasis on SSN validity
and refund delays.



83

Chairman JOHNSON. Perhaps you, then, could tell me exactly
when the IRS did inform people of these changes? The Commis-
sioner referred to the tax package that went out to all filers.

Ms. RICHARDSON. No, I am sorry, on the removal of the direct de-
posit indicator, or the decision not to provide it any longer, that
was made in October. I believe it was toward the end of October
of last year by Secretary Bentsen. We can get you the precise date.
That was announced at a press conference and widely publicized
and the public record is quite—there are people that had a direct
interest in it that we actually called and told them that the an-
nouncement was being made, but it was also announced to the pub-
lic by the Secretary at the end of October.

Chairman JOHNSON. At the end of October.

Ms. RICHARDSON. Yes, ma’am.

Chairman JoHNSON. Thank you very much.

Are there other questions from the subcommittee? Yes, sir, Mr.
Johnson from Texas.

Mr. JOHNSON of Texas. Thank you, Madam Chairman. I would
just like to bring up the issue of the overseas assistance and tours
that your department does, which is to some of the more exotic
places in the world.

You answered the question about the Service’s estimate of addi-
tional tax revenues that have been or will be collected by the Fed-
eral Government directly attributable to the program, and you say
there is no data available to estimate the additional tax revenue
attributable to overseas taxpayer assistance.

It would seem to me if we do not know that we are making
money, if we do not have a cost analysis, then we ought to stop the
program.

Ms. RICHARDSON. I would like Mr. Brand to maybe address that
because he has the international operation under his——

Mr. JOHNSON of Texas. Thank you.

Mr. BRAND. Mr. Johnson, I would say this; that we assisted
95,000-plus taxpayers at a cost of $265,000 for travel.

Mr. JOHNSON of Texas. What is the total number of taxpayers in
this country?

Mr. BRAND. Two point two million taxpayers are overseas and
about half of these are, in fact, military taxpayers that we in fact
assist there.

Mr. JOHNSON of Texas. So you saw a very small portion of them,
actually.

Mr. BRAND. One could look at that and say that, yes, 1 million
out of 2.2 million assisted.

Mr. JOHNSON of Texas. You have volunteers in the military and
State Department that help you, do you not?

Mr. BRAND. Part of the purpose for the overseas travel, is, in
fact, to train those volunteers, yes, sir.

Mr. JOHNSON of Texas. It would appear to me in some of the in-
stances that you were spending hours, 1 or 2 or 3 hours, with very
few people, in some cases. Others you had more there, I would
agree.

Mr. BRAND. That is one of the things that you do on an annual
basis, is you do probe and look to where there is in fact demand


5

is not only relevant to the IRS’ efforts to curb this fraud but also
to decisions that we might make in coming weeks.

The action to delay refunds for 16 percent of the tax returns,
that is one out of every six returns, has created some problems and
we will get into those problems today.

Commissioner, with you and later in the hearing with those af-
fected by them, we hope to understand the problems that have
been created by your antifraud efforts and look at whether there
are any ways that we could alleviate some of those problems as
well as understand fully the rationale for your actions.

I welcome you, Commissioner Richardson. It is a pleasure to
have you and your staff before us, and I yield to my colleague, Mr.
Matsui, the ranking member of this subcommittee, for an opening
statement.

Mr. Matsul!. Thank you very much, Madam Chairwoman.

I want to endorse the statements that you made in your opening
comments. I would like to just make a couple observations, some
are redundant from what you have indicated.

The IRS is asking for a budget increase of $739 million from the
last fiscal year, and that would include a 922-person increase in
employment. I think, as you said, however, that whenever the IRS
seeks additional funds, it is usually to increase collections, and so
certainly we will support an effort such as that.

In addition, we have the tax systems modernization program
that the Commissioner has been pursuing for several years. This
is something that I support. One issue I think that we need to re-
solve, however, is just what kind of savings we will see out of this.
The service says approximately $9 billion will be achieved over a
period of 5 years, and the GAO (General Accounting Office), who
we will be hearing from today, has indicated that they are not able
to make that determination. We need to find out about what we
will actually save.

Of course the third area, I think, is the area of fraud. I think the
earned income tax credit and others have created some problems,
and I think the Service is attempting to deal with those.

With that, I would also like to tell the Commissioner that we
look forward to hearing her testimony and of course working with
her throughout this tax filing period and throughout the year.
Thank you.

Chairman JoHNSON. Do other members of the subcommittee wish
to make opening statements?

Commissioner.

STATEMENT OF HON. MARGARET MILNER RICHARDSON, COM-
MISSIONER, INTERNAL REVENUE SERVICE, ACCOMPANIED
BY MIKE DOLAN, DEPUTY COMMISSIONER; LARRY
WESTFALL, MODERNIZATION EXECUTIVE; PHIL BRAND,
CHIEF COMPLIANCE OFFICER; BOB WENZEL, CHIEF
STRATEGIC PLANNING AND COMMUNICATIONS; AND JUDY
VAN ALFEN, CHIEF TAXPAYER SERVICE

Ms. RICHARDSON. Thank you, Madam Chairwoman, and other
distinguished members of this subcommittee.

I would like to introduce the people who are with me today. Mike
Dolan, who is the Deputy Commissioner is on my right, your left;


111

APPENDIX V APPENDIX V

OTHER ISSUES RELATED TO IRS' FISCAL YEAR 1996 BUDGET REQUEST

Beyond those issues discussed already, the most significant
questions surrounding the fiscal year 1996 budget request are (1)
will IRS receive the expected amount of installment agreement
user fees? (2) will IRS successfully implement the fiscal year
1995 compliance initiatives? and (3) is the budgeted increase for
a federal employee pay raise sufficient?

WILL IRS RECEIVE THE EXPECTED AMOUNT
OF INSTALLMENT AGREEMENT USER FEES?

IRS' operating plan for fiscal year 1995 and its budget for
fiscal year 1996 both assume the receipt of $92 million from new
installment agreement user fees. Installment agreements allow
taxpayers to pay their tax liabilities on an agreed-upon schedule
with IRS.

IRS' fiscal year 1995 budget request proposed two new user fees--
one for providing a direct deposit indicator associated with the
electronic filing program and another for setting up installment
agreements. The proposed direct deposit indicator fee became
moot when the Department of the Treasury announced in October
1994 that it would no longer provide that indicator. IRS expects
to start charging for installment agreements in early to mid~
March 1995. The fee is to be $43 for each new installment
agreement and $24 for restructured agreements.

In our report on IRS' fiscal year 1995 budget request, we said
that it is impossible to predict how taxpayers will react to a
fee for installment agreements.” For example, some taxpayers
may be encouraged to pay their entire tax liability to forego
incurring the fee. Others may be discouraged from entering into
these agreements because of their cost. According to IRS
officials, the $92 million estimate is based on an assumption
that IRS will receive about 2 million new installment agreements
and 90,000 restructured agreements.

1RS' fiscal year 1995 appropriation act (P.L. 103-329) provided
that the Secretary of the Treasury could spend user fee receipts
to supplement appropriations made to IRS. Accordingly, IRS*
fiscal year 1995 appropriation and fiscal year 1996 budget
reflect lower amounts for tax return processing and taxpayer
assistance than would have otherwise been the case if there were
no user fee provision. If the demand for installment agreements
falls short of what IRS expects in 1995 and/or 1996, activities
that are included in IRS' appropriation for returns’ processing
and taxpayer assistance would be underfunded.

WILL IRS SUCCESSFULLY IMPLEMENT THE
FISCAL YEAR 1995 COMPLIANCE INITIATIVES?

In every year but 1 from 1990 through 1994, Congress has funded
compliance initiatives to provide IRS with additional staff with
the intent of increasing compliance and producing more revenue.
Yet, IRS' compliance staffing declined in that period. For
fiscal year 1995, Congress provided IRS with $405 million for
more compliance initiatives and restricted IRS' ability to use
the compliance funds for other purposes. The fiscal year 1995
appropriation act also said that no funds could be transferred
from IRS* Tax Law Enforcement appropriation. These restrictions
were imposed because IRS had not fully implemented past
initiatives and had used initiative funds to cover budget
shortfalls in base operations. In recent testimony before the
House Appropriations Subcommittee on Treasury, Postal Service,
and General Government, we said that these restrictions increased

“rax Administration: Analysis of IRS' Budget Request for Fiscal
Year 1995 (GAO/GGD-94-129, Apr. 20, 1994).



81

Chairman JOHNSON. In the same vein, when did you highlight
the bifurcation of the return in the refundable area?

Ms. RICHARDSON. I will get you that specific information.

Again, that——

Chairman JoHNSON. When you notified people and the tax pre-
parers and what kind of advanced notice they actually got.

Ms. RICHARDSON. That specific issue is the subject of a pending
lawsuit right now.

{The following was subsequently received:]

Although the potential for two payments was discussed at a meeting with the
Commissioner's advisory group in September 1994, information about split refunds
was first discussed in a more public forum in the Commissioner's press conference
to kickoff the filing season on December 28, 1994. Questions and Answers, includii
information about issuance of a paper check for the second portion of the refun
were placed on the Electronic Filing Bulletin Board in conjunction with the press
conference. (See our previous submission for the chronology of activities.)

Chairman JOHNSON. On a more general plane, going back to your
predecessor’s letter, which I did not pursue because I thought we
would focus first on tax modernization systems, but Commissioner
Peterson’s letter did go on to very specifically say that in 1994 they
would eliminate the DDI (direct deposit indicator).

Now the DDI does seem to be a real culprit in encouraging fraud-
ulent returns and payment of returns in a way and at a pace that
makes it very hard for us to retrieve the dollars if they are mistak-
enly paid.

I understand that your bifurcated system is responding to this,
but why did you not just implement the recommendation that had
been developed in the IRS to eliminate the DDI, which probably
would have solved the problems rather more directly and with less
complexity than the bifurcated return?

Ms. RICHARDSON. We did, and last October Secretary Bentsen
announced that we would no longer be issuing the direct deposit
indicator, and we are not doing that for this filing season.

Chairman JOHNSON. But you did do it for the 1995 filing season.
I must have not expressed myself clearly. The original rec-
ommendation was for the 1994 filing season. Why was it delayed

ear?
s. RICHARDSON. I was actually—I did not make that——

Chairman JOHNSON. If it is a transition thing, you may want to
yield to one of your—

Ms. RICHARDSON. I did not make that decision at the time, but
what we really wanted to do was get an opportunity to look at, as
we testified here last year, to take a very principled approach to
looking at the fraud, to trying to define what it is before we made
any decisions.

thairman JOHNSON. I agree with that. I do think this is an im-
portant point. Because clearly the IRS had determined that there
was a real explosion in fraud going on, and that eliminating the
DDI would help. I am concerned why that decision was delayed a
year and any light you can shed on that would be very useful for
us. Because, of course, millions of dollars went out that we will
never recoup because the decision was delayed a year.

Mr. DoLAN. Madam Chairman, one of the perspectives I might
add is that I participated over a series of about 3 years in a num-
ber of discussions both—basically across the constituency base of


107

APPENDIX IIT APPENDIX TIT

We addressed this problem in a March 1993 report, in which we
analyzed four alternatives to simplify the laws on dependent
exemptions, including two that would change the support test.*
On the basis of our analysis, we recommended that Congress
consider enacting legislation that would substitute a residency
test similar to that used in the EIC program for the dependent
support test when the dependent lives with the taxpayer.

Persons eligible to receive the EIC can choose to receive it in a
lump sum payment after filing a tax return or in advance as part
of their paycheck. In February 1992, we reported that less than
1 percent of BIC recipients in 1989 took advantage of that second
option.’ Although use of the advance payment option would help
taxpayers benefit from the credit sooner, it could also create
problems for IRS if persons receiving the advance payment later
filed a tax return but did not report that they had received the
credit in advance. Under IRS' returns processing procedures in
place at the time we did our review, those persons could receive
the credit again as a lump sum payment. We recommended that IRS
take various steps to (1) better ensure that eligible taxpayers
are aware of the advance payment option and (2) prevent those who
take advantage of that option from receiving the credit a second
time. When last we checked, IRS had taken steps to better
publicize the availability of the advance payment option but had
not revised its procedures to protect against duplicate payment
of the EIC.

With respect to fraud on electronically filed returns, we
recommended in December 1992 that IRS work toward electronically
matching employer wage information with electronic return

data. That kind of match is currently beyond IRS*

capabilities. Currently, employer wage information other than
that provided by taxpayers is not available to IRS until after it
has processed taxpayers’ returns. This is because of the time it
takes to verify the information and correct any errors." IRS
has begun to test the possibility of getting partial year's wage
information from the states and using that to verify that the
taxpayer is employed and to have some information on the
taxpayer's amount of earned income.

‘Tax Administratign: Erroneous Dependent and Filing status
Claims (GAO/GGD-93-60, Mar. 19, 1993).

°garned Income Tax Credit: Advance Payment Option Is Not Widely
Known or Understood by the Public (GAO/GGD-92-26, Feb. 19, 1992).

‘Tax Administration: IRS Can Improve Controls Over Electronic
Filing Fraud (GAO/GGD-93-27, Dec. 30, 1992).

Under the Electronic Management System--one of many planned
components of TSM--IRS expects to electronically receive tax
returns, tax information documents (like W-2s), and
correspondence. Electronic transmission of W-2s would enable IRS
to more quickly verify and correct the information, thus offering
the possibility of having that information available to match
with data being reported on electronic returns.


92

Chairman JOHNSON. Mr. Portman from Ohio.

Mr. PoRTMAN. Just very briefly, Madam Chairman. I appreciate
your acknowledgi: ng me. I had a good meeting with the Commis-
sioner last week. Sorry I was unavoidably detained ihis morning.
I looked over your testimony briefly. I know you addressed the die-
sel gas and excise tax issue in your testimony. I would ask on the
record that we work on that issue with regard to the refunds.

Ms. RICHARDSON. Right.

Mr. PorTMAN. I told you I had some specific evidence the refunds
were not being applied back in a timely fashion. I will get that spe-
cific information to you.

Second, just on the tax modernization system, I know you have
already had an opportunity to talk about TSM. My only question
would be whether it might make sense for us to see a list of the
top complaints that the Service gets and that we get from our con-
stituents constantly and then match those with the various TSM
projects. This would be a project that I would be happy to work
with you on. I could provide you with the complaints; you can pro-
vide me with the TSM projects that could address them.

Honestly, I think all of us on this panel do get complaints con-
stantly regarding specific matters, and it might be interesting to
see where the various TSM projects line up with the complaints
and whether they are in fact addressing them, and I would be
pleased to work with you on that.

Ms. RICHARDSON. We would like to work with you on that, too,
and we will follow up with you.

Mr. PoRTMAN. Thank you.

Chairman JOHNSON. Thank you, Mr. Portman.

Ms. RICHARDSON. Thank you, Madam Chair.

Chairman JOHNSON. Thank you, Commissioner.

As the first panel leaves the witness stand, let me call the second
panel.

Jennie Stathis, the director of tax policy and administration is-
sues of the GAO; Lynda Willis, associate director; Hazel Edwards,
also of the GAO.

As the panel sits down, let me announce that we will have to
begin abiding by the 5-minute rule, both panelists and members.
We will begin using the lights.

Welcome, Ms. Stathis.

STATEMENT OF JENNIE S. STATHIS, DIRECTOR, TAX POLICY
AND ADMINISTRATION ISSUES, U.S. GENERAL ACCOUNTING
OFFICE; ACCOMPANIED BY LYNDA WILLIS, ASSOCIATE
DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES;
HAZEL E. EDWARDS, DIRECTOR, INFORMATION RESOURCES
MANAGEMENT/GENERAL GOVERNMENT ISSUES

Ms. StaTuis. Thank you, Madam Chairman.

Chairman JOHNSON. Please proceed with your testimony and
then we will move with questions, and I hope with a little more
dispatch than we have to this point today.

Ms. Sratuis. Thank you.

We are pleased to be here this morning to participate in your
hearing, and as you have introduced them, on my right is Lynda


60

Mr. JOHNSON of Texas. You don’t like the GAO, and you don’t
like the press. Do you like anybody in Federal Government?

Thank you. I appreciate the responses.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you.

Mr. Zimmer will inquire.

Mr. ZIMMER. Thank you.

Mr. Westfall and Commissioner Richardson, as I walked by the
Congressional Federal Credit Union on my way over here I saw
their newsletter, and the headline says, get your tax refund weeks
faster, and in the fine print it says up to 5 weeks faster if you file
electronically.

My question is, if you are eligible for earned income tax credit,
is that an accurate promise this year?

Ms. RICHARDSON. Yes, it is, if you are eligible for the earned in-
come tax credit. If you are not, it is not accurate. We have been
very concerned, as has this subcommittee in prior years, about peo-
ple claiming a credit who are not eligible. There has been some
fraud, and we have stepped up our efforts this year to police the
whole refund program.

The vast majority of the people are getting their refunds in a
timely fashion or timely in the sense of the customer service stand-
ards that we published. Only if people have questionable—or we
have reason to question a refund or a credit claim are we holding
it up.

Mr. ZIMMER. So what percentage of those EITC returns are being
held up more than they were last year?

Ms. RICHARDSON. Mr. Zimmer—as of this morning we didn’t have
that information. I will be able to provide it to you, I think, in
about another week.

(The following was subsequently received:]

Because the tax filing season is coming to a close, IRS does not yet have a final

report on the number of EITC refunds delayed, but we will be happy to provide that
report as soon as it is available.

Mr. ZIMMER. Is it a larger percentage? Because we understand
from our constituents that it has gone up considerably.

Ms. RICHARDSON. It has certainly gone up over last year. As I
said in my opening statement, I regret that there are people who
are legitimately entitled to refunds and to the credit who are being
caught in the initial screens and filters. But we have been very
concerned about promoting integrity in this system and wanting to
make sure that people who are eligible do get the credit and people
who aren’t don’t.

One of the things that we have also encouraged is the advanced
earned income tax credit which people can get throughout the year
in their paychecks and wouldn’t have to wait until they file their
return to get at least the majority of the credit.

Mr. ZIMMER. At the end of your testimony, you said that you
would appreciate it if we in Congress gave you some advance notice
as to when we were going to change the Tax Code because of the
impact it has on administration by the IRS. I certainly understand
that.

Ms. RICHARDSON. We would certainly like to work with you.


56

Mr. WESTFALL. We estimate, approximately, an additional 12,000
FTE over the term of implementing TSM that will be capable of
being given up as backroom jobs—a lot of clerical positions, paper
handling positions, control positions that can be—for which we will
have a choice. The choice that you will have is either to remove
those positions from our funding base or to authorize us to reallo-
cate those positions into compliance jobs at a 5-to-1 or greater reve-
nue generating capability.

One of the things we get out of TSM is a lot of new compliance
opportunities that are generated by the additional information abil-
ity to analyze the information and, in the end, potentially apply
some resources to work that particular compliance agenda.

Mr. RamstaD. Well, I appreciate your responses, and I certainly
hope that the thrust is to reduce the Federal work force. I under-
stand you have a difficult job and certainly as many critics as we
do in on ess. IRS isn’t everyone’s favorite agency—I know that—
but, nonetheless, I think all of us have to be very diligent in trying
to cut expenditures as we are downsizing government. We need to
do what the private sector has done for a long time.

I think it is clear the American people want us to reduce the size
and scope of the Federal Government. It seems to me that, at least
based on our visit and what you are saying now, that you are get-
ting that message like all of us, hopefully, are getting that mes-
sage; and we will continue to work toward that end.

Ms. RICHARDSON. Not only are we getting it, I think we got it at
least several years ago.

In my testimony, I mention the fact that we are actually reduc-
ing the number. We now have 10 service centers. We are moving
to five submission processing centers. So there will only be five cen-
ters out there where people will be filing their returns. We will
have 3 computing centers instead of 12—10 service centers and 2
computer sites.

'e are moving about a thousand employees out of our head-
quarters operation. I think over 500 are out now. By the end of the
year, another 500 will be out on the front lines. The same with our
tegional structure.

‘e are in the process of looking at our district office and regional
office missions and operations, and we will be making some rec-
ommendations later this spring about how we want to have those
structured.

So we are acutely aware of the importance of using our resources
wisely. We understand the importance of streamlining.

But what modernization has allowed us to do is to really
reengineer the way we do our business. To be able to reengineer
our business without having the technology to go along with it
would really not, I think, be the prudent thing to do in terms of
the tax administration system. The two do go hand in hand.

Mr. RaMsTAD. Thank you, Madam Chair.

Chairman JOHNSON. Mr. Johnson of Texas.

Mr. JOHNSON of Texas. I didn’t mind yielding to my friend from
north Texas.

I would like to ask a couple of questions. First, it seems to me
that maybe we are reinventing the wheel taking so long—to the
year 2008—to get this job done.


18

ORGANIZATIONAL CHANGE

In making our tax administration system as effective and
efficient as possible, we understand that it is not enough to
modernize our information systems and business systens without
updating the organization’s 40-year old structure. A structural
change is essential to capitalize on the modern technology and
the way we want to do business. In 1993 and 1994, we
restructured our Headquarters and Regional Office organizations,
and redesigned our methods of supporting compliance and customer
service operations. This reorganization has reduced layers of
supervision, increased management spans of control, reduced
overhead, consolidated support operations (personnel, automation
support, training, facilities support), and focused line
executives on improving compliance and’service to taxpayers.

These efforts are part of our Business Vision --
consolidating functions that were previously dispersed and making
the optimum use of technology. We are beginning to consolidate
the returns processing operations now done in ten Service Centers
into five Submission Processing Centers, and to consolidate the
44 geographic locations where we had 70 phone and correspondence
operations into 23 Customer Service Centers. We will be
operating with three computing centers responsible for
centralized mainframe computing instead of twelve, and we are
very close to finalizing recommendations about the number and
primary functions of our district offices. The combination of
organizational streamlining, business change and state-of-the-art
technology will move us from a paper-based, labor intensive
system to an electronic filing and payment system

COMPLIANCE

In addition to our financial services and processing lines
of business, the IRS is also charged with enforcing the law --
both civil and criminal -- and collecting taxes that are not
voluntarily paid. Although it is only one part of our business,
our compliance function is probably the best known part of what
the IRS does.

Our research estimates that about 83 percent of taxes due
are paid voluntarily. Another 3.5 percent (for a total of 86.5
percent) is collected annually through compliance and enforcement
efforts. In FY 1994, total enforcement revenue collected by the
IRS was $33.7 billion, of which $23.5 billion was a direct result
of the IRS collection organization. Total revenue collected last
year was more than four times as much as the entire IRS budget
And while compliance is not directly responsible for the
generation of revenue which is voluntarily paid, examinations,
collection actions and criminal investigations are, and always
will be, essential to demonstrate to those who do comply with the
tax law that those who do not comply will be caught

As part of our efforts in FY 1994 we:

- Increased the number of examinations of foreign
controlled corporations and proposed over $8 billion in
adjustments, thus making sure that income is taxed in
the proper jurisdictions;

- Initiated over 5,340 criminal investigations and
recommended prosecution in over 3,740. These
investigations covered motor fuel’excise taxes, failure
to file income tax returns, money laundering,
bankruptcy, and other financial crimes;

- Examined 1.4 million income, employment and excise tax
returns, proposed additional tax and penalties of $24.4
billion, and disallowed $3.3 billion in claims against
the Treasury;


aT

wn of ARDI ics

In 1990, Congress extended the time the IRS is required to keep accounts
receivable on the books from 6 to 10 years. Thus, unlike businesses in the private
sector, IRS accounts receivable cannot be written off even if they are not collectible.
This change alone increased IRS accounts receivable by 20%. The Accounts
Receivable Inventory carried by the IRS is not a reflection of an annual underpayment
of taxes, but includes current receivables, plus a ten year carryover of unpaid taxes,
along with accrued interest and penalties.

At the end of FY 94, IRS gross receivables equalled $156 billion, of which 30%
or $46.8 billion reflected accrued interest and penalties. At the end of FY 90, gross
receivables were $87 billion. The IRS gross receivables, like the receivables of a
private business, are divided into two components: (1) currently not collectible; and
(2) active accounts receivable. An analysis of these two categories as of the end of
FY 94 reflects:

@ Currently Not Collectible (CNC) - $76.5 lion is currently not
collectible; 38.3% ($29.3 billion) of this amount is comprised of accrued
penalties and interest. Over 86% ($65.79 billion) of the CNC inventory
is not collectible due to defunct (no asset) corporations; bankruptcy
(after adjudication by the bankruptcy court); hardships; or the taxpayer
did not respond to contacts or could not be located.

# =~ Active Accounts Receivable - $79.5 billion is potentially collectible. Of

this amount:

* 20.7% ($16.46 billion) is comprised of accrued penalties and
interest;

* 18% ($14.5 billion) are lower value cases that will be collected
through systemic monitoring;

* 18.4% ($14.63 billion) of the inventory is inactive, either awaiting
adjudication by @ court of acceptance of an offer in compromise;

. 13.6% ($10.81 billion) are reported by notices;

* 42% ($33.4 billion), the largest portion of the active account has

been assigned for enforcement action.

In FY 94 alone, the IRS collected $1.2 trillion in net tax receipts. Also in FY
94, the active accounts receivable increased 7% ($5.1 billion), the smaliest growth
in active accounts receivable in 4 years.


51

We disagree. We think we can’t afford not to spend that money.
We think that it is directly pertinent to where we want our collect-
ibility to go for the future and is an appropriate transition step to
take.

To get to the nub of the issue. I think it is a question of are you
building the ultimate system or are you spending money
transitioning your current system over time to where you want to

go.

I believe GAO would have us go more to build a fully integrated
system and dedicate and build resources. We agree we have to en-
gage those resources and deliver that integrated solution. But, in

loing it, we also believe that we have to improve operations today,
especially with systems that are proven and already developed, and
that we can make those systems consistent with the future.

For instance, these systems that we are putting online today, we
are attempting to use hardware and, where possible, the standard
approaches that will make that system as consistent with our ulti-
mate vision as we can. We might have to throw the software away,
but where we can, we want to at least be able to work the
workstation in the longer term environment as we change.

Mr. LEVIN. I want to ask one other question, and I think we are
now anxious to talk to the GAO. Unfortunately, we have these pan-
els and you don’t get people talking to each other who disagree. So
let me just ask you, because we have such a stake in this, I think
if any system needs to be automated it is the tax filing system,
right? I mean, there has to be more paper going through there than
even here.

Now, do you talk to experts? I mean, are you—this disagreement
about short term, long term, are you doing this of your own notions
or are you consulting wise people outside? How are we supposed to
sit in here and have any idea of who is right? We haven’t heard
from GAO yet, but what are we supposed—there is a lot at stake
here. So you talk to people before you do these things?

Ms. RICHARDSON. We most definitely do. I wanted to mention
that Mr. Bowsher, the Comptroller General, and I will be meeting
some time this week to really talk about what the facts are, what
our differences are, if any, and where we can go about reaching
common ground so we can move on with this together.

We very much appreciate the oversight role of the General Ac-
counting Office, and I think it is important that we have oversight.
I have enga ed the National Research Council to help us. That is
part of the National Academy of Science, National Academy of En-
gineering. We have a number of people from the private sector who
sit gratis on a panel to help us with this. As Mr. Westfall testified,
we are using a number of outside contractors as well.

I think it is important that we all do work together to accomplish
this goal because good tax administration is vital to this country.
It has nothing to do with political issues or anything else. It is ter-
ribly important that we work together.

So our staffs actually met last week primarily to talk about some
of the issues. We are going to be talking about what we can do. I
think it is only fair that we keep you apprised of where we are be-
cause, obviously, you all do not have the time to get into these mat-
ters as deeply as we do, and I don’t have as much time as Mr.


February

80

1995 (Con’t)

Commissioner's letter to Industry providing background on Revenue
Protection Strategyand delay of refund.

Commissioner's letter to Members of Congress providing background on
Revenue Protection Strategy.

Communication audiovisual products addressing overall accuracy, correct
SSN ‘and refund delay message include:

+ PBS Tax Clinic aired February 5th on 176 PBS stations; 116 other PBS
stations, numerous cable stations and Armed Forces Television are
scheduled to air it later. The February 5th airing resulted in over 35,000
calls to the Taxpayer Service Toll Free area.

Public Service Announcements have been distributed to over 8,800
radio stations and 2,400 television stations.

+ Videoguide to Taxes - approximately 5,000 have been distributed to
libraries, 2,500 copies to video outlets, such as Blockbuster, and 2,600
copies to IRS field Public Affairs Officers and Taxpayer Education
Coordinators for local use. GEMSTAR Development Corp. also made it
available to VCR Plus users in three regional markets and several smalier
markets.

Chief Compliance Officer interviewed by Associated Press and
Washington Post reporters about the Revenue Protection Strategy. News
Release IR 95-16 issued, urging accuracy to avoid delays and addressing
the potential for split refund payments on returns claiming tax credits.
The news release was distributed to 43 representatives from general print
media, technical tax press, electronic media, financial press and
professional associations. The news release and Qi&As, which addressed
the split refund and second payment by check, were also made available
on the ELF Bulletin Board and the Public Affairs Bulletin Board.

Subcommittee on Oversight, Committee on Ways and Means Hearing,
"The 1995 Filing Season and IRS's FY 1995 Budget Request’.


142

returns and those claiming a refund based on the Earned Income Credit. ‘These individuals
have come to count on the Rapid Refunds promised to them over the last five years. The
IRS created a demand for the product, and has now cut off the availability of that product,

One possible intermediate solution would be to process in an expeditious manner those
returns where the taxpayer’s are using the same name, address and social security number as
on previous returns, where the taxpayer has @ history of claiming the Earned Income Credit,
has the same employer and has a history of receiving refunds. Thus, only those returns that
showed a variation from the normal and customary pattern of filing or were claiming the
Earned Income Tax Credit or other refunds for the first time would be selected for greater
scrutiny. This would allow the IRS to process refunds to many taxpayers quickly, fulfilling
the promise of the Electronic Filing Program while maintaining safeguards against
questionable claims.

Another suggestion would be that since several reports show a significantly lower incidence
of fraud and negligence among licensed tax professionals, electronic filing originator status
should be limited to those practitioners already licensed and supervised by the IRS.

Another alternative would be to require that Electronic Filing Originators, not covered by
Circular 230, post a bond as well as be licensed by the IRS.

‘The effect of this slow down in processing returns has had a dramatic effect on the tax filing
system. A recent report states that electronically filed return usage is down 25%-30%. A
recent article in the Wall Suet Jounal reports that rejected return frequency is up 25%.
This is occurring even though many of the returns contain information similar to last year
and were filed electronically in previous years and accepted.

We do not believe that there is one easy solution to the problem of refund fraud, especially
With the age of electronic filing. However, a combination of the above suggestions should
serve to stem the hemorrhage of fraudulent refunds that have been issued during the last
several years as well as speed the processing and issuance of refunds to those taxpayers most
in need.

NAEA supports all efforts to identify and eliminate fraud in the tax filing system. We
believe that the tax professional community is the first line of defense in return preparation
fraud detection. We are ready io offer our members’ support in this effort. Again, the
members of NAEA thank you for this opportunity to testify on this important issue. We
offer our assistance to provide any additional information raised by these comments or other
areas of concern

REGULATION AND REGISTRATION OF COMMERCIAL TAX RETURN PREPARERS
JANUARY 18, 1995 COMMISSIONER'S ADVISORY GROUP MEETING

In 1989, the Commissioner's Advisory Group studied the
matter of regulating and registering commercial tax return
preparers. At the time, the reasons for considering this matter
included the following:

1. Any person, regardless of training or experience, may
prepare income tax returns for a fee.

2. Commercial tax return preparers generally are not
required to subscribe to any rules of professional
conduct or professional responsibility.

3. ‘The complexities of the tax laws are such that doubts
are raised relative to the overall competence of
commercial tax return preparers.

All of these concerns are still valid. In addition, the
February 1994 hearings on the IRS Refund Fraud Strategy, held by
the Subcommittee on Oversight of the House Ways and Means
Committee, indicate a strong need to address the competence and
integrity of the commercial tax return preparer community. In
fact, close examination of the testimony provided at these
hearings reveals support for the regulation and registration
concept.


135

returns are having the EITC portion of their refund held for an
additional period of time. This affects millions of taxpayers who
qualify for, and depend on, this credit. only after the IRS
examines and’ verifies the Farned Incone Tax Credit claim will they
forward the refund to each taxpayer in one of four ways. The IRS
will: 1) issue a refund, less the Earned Income Tax Credit amount,
right away; 2) delay a refund for up to 8 weeks while they review
it; 3) send a questionnaire to be filled out and returned by the
taxpayer before issuing a refund; or 4) issue a refund without
delay.

As a result of Treasury's decision to eliminate the direct
deposit indicator, banks have been forced to increase their Refund
Anticipation Loan prices, as well as their credit criteria which
has angered many more taxpayers. As with other procedural changes
made by IRS this tax year, while the intent of reducing fraud is
commendable, the late announcement of such a significant change has
caused significant financial hardship for taxpayers who are least
able to afford it. This year the fees for RALs depend on the
refund size, and on average the amount has doubled and range from
a minimum of $29 to a maximum of $89. When the bank denies a RAL
request, Block will waive its electronic filing fee of $25 for a
Block-prepared return and $35 for a non-Block prepared return. In
its place a service fee of $5 and $10, respectively will be
charged.

EFFORTS TO FIGHT ELECTRONIC FILING FRAUD

Prior to tax season 1993, H&R Block established our own fraud
prevention plan targeted at electronically filed returns. During
the 1995 season, Block continues to be diligent in its efforts to
maintain the following action plan to prevent the filing of
fraudulent tax returns.

® Because so many fraudulent returns include first time
Earned Income Credit (EIC) claims, Block does not allow banks
making Refund Anticipation Loans (RALs) to Block clients to do
so for any taxpayer who is eligible for EIC but did not file
a tax return the previous year.

¢ Block subjects all W-2s to a stringent review process. All
electronically filed returns containing a non-standard
(substitute, handwritten, typewritten, or altered) W-2s are
carefully reviewed before the returns is transmitted to the
IRS. The FICA and Medicare withholding amounts are verified
for accuracy. When it is suspected that a W-2 is fraudulent,
Block verifies the taxpayer's employment with the employer
listed on the suspect W-2. If employment cannot be verified,
Block notifies the taxpayer that Block will not electronically
file the return.

© Block does not allow banks making RALs to do so for any
taxpayer whose only income is from Schedule Cc.

* Block compares the amount of income tax withholding on each
Form W-2 with gross wages to determine whether the withholding
amount is "reasonable" for the amount of wages.

* If Block detects or suspects fraud on any return, it sends
a letter to the taxpayer explaining that the return contains
discrepancies that must be cleared up before the return can be
electronically filed. If the taxpayer does not respond
satisfactory to the request for additional information, Block
brings the situation in question to the attention of the
criminal Investigation Division of IRS.

RECOMMENDATIONS FOR REFUND FRAUD PREVENTION

After reviewing the results of this Subcommittee's February


13

tions, before the 1994 season even ended, to let them know we
would be taking additional steps this filing season to protect tax
revenues against fraud. We also would be soliciting their assistance
about how to better accomplish this goal in a way that would be
less burdensome to taxpayers.

One subject that I would like to touch briefly on is one we have
worked very hard to promote, and that is claiming the earned in-
come tax credit on an advanced basis. Workers who qualify for the
advanced earned income tax credit can get up to $105 a month in
their paychecks. They can get it whether they are paid weekly, bi-
weekly, monthly or whatever, and they can do it ty filling out a
simple form W-5, the Earned Income Tax Credit Advance Payment.
Certificate, and providing it to their employers.

By claiming the earned income tax credit in advance, eligible tax-
payers can have the use of the additional money throughout the
year. They can also avoid potential delays when they claim the
credit after the yearend. In other words, they do not have to wait
until they file their returns to get that credit.

Turning to modernization, a fully implemented tax systems mod-
ernization program is an integral and necessary part of the IRS’ fu-
ture. For that reason, I understand and all of us at the IRS under-
stand that it is essential that tax systems modernization be effec-
tively managed.

In addition to the progress that we have made toward moderniz-
ing the tax system, the IRS has also made significant improve-
ments in our overall management of TSM. Because of the very
large financial commitment we are asking for TSM, we understand
the need to assure Congress and the American taxpayers that the
IRS can indeed implement this program.

In recent testimony before our House Appropriation Subcommit-
tee, the General Accounting Office expressed three basic concerns
it had about the successful completion of TSM. The first concern
focused on technical and management expertise and skills.

Madam Chairman, we have worked very, very hard to assure
that we not only have the IRS personnel necessary to do that job,
but that we are also including outside experts in the project.

Probably the most important step I have taken as Commissioner
in connection with TSM has been the appointment of Larry
Westfall as the modernization executive. On June 30, 1994, I is-
sued a memorandum throughout the Internal Revenue Service de-
tailing his role in managing TSM. He reports directly to me, and
my memorandum made it very clear that everyone in the IRS re-
ports directly to him in all matters concerning tax systems mod-
ernization. In other words, he is our TSM program manager and
has the responsibility for overseeing every aspect of modernization,
including the use of outside contractors.

About 75 percent of the proposed TSM budget would pay for con-
tractor-provided products and services. Two major support contrac-
tors, the Illinois Institute of Technology and the TRW Corporation,
have worked with us for some time to develop and manage our
TSM effort. We are also relying heavily on oversight and guidance
from the National Research Council and from the General Account-
ing Office.


137

Schedule EIC Earned Income Credit 1994
Sueqy trans on au [Yee Beeia ecurty nama
Yeu cannot take tis ere * yout retumis fer ess nan #Z-ment pens (uness the shor penedia cus ic ne taxpayer scestingr
+ your Sing status ia marred fing a separate mtu: at
+ You arm axcuding any freq azmed come oy tung Form 2555 ¢F 2685.2 wen your rate,
‘You may be agile to take an + yout acjusted gross income (ine 16, Frm 1040A.r ina 31, For 1040! and
samasineame creck # + your eamedincome (ine 7. Form 10408 or ines 7,12, ane 15, £27 1040,
plus any nontaxabieeamedncome fom yout empoyer) are bom les than.
+ $Z3,753if you have one quaitying cnid; oF
{25.2931 you have two or ca quastying ehileren ot
+ $9.000d you have no qualifying chidren,
Te determine whether er not you + Complete Patt i you believe you may have a qualtying chi; or
‘an tahe an somedincome cred + Complete Pan If you know you dont have a quatting chi
Part: Earned Income Gredit For Taxpaygse Witt ‘a Qualifying Child
{Ta Orda cle five with you in the Un at of 1984 (al ef 1994 1 te Chid is a fester chia),
or for the part of the year he or s? 13 bor or died during the year? Yes 0 No CO
ts the child your son, daughter, adept ota ci? (Mare hit must be your
dependent or would be except you gavs ‘porent) Yes O No Oo

¢ Atthe and of 1994 was the child under age 19. 0 a fulktime stidant or
any 290 and permanenty and totally olsabh :

H you answered yes to all parts of question 1,
you do not have @ qualifying chia but, if your int

Yes 2 No O

2 ee yov uthing eho ocr asaya ves © he 3
yan de ot erga at feo, You 2 in
2 hg you and anata tear over na ou sound @ ator eam) a
SavUmE caters oy tna sh yar 0 v0 2
Mya, assur cow nena cured eat mcg pe arg re
targets
4 inyour seated gros name mar man ancien ne) ver © We 2
Mae ea netconite mente wr, Ys eae cn se aS
Spares emai ote ie a to ernee
Saeameg st egiearins aes or,
= 7a
mrs [acon] oon |e
non | eecere)| coe, | BSE
oe Ray Saas | Eee
seowtwewecemen | = [BEE [oaks zs
7
2 i

Part il; Eamed income Credit For Taxpayers With No Qualifying Child

8 Arm you lor your scouse) 9 qualiving Chil of ancihertarpayer?
taxcayers 1994 retun?

7 Ware you a denandant aigitie to be claimed on anctne

ite of the United Staten fer 3 montis of

8 Was your main nome lecated ©. sacag 19947

mend of 19847

9 Ware you lang your apouge if mares unt wan aga 64 at y

I yau anamered yas to sry of ine atove questions, yeu co nat cuatly fer the cad= do nat corelcre
tye reat of a fot Il you answers m0 9 au'91 tna Sobre questons: gs ts har ita few yout See

saga 25 er older

ves C Ne


55

The following table provides additional documentation on the 11,819
cumulative FTE savings from automation achieved through FY 1995:

FY 1996 PRESIDENT’S BUDGET, FEBRUARY 6, 1995
CUMULATIVE PRODUCTIVITY SAVINGS
FY 1992-1995 (FTE)

FY 1992 Py 1993 "FY 1994
HE pat

Regine
‘Sub-total. Current Siem

‘TAX SYSTEMS MODERNIZATION:
ly Integrated Exar. System (TIES) _
‘Corporate Files On Line (CFOL)

ee Auemed amated Systems Envi

‘ollestion System (ICS)
Serv image Proce:
Telephone Rowing Ineractive System (TRIS)
Tnspection Systems Development

Corporate Sy
Sub-total, TSM
‘Total, FTE Savings

For the FY 1996-FY 2000 period, an additional 22,703 FTE of Tax Systems
Modernization savings are projected based on full funding of the FY 1996
President's budget. These savings, which accrue by year, are proposed to be
reinvested in compliance and detection activities made possible by the capabilities
that TSM will provide. Additional revenue in the amount of $2.546 billion can be
generated from this reinvestment for the same time period.



ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
February 15, 1995
No. OV-3

IHNSON ANNOUNCES HEARING ON II -RNAL REVENUE SERVICE
L 9

'S
AND 1995 TAX RETURN FILING SEASON

Congresswoman Nancy L, Johnson (R-CT), Chairman of the Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the Subcommittee will
conduct a hearing on the Internal Revenue Services’s budget proposal for fiscal year 1996 and
the 1995 tax rerum filing season. The hearing will be held on Monday, February 27,
1995, in room B-318 Rayburn House Office Building, beginning at 10:00 a.m.

This hearing will feature invited witnesses only. In view of the limited time available
to hear witnesses, the Subcommittee will not be able to accommodate requests to testify other
than from those who are invited. Those persons and organizations not scheduled for an oral
appearance are welcome to submit written statements for the record of the hearing.

BACKGROU!

The fiscal year 1996 budget request for the Internat Revenue Service totals $8.2 billion
and will support the activities of almost 115.000 employees. These resources will support the
IRS's operations in collecting nearly $1.3 trillion in revenue and in administering the federal
tax laws. The $8.2 billion budget request includes $830 million to process the tax returns
which taxpayers will file in 1996; $1.6 billion to examine tax returns, $909 million for
collection activities; and $1.9 billion for information systems.

The 1995 tax retum filing season refers to the period of time between January and
April ISth when American taxpayers are expected to file 116 million tax returns.
Approximately 82 million taxpayers are expected to receive an average refund of over $1,100
in 1995.

The Subcommittee on Oversight held two hearings last year on the subject of income
tax refund fraud. The Subcommittee learned that criminals were @xploiting the tax system to
receive fraudulent refund payments from the IRS. Two factors appear to have fueled a rapid
expansion of refund fraud schemes. First, the refundable nature of some tax credits, such as
the eared income tax credit (EITC). make them particularly susceptible to refund fraud.
‘The U.S. General Accounting Office has said that the EITC is a factor in over 90 percent of
fraudulent refund claims. Second. the advent of the electronic filing of tax retums has led
some tax rewurn preparers and banks to provide what are generally called "refund anticipation
loans" (RALs) to taxpayers who file electronically. With RALs, banks lend money to a
taxpayer based on his or her anticipated tax refund and not on the credit worthiness of the
person a&® borrower. Criminals sometimes can exploit the rapid tumn-around time of 2 RAL
to receive a refund before the IRS can complete its cross-checks and identify a fraudulent
refund claim. At an October 6, 1994, Subcommittee hearing, Ronald K. Noble, the Under
Secretary for Enforcement at the Department of the Treasury, testified that the refund
fraud problem could be as high as $5 billion

‘The Adminstration has taken several steps to curb income tax refund fraud during the
1995 filing season.


163

1 would like to thank the Chairman and the members of this Subcommittee for the opportunity to
‘express our views. We are Universal Tax Systems, Inc., a developer of tax preparation software
and a third-party transmitter of electronic returns. Last year our software was used to transmit
well over one million tax returns electronically to the IRS and 30 state revenue departments. Our
software was also used at hundreds of IRS VITA sites, district offices, service centers, and
military installations here and abroad. We also file electronically for home users of tax software
packages designed for individuals who do not use a preparer. We are in our second year of
involvement in the IRS File-from-Home initiative. Our president, Steve Safigan, serves as the
Vice-President, Infrastructure for the Council for Electronic Revenue Communication
‘Advancement (CERCA) and is an active member of the Electronic Filing Committee of the
National Association of Computerized Tax Processors (NACTP).

We wish to express alarm at some of the statements made by Deputy Commissioner Michael
Dolan when questioned by Chairman Johnson about the Direct Deposit Indicator (DDI). If you
recall, Mr. Dolan attempted to defend the IRS’ decision to retain the DDI during the 1994
processing season, but removed it for the 1995 processing season.

Mr. Dolan claimed that there was “statistically valid” data showing that the DDI indeed caused
fraud, and that the data was collected during the 1994 processing season. This was the reason, he
claimed, for the decision to remove the DDI. His testimony contradicts the Treasury
Department's own findings. As you know, this very Subcommittee directed then-Secretary of the
Treasury Lloyd Bentsen to commission a task force to examine refund fraud and to make
recommendations. The task force was convened under the direction of Under Secretary Ron
Noble. Mr. Noble reported his findings in thoughtful and well-informed testimony to this
Subcommittee on October 6, 1994.

Mr. Noble devoted 3 pages of his testimony to the question, “Should the IRS abolish the DDI?”
His testimony can be summarized as follows.

The Task Force found two grounds for concern about the DDI: cost and speed... if
the IRS is to continue the DDI, the RAL banks that benefit from it should pay the
administrative costs of the DDI check. Were they to do so, the cost concern
would not be a major one. With regard to the second issue the speed with which
electronic refunds can be delivered, our concern is not that the DD] will cause the
IRS to suffer fraud losses. If the IRS pays no refunds until it receives all of the
paperwork that must accompany an ELF return and until all of the detection
procedures currently planned for the 1995 and subsequent filing seasons have been
undertaken, the issuance of a DDI should neither increase nor decrease the
likelihood that the IRS will be the vietim of ELF fraud. As long as the IRS will
run necessary checks on all electronic returns, all will be screened equally without
regard to whether a DDI has been issued...the irony is that the speed of the DDI
and RAL loans may lead in a relatively short time to improved fraud detection.
This irony is attributable to the fact that, if the IRS detects problematic returns and
stops refunds, the banks rather than the IRS will be at risk of loss... Thus, the Task
Force believes that the DDI may offer some potential for increased fraud control
and for increased ELF filing by genuine taxpayers... Accordingly, the Task Force
concludes that this is not the time for a firm recommendation either to continue the
DDI indefinitely or to kill it immediately. In lieu of either of these extremes, the
Task Force believes that Treasury and the IRS should continue to examine the
impact of the DDI on electronic filing in the next filing season and to determine
‘what effects it has on fraud control and on incentives for ELF filing,

‘Twenty days later, on October 26, 1994, then-Secretary of the Treasury Bentsen announced the
elimination of the DDI. Mr. Noble and Commissioner Richardson were in attendance. In light of
subsequent actions, Mr. Noble might well regret the candor he displayed in his testimony before
this Subcommittee.

Unbiased examination of the record would indicate that one of the following must be true: a) no
“statistically valid” research exists showing such compelling evidence as Mr. Dolan testified; b)
this research was withheld from Mr. Noble’s task force; or c) the Task Force reviewed the
research and considered it not worth mentioning


72

I can tell you that the best advice I would take is, if I don’t know
the answer to the question, I will ask my lawyer and we will get
back to you.

I know that a number of States use a Federal—because they pig.
gyback onto the Federal tax system, ask you to file your schedule

or schedule B or whatever with your State return. I think that
happens here in the District of Columbia and in the State of the

irginia.
ir. HANCOCK. Can they require the entire 1040 return be sub-
mitted as part of a State return?

Ms. RicHarpDsoN. I think I really would feel more comfortable
finding out and letting you know for sure.

Mr. Hancock. Thank you.

Chairman JoHNSON. Thank you.

[The following was subsequently received:]

The Internal Revenue Code neither authorizes nor prohibits a State from having
such a requirement. In general, the rules of section 6103 of the code governing the
confidentiality and disclosure of Federal returns and return information apply only
to information that is submitted to the Federal Government. Therefore, States are
free to ask for Federal tax return information directly from their taxpayers.

Section 6103(p)(8) of the code, however, was designed to ensure that States re-
quiring Federal tox information ‘directly from their taxpayers take stops to protect

e confidentiality of that information. This section requires these States to adopt
confidentiality laws before they can receive any Federal tax information directly
from the Federal Government. Because information exchange with the IRS is very
important to State taxing authorities, this provision has been an effective incentive
for the States to adopt confidentiality laws that are satisfactory to the Internal Rev-
enue Service.

Chairman JOHNSON. There are a couple of precise questions that
I think we need to get on the record, Commissioner. We have
strayed from the tax systems modernization program into the other
areas that are of concern to the subcommittee, and that is accept-
able, but there are a few more things we need to follow up on.

First of all, what were the consequences of the $400 million cut
in your 1995 budget request for your tax system’s modernization—
in terms of your timetable for implementing the tax modernization
system specifically?

Mr. WESTFALL. We are continuing to do—let me start this way.
What we did when we took the major cut in the request that we
made for 1995 is we did a complete reevaluation of where we were
putting the money and how fast the systems were rolling out. We,
basically, for the most part, have done some reprioritization, but
geared the program down. The exact impact of what we have done
is still somewhat uncertain.

We believe that we are probably slowed by a full year in the im-
plementation of the program. How much of a delay or perhaps even
program reductions have to take place will be a product of whether
our 1996 request is authorized or not.

Chairman JoHNSON. Are you aware that the GAO believes that
you will not be able to spend this year’s money?

Mr. WESTFALL. I have read that in the GAO testimony. I believe
that my response very clearly would be we will effectively spend
the money.

We basically went on a hold last yor as a result of the fact that
the increase was not authorized. We have several major acquisi-
tions in the system that are about ready to go to closure that re-


The President’s Budget for FY 1996

The 1996 President's Budget enables the IRS
to continue its overall mission by funding basic
ongoing operations and programs and
providing additional resources for specific
initiatives. The attached Appendix is a
comparison of the FY 1994, FY 1995, and
FY 1996 IRS budgets by budget activity

Overview

The FY 1996 resource requirements for the
IRS are 114,885 FTEs and $8.228 billion.

The Service’s net increase in resources over
FY 1995 is $739 million and 922 FTE. The
total proposed increases for the Service are
$844 million and 1,930 FTEs in the following:

-- Tax Systems Modemization (TSM)

-- Non TSM Systems: Storage Peripheral
Replacement Unisys Computer
‘Equipment (SPRUCE)

-- Revenue Protection/Tax Refund Fraud

~ Tax Account Telephone Resolution

- Automated Criminal Investigation (ACT)
-- Service Center Workload Growth
- Maintaining Current Operations

FY 1996 BUDGET INCREASES

($844 Million)
INFORMATION BYTES
oo.
MANTA
Now ronsanion ‘renamons
‘eres o, mr

27

FY 1996 BUDGET INCREASES
(1.930 FTE)

NONANFORMATION SYSTENS,
am,

INFORMATION

‘These increases are partially offset by
proposed reductions of $105 million and 1,008
FTE.

‘These reductions include:

Productivity Savings
Administrative Support Costs
Streamlining/NPR Staffing

~ One-Time (Non-Recurring) Costs

FY 1996 BUDGET DECREASES
(S105 Milion)



70

1994 (cont'd)

delays and addressing the potential for split refund payments on
returns claiming tax credits. The news release was distributed to
43 representatives from general print media, technical tax press,
electronic media, financial press and professional associations.
The news release and Q&As, which addressed the split refund
and second payment by check, were also made available on the
ELF Bulletin Board and the Public Affairs Bulletin Board.

Subcommittee on Oversight, Committee on Ways and Means
Hearing, “The 1995 Filing Season and IRS’s FY 1995 Budget
Request.”


146

Chairman JoHNSON. Thank you both for your very useful testi-
mony.

Mr. Buckley, if you_want to just briefly run through your rec-
ommendations, I would be interested in hearing those.

Mr. BuckLEy. OK. Basically we have a four-step program that
we suggest. One is to impose higher standards on electronic return
originators which is much similar to what Mr. Martin just men-
tioned. Also, to produce a cooperative public relations campaign be-
tween the IRS, the Criminal Investigation Division, and the elec-
tronic return originators; require additional process controls by
chronic return originators; and to enhance the IRS system check-

ing.

‘Ghairman JOHNSON. As to the current filing season, are there
any changes that could be made midstream that might help
straighten out some of the problems without reducing the chances
of eliminating fraudulent claims?

Mr. BucKLey. I would think at this point in time that the IRS
would have sufficient returns there that there would be some that
they could start processing a lot quicker than what they anticipate,
so that many of these taxpayers who are not used to waiting the
8 weeks to get their refunds or maybe 12 weeks if they get this ad-
ditional form could possibly be served better.

Chairman JoHNsoN. I do think that the wait of 2 months while
you do point to some real cases of hardship, in general the wait of
2 months is not nearly as great a hardship as the fraud associated
with this program and the cost to the taxpayers. So I think this
was a necessary step to go through. Why is it that your industry
wasn’t better prepared for what was going to happen this season?
It does appear that notice was given.

Mr. BUCKLEY. I don’t feel that we were given proper notice as to
the scope of the problem. We knew that they were going to be look-
ing at earned income credit returns. The magnitude of the number
of refunds that they have stopped is obviously a lot larger than
what we anticipated. I agree with your former statement, Madam
Chairman, that we need to do something to stop fraud and 2
months’ wait is not that bad. The problem is I think taxpayers and
tax preparers should have been able to warn those people much
sooner than having to come into our office and then startling them
that there may be a problem.

Chairman JOHNSON. Did the tax preparers underestimate the
number of people whose Social Security number was inaccurate? I
mean you certainly must have known this from past experience, or
did you underestimate the number of people that were involved in
the EITC?

Mr, BUCKLEY. I think —

Chairman JOHNSON. Both of which facets, seems to me, you
would have known from your past experience.

Mr. BUCKLEY. Well, in the past when a return was submitted to
the IRS, the primary Social Security number was checked and veri-
fied. This pean not only are they checking the primary, but they
are also checking the spouse and the children and everyone else
that is on the return. Our experience would show that many, many
taxpayers out there are filing returns with the identical Social Se-
curity numbers that they have used for years. All of a sudden, they


October

April

June

June

63

REVENUE PROTECTION STRATEGY

1992

Commissioner and Deputy Commissioner, Assistant Commissioners
(RP) and (Cl) and Chief Counsel met with representatives from H&R
Block, Beneficial Corp., Jackson Hewitt, Mellon Bank, Greenwood
Trust, NATP and others to discuss plans to remove the Direct Deposit
Indicator (DDI) in the 1994 filing season. The Industry presented IRS
with a briefing document entitled, "The Direct Deposit
Acknowledgement Issue and Its Relationship to Electronic Filing
Fraud."

1993

Banks submitted a supplement to the October 1992 paper entitled
“Electronic Filing: Industry Led Initiatives to Combat Fraud and Improve
Electronic Filing.”

Creation of the Council of Electronic Revenue and Commerce
Advancement (CERCA) to review security of data and privacy issues,
and increase the value of electronic filing commerce with all agencies
to ensure consistent standards of software and data elements.

Deputy Commissioner, Assistant Commissioner (RP), Deputy Assistant
Commissioner (RP), Director, Office of Refund Fraud and members of
their staff met with industry representatives regarding the DDI issue

IRS announced the decision to retain the DDI for the 1994 filing season
along with steps to strengthen fraud detection/deterrence and
expectations of the industry. Explained to industry that we will review
this decision each filing season based on ongoing trends.

1994

Presentation to CERCA on changes to Suitability, RAL advertising and
Form 8453 requirements.

Refund Fraud Strategy approved by Treasury


20

calendar 1993, adjusted for the recent rate increase -- an
additional $1.09 billion. Although some of the increase in sales
reported may be attributable to improved economic conditions, we
believe almost all the increase is due to greater compliance
achieved by moving the collection point from the distributor to
the terminal rack, dyeing of diesel fuel used for non-taxable
purposes, and greater enforcement efforts.

‘The IRS could increase collection of excise taxes even more
with the help of this Subcommittee. Diesel fuel fraud --
particularly when it involves organized crime -- must be
addressed through undercover operations initiated by our Criminal
Investigation activity. As I testified in a hearing before this
Subcommittee last October, undercover fraud operations,
particularly diesel fuel fraud investigations, are expensive and
currently must be paid for with appropriated funds. The
Department of the Treasury supports giving the IRS authority to
use the proceeds of undercover operations to finance them. IRS
had this so-called "churning" authority at one time but the
statute lapsed and needs to be reinstated. We are currently the
only federal law enforcement agency without this authority.

THE FY 1995 COMPLIANCE INITIATIVE

The IRS has an ambitious goal to raise the overall
compliance rate to 90 percent by the year 2001. As I stated,
accomplishing this goal will increase the revenue collected
without any change in the tax rate. Last year, with the support
of this Subcommittee, Congress funded a five-year compliance
initiative that provided for an appropriation of $405 million and
6,238 FTEs for additional compliance programs. That initiative
affords IRS the first opportunity since FY 1991 to undertake a
multi-year effort to collect the revenue owed. Over the FY
1995 - FY 1999 period tax revenue from this initiative is
estimated at $9-10 billion. The return on this investment builds
each year as new employees become fully productive and additional
cases are closed.

As part of the initiative, the IRS has already hired more
than 3,300 permanent compliance employees. With further hiring
underway, the IRS is poised to fully utilize all of the much
needed resources provided in this initiative. This initiative is
focused heavily toward the collection of delinquent accounts,
with special emphasis on reaching taxpayers quickly by telephone
if we have an indication of a delinquency

Even with the additional staffing, in FY 1995 IRS is
operating with about 3800 PTE fewer than we had in FY 1992.
Because of improvements in management and the impact of our early
TSM projects, we have placed more FTE in compliance and accounts
maintenance work and proportionately fewer in processing returns
and correcting errors. As part of TSM, we have a number of
projects underway to increase compliance and reduce taxpayers’
burden. These systems are producing immediate benefits, while at
the same time, building the foundations for the fully integrated
system of the future.

TAX SYSTEMS MODERNIZATION

A fully implemented Tax systems Modernization program is an
integral and necessary part of the IRS‘s future. For that
reason, I understand, and all of us at the IRS understand, that
it is essential that TSM be effectively managed. In addition to
the progress that we have made toward modernizing the tax system,
the IRS has also made significant improvements in our overall
management of Tax Systems Modernization. Because of the very
significant financial commitment we are asking for TSM, we
understand the need to assure Congress and American taxpayers
that the IRS can implement this program


37

the paper activity in the future electronic, as we can, for the obvi-
ous business value that you get out of that.

Second, we recognize that in the year 2000 to 2001, we will still
have large amounts of paper in the system. The preponderance of
the system will still be paper in many respects. We seek to use
image technology, character recognition technology in ways that.
allow us to reduce the labor-based environment that we now use
to put information in the system. By using scanning, using char-
acter recognition, and using more sophisticated systems, we can get
much more of the information from tax returns into the system
than we can afford to manually key stroke in today. We are already
proving that we have the ability to massively take the errors out
of the system through this kind of technology. So the first thing we
do is go electronic.

The second thing we do is become much more efficient and effec-
tive at processing the residual paper that exists. Through a com-
bination of this, we pick up much more information both in the
form of computer-based information and also images of documents
and tax returns and get that into a computing environment which
does not exist today. Our master files can be enhanced by consider-
ably more information and also made available online by
workstation accesses throughout the system. We can be more re-
sponsive to the public and the public can get access to the informa-
tion that it needs in connection with its tax account records.

All this enables that corporate computing center database to drop
information into, No. 1, our customer service operation. In our cus-
tomer service operation for the future, there is a basic fundamental
thing that we seek to do that we have never been able to do effec-
tively as we feel we must. It involves doing business with the tax-
paying public by telephone.

We simply have to use the telephones in the business of taxation
much more extensively than we do or we have in the past. We have
to be able to get access to information on a 24-hour-a-day basis, in-
stead of a 9 to 5 basis. We have to be able to reduce the cost of
a personal contact with a taxpayer or the necessity of burdensome
notices and letters that cross in the mail by acting quickly on a tax
account issue and doing it, wherever possible, with a telephone con-
tact with the taxpayer that will much more quickly and much more
effectively close the issue out.

Finally, we also need to put information in our field compliance
activities so that our revenue officers, our revenue agents, our tax
auditors can get faster access to more information with more com-
puter assistance. This will enable us to better segment the tax-
paying public, better segment compliance zones, focus our compli-
ance resources on education and assistance in compliance actions
designed to impact a particular industry that has a significant com-
pliance issue, and impact that industry industrywide, instead of

loing one audit at a time with a lot of manual work that we have
to do in the system today.

From a business perspective, that is the environment that we
seek to create in the future. I will make about 30 seconds’ wo
of points from this second overhead to complete the presentation.

In this overhead, which is also in your information packet, we
seek to demonstrate progress made to date toward the ultimate


157

anticipation loans. These individuals receive their RAL based on the full amount of the refund
which the bank believes will be deposited into the taxpayer's account, When the check for the
camed income credit goes to the taxpayer, it creates an obligation on the part of the taxpayer to
retum the money to the RAL lenders. Those who receive the checks often believe that, since it
comes from the government, it must be free of encumbrance. Many never bother to contact the
ERO who filed the return to find out exactly what has happened. When this obligation goes
unpaid, it eventually winds up on a credit report and comes back to haunt the taxpayer at a future
time.

In response to these concems, CERCA respectfully recommends that action be taken to ensure
that once a taxpayer qualifies for and requests a direct deposit, the entire refund is deposited
directly to the taxpayer's account. If the Service needs extra time to examine claims for the
eamed income credit, a bifurcated payment system should certainly be allowed. However, the
taxpayer's request for a direct deposit should be honored for both segments of the payment.

Social Security Number Scrutiny
The last concem that has arisen out of this tax season is the closer scrutiny of social security
numbers by the Internal Revenue Service. Clearly, this increased emphasis on accuracy is a vital
part of the efforts to stop the flow of fraudulent refunds out of the Treasury. Nevertheless, some
concems have arisen with the coordination between the Internal Revenue Service and the Social
Security database used to verify taxpayer numbers. CERCA would like to request that the
communications process between these two agencies should be reviewed in order to determine
what measures can be taken to more effectively and efficiently match taxpayer names and social
security numbers.

Constructive Congressional Relationship Needed
Finally, CERCA would like to respectfully recommend that this committee take a proactive stance
toward the Internal Revenue Service, working to head off difficulties before they grow into
nationwide problems. In addition, we would like to offer the Council for Electronic Revenue
‘Communication Advancement as a resource for you in your work with the IRS to make sure that
the tax system runs at maximum efficiency and effectiveness. CERCA was created at the behest
of the Intemal Revenue Service to provide a sounding board that represented every facet of the
tax preparation and filing industries. Due to the breadth of its membership, CERCA can provide
detailed information on almost any function in the process of filing a return

Conclusion
In closing, we would like to thank this honorable committee for the opportunity to submit this
written statement and we hope that you will consider the Council for Electronic Revenue
Communication Advancement as a valuable source of information in your work to improve the
administration of the tax system,

Respectfully submitted

ilo

Robert E. Barr

President

Council for Electronic Revenue
Communication Advancement


57

I am pleased to know that you are consulting with TRW. That
is a good company, and they have just made a conversion them-
selves. They moved their equipment—they changed their whole
computer system and moved the equipment in overnight without
hampering customer service one iota.

I know in the Air Force it takes us 10 years to develop an air-
plane and here you are taking 12 years or more just to get a new
computer system going. Can you explain that to me?

is. RICHARDSON. Well, I am going to let Mr. Westfall handle the
more technical details, but this might be a good time for a plug
about the Federal procurement process, too.

Mr. JOHNSON of Texas. Well, then let me ask you another ques-
tion. Can you privatize this conversion and get it out of the govern-
ment control? That is what you just said you could do.

Ross Perot used to say—and I don’t quote him very often—he
said, “Why don’t you just pull it over to the side of the road, lift
the hood and fix it?”

Ms. RICHARDSON. Let me say if we could have done it, it probably
would have been done long before my watch, too. It is a massive
undertaking. The xgar— really, I hope, before the year 2001—and
I will let Mr. Westfall address that.

But I do think that when you talk about technology acquisition
you need to have a long, hard look at what the procurement rules
do. They were very well suited to the time when we were buyin;
jeeps and tanks and things that weren’t changing very rapidly, an
it is a very fair system. A lot of people can put in their bids. But
technology is rapidly changing, and we need to be able to respond
much more quickly.

That has been part of the problem with the delays. We have an
extremely competent contracting staff. We have done a very good
job in the procurement area withstanding protests, and I think we

ave done as well as we could and probably better than most other
agencies in terms of procurement process working with what we
have today, but it is still cumbersome.

Mr. WESTFALL. We have awarded—

Chairman JOHNSON. Let me just say we do have a number of
other panels, so we will have to try to keep the answers focused.

Ms. RICHARDSON. One thing I might add also. We would be more
than happy to meet with you or meet with some of the members
of the subcommittee—with Mr. Westfall.

Mr. JOHNSON of Texas. That is fine. I would like to know why
it has taken so long.

Let me bring one more question into focus here before we quit.
I am going to quote a quick paragraph from the Dallas Mornin;
News whic! saul, “According to wire reports, the IRS plans to col-
lect credit reports, news stories, tips from informants, information
from real estate, motor vehicle, and child support records as well
as conventional government financial data. Aside from civil lib-
erties concerns, citizens also fear the IRS is acknowledging that
some of the data may be inaccurate but that taxpayers will not be
allowed to review it or correct it.”

Now I know in the case of TRW they do allow their consumers
to correct their records, and I would hope the government doesn’t
get into that position. Can you tell me with a straight face that our


23

This filing season we have expanded our hours of service
Our telephone lines are now open at least 10 hours a day each
work day within the continental U.S., and all IRS telephone sites
will provide telephone help during three Saturdays in April. TSM
funds have allowed us to replace our equipment with a new state-
of-the-art telephone system that has provided us the capability
to transfer calls among our toll-free sites so that calls can be
transferred from those sites that are at or over capacity. This
new system is already improving productivity by 10 percent where
implemented, allowing us to answer more taxpayer calls. In
addition, we have after-hours routing to our automated Tele-Tax
system that can address 140 tax topics as well as automated
refund status information

We also provide other types of assistance. We will respond
to more than 22 million pieces of correspondence and this year we
expect to help more than seven million taxpayers at IRS walk-in
assistance sites. To further our goals to reduce the burdens on
taxpayers, we have expanded the number of our assistance sites
offering no cost electronic filing from 42 last year to 232 this
year. Electronic filing at no cost is also available at over
1,000 Volunteer Income Tax Assistance (VITA) sites.

THE FILING SEASON - REVENUE PROTECTION

our biggest challenge this filing season has been to put in
place better methods to protect the tax revenue from those who
want to commit fraud on the system. IRS has addressed tax refund
fraud through its Questionable Refund Program for many years
Teans of trained personnel in each of the Service Centers have
used both manual techniques and computerized criteria to
determine which returns need review. However, technology has
significantly improved the capabilities of both government
agencies and financial institutions to deliver money faster. But
shorter payment cycles and electronic payments require both
public and private institutions to be more vigilant than ever in
guarding against fraud.

Since 1990, the IRS has steadily increased its efforts to
control refund fraud -- significantly more fraud has been
identified and stopped by TRS and more new schemes have been
identified. In May 1993, I appointed an IRS executive to
coordinate our refund fraud prevention and detection efforts and
established a coordinating group to assure all components of the
IRS worked in concert to address problems contributing to refund
fraud. Since the hearing before this Subcommittee last February,
we have taken many steps as part of an agency-wide revenue
protection strategy. We established new criteria for qualifying
Electronic Return Originators. We used both IRS and outside
expertise to analyze patterns indicative of erroneous or
fraudulent refunds and programmed a series of filters and screens
into our processing system. Also, we have made additional staff
available to our processing, criminal investigation and
examination activities to reinforce our Refund Protection
Strategy. Last spring, in consultation with this Subcommittee
the Secretary of the Treasury established a special task force to
further study the problem of refund fraud and propose additional
preventive actions. In reporting to the Congress last October,
the task force estimated that erroneous and fraudulent returns
could be costing the Treasury between one and five billion
dollars.

This filing season, we are carefully reviewing all returns -
- paper and electronic =~ to ensure that only those taxpayers who
are entitled to refunds receive them. We have spent a lot of
time both before and during this filing season urging taxpayers
to be very careful to use accurate Social Security Numbers (SSNs)
for themselves and for their dependents because we are verifying
those numbers on all returns. Refunds are being delayed on
returns with missing or incorrect SSNs and on some returns
claiming refundable credits to allow us additional time to verify



144

Registration and phase~in period:

After the approval and implementation of this proposal,
anyone meeting the definition of CTRP would have one
year to register with the Internal Revenue Service
without providing proof of continuing professional
education (CPE). This one year period would constitute
the phase-in period. The group of CTRPs, who would be
grandfathered into the program, would be obligated to
meet all the requirements of registration renewal as
set forth below.

Post phase-in period:

Persons desiring to register for the first time after
the first year of the program would be required to meet
the criteria listed below and submit proof of
satisfying a minimum of 24 hours of CPE during the 18
months immediately preceding the receipt of the
application for registration. Such proof, the
completed registration form and required fee would be
submitted to the Internal Revenue Service for
acceptance.

Criteria for CTRPs:

A, Be not less than eighteen (18) years of age;

Continuing professional education requirements
must be adhered to as follows:

i. A minimum of 48 hours of approved CPE over a
‘three year period with a minimum of 8 hours
of CPE in any one year.

2. Qualifying CPE will be that which meets the
definition of “Continuing Professional
Education" as found in Treasury Department
Circular 230, section 10.6(£).7

3. Evidence of continuing professional education
and a renewal application would have to be
submitted every three years commencing with
the third anniversary of the initial
registration.

The information submitted on each application for
the registration would be subject to IRS
verification and investigated in a manner
consistent with that of applications for
enrollment to practice before the IRS;

CYRPs would be subject to the standards set forth
in Circular 230;

Violations of ethical standards would result in
the assessment of monetary penalties as authorized
and/or prohibition from further tax return
preparation;

Limited fees would be paid for registration to
make the program self-funding. A study is
requested to ascertain the minimum fee
reguirement;

Opportunities for non-English speaking preparers
will be made available to accommodate registration
and continuing professional education.

The program would be administered by the IRS
Office of Director of Practice with strong support
and referrals from the District Directors’
offices.


90

the provision of access to, goods or services produced by an
activity which constitutes a trade or business, regularly carried
on, and not substantially related to the organization’s exempt
purposes other than through the production of income.
Consequently, other than where the statute or regulations
specifically provide a method of allocating a portion of dues
payments to unrelated business taxable income, the Service will
treat dues payments from associate members as not including gross
income from an unrelated trade or business if the associate member
category has been formed or availed of for the principal purpose of
furthering the organization’s exempt purposes.

In applying this revenue procedure, the Service will look to

the purposes and activities of the organization rather than of its

members.
EFFECTIVE DATE

This revenue procedure is effective for all open years.
DRAFTING INFORMATION

The principal author of this revenue procedure is Charles
Barrett of the Exempt Organizations Division of the Office of the
assistant Commissioner (Employee Plans and Exempt Organizations).
For further information regarding this revenue procedure contact

Mr. Barrett at (202) 622-8152 (not a toll-free number).


44

It isn’t like your being able to call your credit card company or
your bank and. if there is a question about your account, you can
resolve it typically right there on that telep!
that today.

Mr. Westfall mentioned 15 to 20 percent of our paper processing
or paper returns end up with errors. If you apply 15 to 20 percent
against 100 million paper returns, that is a lot of errors, a lot of
contact; and it is a very labor intensive process.

We feel like if we can handle that account question or handle
that account matter over the telephone and resolve it right there,
we have probably saved ourselves a lot of correspondence but also,
ultimately, maybe some compliance issues down the road which are
also expensive if you have to have a revenue agent or revenue offi-
cer involved.

Mr. HERGER. Now GAO says that the chances of a taxpayer get-
ting through to the IRS on his phone call is only 13 percent—in
other words, less than one in five times——

Ms. RICHARDSON. That was based on weeks earlier in this filin
season. We don’t have precise agreement, I think, with the GA
about how you measure access to our system but, in any event, it
was based on a 1-week look early in the filing season.

Mr. HERGER. That 1 week was less than one out of five times
they were able to get through to you. Is it——

is. RICHARDSON. I think it was based on a number of calls
placed, not the number of taxpayers who got through. We actually
use a system, the unique number report, with which you can iden-
tify where people have actually been able to get through on a sys-
tem.

Mr. HERGER. So you are saying that that 13 percent is not char-
acteristic of —

Ms. RICHARDSON. Correct, it is not characteristic of what we are
experiencing at this point in the filing season.

(r. HERGER. What would you say it is at this point? Thirteen
percent, T am sure, we all have to agree, is certainly something we
ave to improve quite dramatically.

Ms. RICHARDSON. I am sorry. It is averaging around 50 percent,
which our goal for this filing season was to try to answer 52 per-
cent of the calls—of the taxpayers’ calls. That is basically what we
feel we are able to do based on what funding levels we had for our
taxpayer service function. We are running about at that level now
for the season.

Mr. HeRGER. I was speaking with a CPA only in the last week
who indicated that—and I don’t know where his statistics came
from—two-thirds of the answers that they did receive when they
did contact the IRS were correct. One-third were not. One out of
three were not correct, and yet that taxpayer was held respon-
sible—accountable for that one-third that weren’t correct. Would
you like to comment on that?

Ms. RICHARDSON. I would. I think that our numbers show that
our accuracy is a little bit higher than that. Our goal is to have
it—I mean, obviously, you would like to have 100 percent, but I
think we have been running right around 90 percent the last cou-
ple of years, and we expect to have that same standard for this
year as well.

one call. We can’t do


85

Chairman JOHNSON. Thank you very much.
[The following was subsequently received:]

The bifurcation of refunds was not discussed when we made notification of the
DDI changes. (See our previous submission for the chronology of activities.)

Chairman JOHNSON. Since the EITC was involved in 90 percent
of the fraudulent claims in 1994 and because in 1995 the number
of people eligible to claim EITC benefits will increase by 6 million,
I congratulate you on doing something about the problems in this
area, We will follow the effects of your policies very closely, and we
will be interested to see if they have any implications for changes
in_tax law, both in regard to the Te and in regard to
refundability in general and in regard to your process as well.

Ms. RICHARDSON. Again, we would like to work with the sub-
committee and the subcommittee staff on any of those proposals.

Chairman JOHNSON. Thank you. I am going to recognize now Mr.
Herger for one last question for the record.

ir. HERGER. Thank you, Madam Chair. I do have another ques-
tion that with your permission I would like to submit and submit.
to the Commissioner.

Chairman JOHNSON, Thank you. You certainly are welcome to do
so, Mr. Herger, and thank you, Commissioner, and your staff, for
your time this morning.

[The following was subsequently received:]


62

WAYS AND MEANS OVERSIGHT HEARING ON FEBRUARY 27, 1995

IRS Budget Proposal for FY 1996 and 1995 Filing Season

insert for the Record

QUESTION: When did IRS highlight the bifurcation of refund returns?

ANSWER: Attached is a chronology dating back to 1992 that details the actions
taken relating to the Revenue Protection Strategy. Highlights include activities in
December 1994 and January 1995 that directly relate to bifurcated refunds.

QUESTION: Did the October 1994 notification covering elimination of the DDI also
include notification of the bifurcated return system of the refunds that were going to
be electronically filed?

ANSWER; The bifurcation of refunds was not discussed when we made
Notification of the DDI changes.


86

RESPONSE TO OVERSIGHT SUBCOMMITTEE OF THE COMMITTEE
ON WAYS AND MEANS REGARDING TAX TREATMENT OF ASSOCIATE
MEMBER DUES INCOME RECEIVED BY TAX-EXEMPT FARM BUREAUS

INTRODUCTION

During the House Ways and Means Oversight Subcommittee
hearing of February 27, 1995, on IRS Budget Proposal for FY 1996
and 1995 Tax Return Filing Season, Congressman Herger requested
that the Commissioner submit additional comments for the record.
Congressman Herger requested information relating to a Technical
Advice Memorandum issued in 1994. Specifically, the Commissioner
was asked whether any change in IRS position evidenced in the
1994 TAM should "come only after careful review at the highest
levels." In addition, the Commissioner was asked to provide any
other thoughts regarding this matter.

The Technical Advice Memorandum (LTR 9416002) (1994 TAM)
involved a farm bureau and the treatment of income derived from
the dues of associate members. The 1994 TAM concluded that dues
income from associate members resulted from the marketing of
access to an unrelated trade or business (i.¢., auto insurance)
and thus was taxable to the organization.

LEGAL BACKGROUND

Income received by labor, agricultural (including farm
bureaus), or horticultural organizations is generally exempt from
federal income tax under section 501(c)(5) of the Internal
Revenue Code. Section 511(a), however, imposes a tax on
unrelated business taxable income received by these otherwise
exempt organizations.

Historically, the Internal Revenue Service position has been
that the marketing of insurance by exempt organizations generally
is an unrelated trade or business and, therefore, income derived
from selling such insurance is taxable. This position was
ultimately upheld by the Supreme Court in United States v.
american Bar Endowment, 477 U.S. 105 (1986).

In 1982, two Technical Advice Memoranda (LTR 8302009 and
8302010) (1982 TAMs) were issued regarding farm bureaus that sold
insurance. In the 1982 TAMs, regular membership was open only to
those who owned or operated farms. Anyone else could join as an
associate member. The organizations’ activities included
lobbying on agricultural issues, distributing of publications,
and sponsoring lectures and seminars. The organizations also
supported 4-H clubs and provided educational materials to public
schools. Associate members paid the same dues as regular members
and had similar access to programs and activities, but could not
vote or hold office. The 1982 TAMs concluded that the insurance
activities were unrelated trade or business, but that dues
payments received from both regular and associate members were


121

In January 1995, IRS issued a study in which it presented data on
the expected costs and benefits of TSM during the 10-year period
from fiscal years 1996 through 2005. That study showed (1) costs
of $6.8 billion and benefits of $9.2 billion over the next 5
years and (2) costs of $12.6 billion and benefits of $32.3
billion over the full 10 years. Some of the reported benefits
derive from investments that were made before 1996, while some of
the costs incurred during the 10-year period will continue to
yield benefits beyond 2005. For this reason, the report is not a
typical cost-benefit analysis.

Of the $32.3 billion in benefits cited in IRS’ report, almost all
($30.9 billion) are expected to come from the increased revenue
generated by redeploying staff and enhancing compliance efforts.
The rest is to come from interest savings ($1.3 billion) and
labor savings (.1 billion). Increased revenues are not the same
thing as “productivity savings" or savings of public resources.
Tax revenues are simply a transfer of resources from taxpayers to
the government. If IRS had wanted to show resource savings, it
would have reported the dollar savings associated with the staff
reductions made possible by TSM. Instead, IRS reports the
additional revenue that can be obtained by reinvesting staff
savings into expanded enforcement activities. The report,
therefore, is essentially a budget-impact analysis rather than a
social cost-benefit analysis.

We did not do the kind of work necessary to validate IRS'
estimates. However, IRS has acknowledged that its study
represented a preliminary, short-term analysis and that it has
certain flaws, such as reliance on an outdated cost model. IRS
expects to issue an economic analysis in September 1995 that it
says will better reflect the costs and benefits that will be
attributable to modernization. For one thing, that analysis is
expected to cover the complete 18 year TSM life rather than the
10 years covered by the January 1995 study.


124

Ms. Epwarps. I think it is fair to say that the information will
be placed in the new system whenever that new system arrives.
The data is transferable, but of course it means that it has to be
transferred manually very likely.

Mr. HaNcock. Transferred manually?

Ms. Epwarbs. Yes. I wanted to make the distinction when we
say that a system is not integrable. It cannot be integrated. We
mean that the information can’t flow from one system to the other.
I just wanted to clarify that point.

Mr. HANCOCK. Wait a minute. Wait a minute. I am a little con-
fused. I don’t know all that much about computers also, Madam
Chairman, but the fact is that once the data is in a database it is
usually available to pull out electronically and to enter into another
form in some manner.

Ms. Epwarbs. You mean electronically.

Mr. Hancock. Electronically, yes.

Ms. Epwarps. That is the notion that is behind integration.
When we talk about integration that is what we mean. It means
that you should be able to pull the data from the system electroni-
cally and electronically pass it to another system.

r. HANCocK. OK.

Ms. Epwarps. That is why the issue of integration is so crucial
to this discussion and what we are saying about these systems that
have been developed to date is that those systems do not allow the
information to be pulled electronically from one system and passed
to another system.

Mr. HANCOCK. Well, let me ask what—maybe it is not a simple
question, but have you all talked to the credit card industry? I
mean, my goodness, the hundreds of millions of entries that they
make daily are probably much bigger than what the Federal Gov-
ernment does, because everybody has got a credit card. If they han-
dle their affairs like we are handling ours, that thing never could
have existed. Why can’t we take a look at what they are doing, get
some of their experts to come in and tell us what we need?

Ms. Epwarbs. Mr. Hancock, the point that you are making is the
essence of our suggestion that IRS needs to have the sufficient
number of managerial and technical experts, if you will, or people
who are skilled in building these systems that link, that integrate,
that pass data electronically so—

Mr. HaNcock. But can they do that in-house? I mean do they
have the personnel to do it or do they need to go to the credit card
industry and get their people to do it on a contract basis? Give
them a figure. Say, look, I wonder what would happen. We are
going to spend $9 billion. I wonder what would happen if we would
tell 1e e industry we will give you an award of $5 Biltion if you will

lo this.

We are not going to give you anything unless you develop a pro-

am, but we are going to give you $5 billion if you do it. I bet
there would be a lot of computer programmers start trying to figure
out how to go about doing it. This guy that took the bank for $1
billion here just recently, I mean that guy could probably figure
this thing out.

Thank you, Madam Chairman.


Storage Peripheral Replacement Unisys
Computer Equipment (SPRUCE)

Until TSM is fully operational, our current
systems must continue to be maintained. The
FY 1996 increase of $51 million is essential to
replace the overage and undependable tape and
disk environment which was placed into
service between {981 through 1987 and
represents tape subsystem technology which is
over 20 years old

Tax Account Telephone Resolution

As the IRS increases its customer satisfaction
focus. telephones have become a major contact
between taxpayers and the IRS. Each year we
answer more calls, but the total number of
calls from taxpayers (answered and
unanswered) grows even faster. Productivity
improvements alone will not enable us to keep
up with the demand. This initiative provides
$17 million and 239 FTE to handle an
additional 1.3 million telephone calls.

Revenue Protection/Refund Fraud

‘The IRS is requesting additional support for
a cross-functional effort to combat tax refund
fraud. This effort identifies and stops the
payment of fraudulent refunds, detects
schemes, and investigates fraud. Over the past
few years, the dollar value of fraudulent refund
claims detected has increased dramatically
from $43 million in 1991 to $461 million in
1994 (through 12/31/94).

To help combat this increased fraud, IRS is
requesting an additional $28 million and 323
FTE to detect and stop fraudulent refunds;
identify and refer for audit those Earned
Income Tax Credit (EITC) cases with audit
potential; handle the rapidly increasing volume
of calls associated with fraud; and investigate

31

and prosecute at least the most flagrant cases.

LEVEL OF RESOURCES DEVOTED TO
IDENTIFYING AND INVESTIGATING
FRAUDULENT REFUND SCHEMES

af FTE

Garg

‘Automated Criminal Investigation (ACD)

The Service is requesting an increase of $3.5
million for the purchase of investigative
equipment, including laptop computers,
desktop workstations, and necessary software.

Crime

The Violent Crime Control and Law
Enforcement Act of 1994 (commonly known as
the Crime Bill) provided $7 million to the IRS
in FY 1995 for combating public corruption
and enhancing illegal tax enforcement
activities. The Service requests additional
funding in FY 1996 of $12 million for a total
of $19 million.

The FY 1996 funds will be used to
supplement current efforts for Revenue
Protection/Refund Fraud and the Automated
Criminal Investigation System.


156

in 1994 to $89 in 1995, This means that the taxpayers who need their refund most of all will now
be receiving less of the money they are due.

‘The circumstances surrounding the DDI and the 1995 filing season have led CERCA to
respectfully make the following two recommendations to this committee. First, set a published
date after which no significant changes could be made to the rules affecting the upcoming tax
filing season. Such a date would give stakeholders the ability to make definite plans after that
date. For instance, had this restriction been November 1, 1994, the Treasury Department could
still have changed its position after testifying before this committee and those affected this year
would have been on notice that nothing was final until November 1. Such a notice might have
saved many stakeholders considerable inconvenience and expense this year. CERCA would
prefer a much earlier date, however.

Second, until someone proves the allegations of fraud associated with the RAL, CERCA asks that
the direct deposit indicator be reinstated in order to limit the cost of the refund anticipation loan
to the taxpayer. Under Secretary Noble never stated that the Treasury's Task Force on Refund
Fraud found conclusive evidence to determine whether the loans were a cause of fraud. He
recommended further study before taking action on the issue. Under the current circumstances,
the IRS is taking halting regulatory steps which are slowly strangling the RAL providers out of
the business,

CERCA asks that the study recommended by Under Secretary Noble be conducted during the
1996 filing season. If the RAL is causing fraud, we ask that the industry be given at least one
filing season to work with the Internal Revenue Service to correct the problem. If further study
shows that the steps taken to correct the problem have failed, we would support action by this,
subcommittee to eliminate the program completely.

Eamed Income Credit Split Payments

Another step taken by the IRS to stem the tide of fraudulent refunds in the 1995 filing season has
been the bifurcation of eamed income credit refuund payments. Many taxpayers qualifying for the
credit, particularly those filing as either head of household or single, have found that the Service
will provide that portion of their payment which represents the refund of withheld taxes within the
normal time period and in the form requested. However, the earned income credit portion of the
refiund is being held back for eight to ten weeks on 2s many as seven million returns. This action
is necessary to allow the Service to more closely examine the taxpayer's claim. The difficulty
arises with the fact that, once authorized, the eamed income credit is mailed directly to the
taxpayer in the form of a check. This has caused three problems for affected taxpayers

First, it hotds the money that Congress has designated for low income taxpayers out of the hands
of those taxpayers for an inordinate amount of time. No one argues with the need for the Service
to secure the system, but we are talking about money upon which America's neediest taxpayers
have come to rely, Currently, the delay is eight to ten weeks. As the filing season progresses and
the Service becomes increasingly busy, who is to say how long it will take to tum the earned
income credit refunds around? Something must be done to speed up the process. In the future,
full fanding of tax systems modernization will make this process much faster and much more
responsive to taxpayer needs. For this year, however, faster response on questionable earned
income credits will probably require an increased manpower commitment from the IRS.

Second, the current system partially eliminates the direct deposit option for affected taxpayers.
We are not talking about the direct deposit indicator now, but simply the option to have your
refund deposited directly into your account. Keep in mind that this affects America's poorest
taxpayers, individuals for whom the direct deposit represents a secure way to receive a refund, as
‘opposed to simply a convenience. Many taxpayers who receive the eamed income credit live in
neighborhoods where theft of government checks from mailboxes is a common occurrence and
where getting a check to the bank can be a risky venture. These individuals count on direct,
deposit to avoid the necessity of carrying a substantial check to the bank and making a deposit in
person

‘Third, it creates an often unforeseen financial obligation on taxpayers who receive refund


7

round-the-clock, 7-day-a-week shifts. In those days just before and
right after April 15, mountains of mail arrive at our service centers
brought by convoys of tractor trailers.

Between 1986 and 1994, the number of tax returns filed in-
creased by almost 15 million, while the staff Processing these re-
turns decreased—a real productivity improvement of 12.6 percent
during that 8-year period. The result of this focus on productivity
is that our 10 service centers today are currently operating at vir-
tually their maximum levels of efficiency and duelit within the
limits of the current system. There is little or no further room for
productivity increases at the service centers without technological
enhancements.

TSM has already begun to help us meet the increased demands
on our other burdened infrastructure by providing alternative
methods of filing and receiving tax returns and payments. Today,
a paper return must travel by mail to the service center, be proc-
essed through our mailroom, transported to a data entry clerk, and
then keypunched into the system. This process is not only outdated
and labor intensive, but it is also proned to errors by both tax-
payers and by the Internal Revenue Service.

n contrast, nearly 16 million electronically filed documents, in-
cluding 14,000,000 individual tax returns, bypassed these costly
and inefficient steps last year. As a result, these electronically filed
documents were processed with an accuracy rate of 99.5 percent,
significantly higher than the accuracy rate for paper returns. Er-
rors, by both IRS and taxpayers, represent rework at a significant
cost and burden to the Service and possible cost and burden to tax-
payers if we have to contact them in order to correct the errors.

By changing the way we do business through increased produc-
tivity and various alternative electric filing methods, we are al-
ready processing some tax returns and payments more efficiently.
Although we are making significant progress by modernizing the
way we conduct our business, we do need your continued support
to completely transform our sixties assembly line processing oper-
ation into an automated, efficient operation worthy of the 21st cen-
tury. Funding for our fiscal year 1996 budget request will help to
ensure that the TSM program is completed in a timely fashion.

Another way we are changing the way we do business is by find-
ing new and better ways to interact with taxpayers. Recognizing
that correspondence is labor intensive, costly, and burdensome, the
IRS has focused on making Significant meaningful improvements
to our telephone operations. We do believe that taxpayers should
be able to get through to the IRS on the first call and they should
be able to have their issues resolved on that call.

To improve the way we interact with taxpayers, we have studied
and are implementing some of the best practices of private indus-
try. For example, today we can now transfer telephone traffic
among 27 sites nationwide that helps us balance our workload and
maximize the service availability to taxpayers.

Even though we have made progress in the way we interact with
taxpayers, we are acutely aware of the fact that we can and must
do more. Much of the progress to date can be credited to tax sys-
tems modernization, but to continue this process, we must fully im-
plement the modernization program by the year 2001.


139

power of attorney, if they can't find my correspondence, they have to go to the IDRS
system, which is at the other end of the room. They have one terminal—I am only
talking about the Baltimore district now—to access that other computer.

To hear that the collection division is going to have another new
system that doesn’t talk to the main system, it doesn’t help us at
all in trying to solve taxpayers’ problems with their accounts re-
ceivable.

But we also have to bring tax system modernization down to the
local level. I am constantly frustrated, as are many of our mem-
bers, with the fact that many IRS district offices do not have a fax
machine readily available so we can fax information to them.

In this day and age, it is unheard of for an office, a business of-
fice not to be able to receive a fax. Many of us in my industry, if
we have to fax a canceled check to the IRS we can’t do so.

The other thing that we think is very important in the long-term
solution is the universal licensing of tax return preparers and we
have included documents from the Commissioner’s advisory group
recommending this. Their subgroup, as well as the GAO study
based on the 1988 taxpayer compliance measurement program,
showed that the amount of tax fraud and tax errors among those
people who are licensed EAs, CPAs, and attorneys was much lower
than the incidence of fraud among unlicensed commercial prepar-
ers.

Short-term solutions—we think that the IRS can do more short
term by better screening of the tax returns. If people have a history
of filing earned income credit claims, those returns probably should
not be scrutinized as carefully as other ones claiming the earned
income credit for the first time.

I would be happy to take any questions that you have.

[The prepared statement and attachment follow:]


147

know they have a problem either when the return is rejected when
you file electronically or they will receive a notice back from the In-
ternal Revenue Service. So it is very difficult to explain to some-
body that you really need to go and check your Social Security
cards.

Particularly what we find today are that many spouses who
when they got married did not change their name with Social Secu-
rity records and as a result they have been filing as Mrs. Johnson
or Mrs. Buckley all these years, and yet this year they file with
that same Social Security number that they have been using and
then the return is rejected. So it is not until after the fact that
these people understand that they really have a problem.

In regard to your question with the earned income credit, we cer-
tainly did underestimate, and I think justifiably from the IRS’
point of view, that they would not be stopping as many returns. It
just seems incredible that there are so many—such a broad brush

as been used to stop the number of fraudulent returns which are
currently out there.

Chairman JOHNSON. Well, could you be more specific about this
broad-brush issue. Certainly claiming more children, more deduc-
tions than you are entitled to, is one cause of a lot of fraud.

Mr. BucKLEY. Well, Madam Chairman, we have been using the
term, “fraud” rather loosely here, as has been indicated from the
subcommittee from last year’s testimony when I believe it was
identified then as problematic refunds rather than fraud, and that
problematic does obviously contain some amount of fraud. I think
the issues that we have recommended to the IRS—I think some of
the things they have done this year as far as having us all get
fingerprinted and get an EFIN for each location. I think these are
commendable. I think checking Social Security numbers is com-
mendable. But I don’t think there is a need out there to stop these
millions of returns when you didn’t tell the people up front this is
what you were going to do.

Chairman JOHNSON. Now, I thought they did tell the people up
front this is what they are going to do. The people don’t necessaril:
understand the dimensions of this, maybe they didn’t know the di-
mensions of this, but can you honestly say that people weren’t in-
formed?

Mr. BUCKLEY. I can say that in the tax booklet which I think
would be the major publication and our major communication that
a taxpayer would have a hard time in reading that. There is one
small line in there that says that some returns that are filed elec-
tronically will be held up to make sure they are accurate. I think
that small little blurb in there, as well as in the Commissioner’s
letter to the taxpayers, which says you must use the proper Social
Security numbers, is being taken lightly by taxpayers, as I men-
tioned, because they have been using these same Social Security
numbers for a number of years.

It would seem: to me that if they did use these same Social Secu-
rity numbers this year as they have in the past, that there should
have been some way that the IRS could have notified these people
last year saying that this Social Security number doesn’t belong to
you and you are going to have to get this fixed before next filing
season.


153

Bank One supports the efforts of the IRS to upgrade the United States tax system through
its Tax System Modernization (TSM) program. We are aware of major efforts going back
to the 1960's to modernize and integrate the tax system to take full advantage of state-of-
the-art technology. Previous IRS efforts that were frustrated have led to the current
problems involving fraud, delayed processing, and the set back in the number of electronic
filings in 1995, Bank One feels it is imperative that the TSM plan be funded and
implemented.

The present filing season is a testament to the problems caused by the IRS’s inability to
keep pace with technology. The delayed refunds, the abandoned phone calls, and the
mountains of paper still to be processed speak volumes as to the changes that are
necessary.

‘The announcement concerning the Direct Deposit Indicator (DDI) on October 26, 1994
was a major blow to electronic filing and TSM. It was ill-imed and unnecessary.
Attempting to blame fraud on a legitimate 20 million person RAL market is a sham
Rather than trying to place blame for past errors, we need to go forward together to
achieve a safe, secure, and responsive tax system. Proper funding for TSM and for
current IRS operations is a vital necessity.

In addition to obtaining TSM technology, the IRS needs to update their stand-alone
philosophy. In this age of cyberspace, no entity can stand alone as the IRS is attempting
to do, They need to embrace the help that has been offered through organizations such as
CERCA and individual stakeholders such as Bank One. We stand ready with commitment
and resources to help maintain the most efficient and fair tax system the world has ever
known, Please urge the IRS to let its stakeholders help,

Si ¢ , LL
pet Galvin

Vice President
Bank One, Columbus, NA

cc: Margaret Milner Richardson


46

Ms. RicHarpson. Absolutely.

Mr. Hancock. I am wondering what your projections are. Are we
going to continue to see these increases? I would think that you
would have this broken down into agés and what have you, just
like a business would. I wonder if we might be able to get that in-
formation, the numbers of accounts and the age on them like a
business would?

Ms. RICHARDSON. Absolutely.

Probably the biggest single factor contributing to that dramatic
growth was a change in the law that required us to keep accounts
receivable on the books for 10 years instead of 6 years. So, unlike
a business and ones that you probably are most familiar with
where you write them off after a certain point when people are
dead or bankrupt or whatever, we are not in a position to do that.
But we do have that breakout and can get you that information.

Mr. HaNcock. Pardon me. You mean if you find that this indi-
vidual is no longer around and that the estate is settled, you still
have to keep it on the books?,

Ms. RICHARDSON. Yes, sir. We can break it out in great detail be-
cause it is not the way you would keep your accounts receivable in
a business day in and. day out—at least in a realistic way. But the
Jargest single increase has been attributable to the fact that we
had to account for them or keep them on the books for 10 years.

Now the 10th year is just ending this year, so next year you will
see a different number. We are working to try to enhance collec-
tions and collect those amounts that are collectible. But there are
some things that are carried in that figure that are not collectible
and will never be collected, and we would be happy to give you a
very detailed breakdown of that.

Mr. Hancock. Thank you.

Thank you, Madam Chairman.

[The following was subsequently received:]


6

Larry Westfall, who is the modernization executive for the Internal
Revenue Service and in charge of the TSM program; I also have
with me Judy Van Alfen, the chief, taxpayer service; Phil Brand,
who is our chief compliance officer; and Bob Wenzel, who is the
chief, strategic planning and communications.

We really do appreciate the opportunity to be here today to talk
about our 1996 bailget request and also the 1995 filing season.

I believe that the United States currently has the best tax ad-
ministration in the world, but we at the Internal Revenue Service
do recognize we can no longer do business as usual. We believe
that American taxpayers have a right to fair and efficient tax ad-
ministration from a customer service-oriented organization. For
that reason, we feel we must be able to take advantage of tech-
nology and business system innovation to collect the revenue owed
at the least possible cost and with as little burden as possible for
taxpayers. ie challenges that face us today—a growing popu-
lation, rapid changes in technology, a global economy, and increas-
ing sophistication in business practices—require innovative and
creative approaches to achieve efficient and effective tax adminis-
tration.

Fiscal year 1996 is a pivotal year for us. Our fiscal year 1996 ap-
propriation will not only shape the agency's future, but, in m: i
ion, it will affect the quality and the effectiveness of tax adminis-
tration in this country for many years to come.

Madam Chairman, this morning, I would like to give you and
your colleagues a sense of the range of our business and what we
are doing to operate more effectively and efficiently today and on
into the next century. The progress toward a more effective tax ad-
ministration system today, however, including the steps that we
took to get ready for the 1995 filing season, will pale in comparison
to the potential the tax systems modernization program will offer
us when it is completed in a timely fashion.

In a few minutes, I am going to ask Mr. Westfall to talk to you
a little more about our tax systems modernization program, but be-
fore he does, I would like to tell you a little bit about how we ac-
complish our mission today, and also our plans for accomplishing
our mission in the year 2001.

I often say that the IRS is like a large multinational corpora-
tion—and we are larger than all but a handful of corporations—
and like other large multinationals, we engage in many lines of
work in order to accomplish our mission. We are in the financial
services business—like a bank or a credit card company—but un-
like most banks and credit card companies, we have to maintain
and service approximately 200 million taxpayer accounts. We re-
spond to taxpayers’ account questions, we adjust accounts, we send
out bills, and we process payments. We also process tax returns
and payments.

For instance, during this filing season, during 1995, we will proc-
ess approximately 1.1 billion information documents and approxi-
mately 208 million returns. Our gross receipts, if you will, are close
to over $1.2 trillion. To accomplish the monumental processing
task, we currently use an assembly line-like process.

Today, processing takes Flace at 10 service centers and 2 comput-
ing centers, and, during the height of the filing season, we work



40

Mr. Matsut. Thank you, Madam Chairwoman.

I have a question directed to the Commissioner from Representa-
tive McDermott who is not able to be here today. May I direct this
to the Commissioner and perhaps the Service can answer it.

Chairman JOHNSON. Certainly.

Mr. Martsut. I want to make two observations before I ask a
question of Mr. Westfall, one is that I have not really kept up with
the tax system modernization program. This is my first year on the
Oversight Subcommittee and so my support of it is, basically, upon
the representations of the Commissioner who I greatly respect in
this area.

I would like to ask Mr. Westfall some questions, however, regard-
ing it. You have indicated, in response to the question from the
chairwoman, that you have been doing this now for approximately
4 years, this TSM system?

ir, WESTFALL. I think what I indicated is that in this particular
tour I have been back here in the Washington office for 4 years.
I have served as program manager for TSM since last June when
the Commissioner announced the major change in how the program
would be managed for the future.

Mr. Matsul. Now, it is my understanding—and I have only start-
ed really getting into this by reviewing the GAO document and also
the testimony today and some documents from the staff—but I un-
derstand since approximately the mideighties this program has
been kind of conceptualized by the IRS. Is this correct?

Mr. WESTFALL, That is correct.

Mr. MarTsul. You were not involved in it at that time?

Mr. WESTFALL. I was involved in it only as an executive in the
field who was interested in modernization and had input into the
original formulation.

Mr. MatsutI. But it wasn’t until the early nineties that we really
started getting into this program and actually coming up with a
scheme, is that correct?

Mr. WESTFALL. That, essentially, is correct, yes.

Mr. Matsut. OK. Now how many managers have been involved
in this since then?

Mr. WESTFALL. The program for the most part——

Mr. Martsut. You?

Mr. WESTFALL. I am the first program manager for TSM in the
form that we have it today. The program was previously managed
by the CIO (chief information officer) more as a technology agenda.
It has become a business agenda in a very large sense, and so the
CIO and that large information systems organization remains very,
very active and dominant in a lot of this, but it has now come
under the management of a business approach.

Mr. Matsul. Because prior to your taking over, which is a few
months ago, this was basically setting up the system conceptually
and on paper, is that correct?

Mr. WESTFALL. A lot of the original investment was in that, yes,
but there have also been systems delivered as early as 1992.

Mr. Matsut. OK. One of the criticisms that the GAO has is that
there is a lack of vision in what you are trying to do, and I am try-
ing to understand this from your franks. can think of three rea-
sons why you want to do this—and you probably can add more.


120

Mr. Herger.

Mr. HERGER. Thank you very much. Ms. Stathis, I believe during
your testimony you mentioned we have been 8 years spending
about $2 billion marginal improvement. I believe that over the next
5 years we are projected to spend an additional $6.7 billion in tax-
payer dollars, but Internal Revenue is indicating that they feel
they will be receiving out of that $6.7 billion, $9.2 million in pro-
ductivity savings. Could you validate these cost estimates and also
validate the productivity savings?

Ms. STaTuIS. I think we will have to get back to you on that. The
$9 billion that you have, is that productivity savings or is that
their estimate of the total benefits?

[The following was subsequently received:]


19

- Examined over 77,700 exempt organizations and 29,300
employee benefit plans; and

- Made determinations on over 62,000 exempt organizations
and 53,400 employee benefits plans.

The IRS is continuing to improve its compliance efforts to
maximize the revenue collected. Enhancing the IRS‘s research
capabilities -~ the linchpin of future compliance efforts -- will
enable the IRS to measure voluntary compliance levels nationally
and locally; identify broad market segments and industries that
are noncompliant; and affect taxpayer behavior through a
combination of information, education and enforcement.

As part of TSM, we have acquired the hardware and software
needed for our National Office Research and Analysis site, as
well as the 31 local District Office Research and Analysis sites.
These sites have been staffed and training is underway. This
research is helping our compliance employees select the most
productive cases for examination and is increasing their
effectiveness during those examinations. These improvements will
not only produce additional revenue but will also reduce taxpayer
burden caused by an inefficient audit process.

We also have other TSM projects underway to increase
compliance and reduce taxpayer burden. The Integrated Collection
system (ICS) and Totally Integrated Examination System (TIES)
automate the examination and collection activities. These
systems increase the productivity of field revenue agents, office
tax auditors, service center tax examiners and field revenue
officers. The TIES and Automated Underreporter (AUR) systems
assist compliance personnel by automating previously manual tasks
such as report writing, tax and penalty computations and a host
of other required actions. These automated systems reduce the
time period to complete an examination by as much as several
months. ICS, which assists collection personnel with the field
collection process, increased revenue officer productivity in the
test site by 26 percent and reduced by 20 days the time it took a
revenue officer to complete a case. The TSM systems are
producing immediate benefits, while at the same time, building
the foundations for the fully integrated system of the future

Automation of Criminal Investigation (CI) is also underway.
During PY 1995, we are piloting the initial phase of the new
Automated Criminal Investigation (ACI) system that, when fully
implemented, will permit CI employees to use information from
sources throughout the law enforcement community. In addition
on a broader scale, Tax Systems Modernization will provide
enhanced capabilities for detecting and stopping those who try to
circumvent the tax system fraudulently.

We have set an ambitious goal to increase overall compliance
to 90 percent by the end of 2001 -~ a goal that will provide an
additional $40 billion in tax revenues by 2001 and every year
thereafter. With your continued support of the FY 1995
Compliance Initiative and TSM, we will be able to achieve this
goal.

I would like to note that in addition to automation and
compliance efforts, carefully crafted statutory changes relating
to the administration of the tax law can dramatically affect the
amount of revenue collected by the IRS. For example, in the 1993
Omnibus Budget Reconciliation Act, Congress changed the point of
taxation for diesel fuel from the distributor to the terminal and
authorized dyeing of tax- exempt diesel fuel. This change has
reduced fraud and abuse and increased dramatically the amount of
excise taxes collected.

Through the first three quarters of calendar year 1994, the
tax dollars from taxable diesel fuel sales reported on excise tax
returns increased by 34.6 percent over the same period in


14

GAO’s second concern was that new technology would be intro-
duced without making improvements in underlying business proc-
esses. We recognize that upgrading information systems alone is
not the answer to meeting current and future challenges, Con-
sequently, we have rethought the fundamental way we carry out
our mission.

As I briefly touched on a few minutes ago, we are not only rede-
signing our business systems, but are also reorganizing to take full
advantage of modern technology. Taxpayers are already benefiting
from the combination of new business approaches and applied tech-
nology, for example, with more filing and payment choices and, I
think, improved customer service is also out there.

Addressing the GAO’s third concern that the IRS set system de-
velopment priorities and establish performance measures, under
Mr. Westfall’s leadership, we are establishing management control
processes for modernization that demonstrate our commitment to
change and our understanding of what it takes to make change
happen. We now have schedules for implementing TSM, monitoring
the program, and measuring its success. We have plans and sched-
ules against which our performance can be monitored and the suc-
cess of TSM determined.

Madam Chairman, I stated at the outset that fiscal year 1996 is
a pivotal year for us as we continue with our plans to acquire and
implement major new systems. What happens to our fiscal year
1996 budget will impact the tax administration system of the fu-
ture, shaping our ability to effectively administer the tax law and
collect all the revenue that is due. TSM will influence most every
aspect of this business: Our processing capabilities and the filing
season, the effectiveness of our customer service efforts, and our
compliance capabilities, including fraud detection and prevention.

I would also like to reemphasize a point that I have made to you
and Chairman Archer and many of your colleagues on this sub-
committee as I have met with you. I realize that the 104th Con-
gress is considering making changes to the Internal Revenue Code
and one of my concerns is that before any legislation becomes final,
we be given an opportunity to advise you about issues relating to
any burden possible changes may have on taxpayers as well as on
the tax administration system. Particularly when_ legislative
changes occur late in the year, the effect on the next filing season
can be very significant. Some of that burden that is placed upon
taxpayers might be avoided if we could consult with you during the
formative stages of the legislation.

I know, Madam Chairman, that you and members of the sub-
committee have many questions, but if it fits with your schedule,
I would like to ask Mr. Westfall to give you just a brief overview
of where we are with TSM and then we would also be delighted
to answer your questions.

Chairman JOHNSON. Commissioner, if I may, thank you very
much for your thorough overview of the challenges that face the
IRS and the great variety of initiatives that you and your staff
have developed to address them.

[The prepared statement and attachment follow:]


In October 1994, the IRS announced that it would suspend the issuance of direct
deposit indicators (DDIs) to tax return preparers who file returns electronically. The DDI
informs the tax return preparer that the taxpayer's refund is not subject to offset for
delinquent government loans or child support. In the past, the receipt of a clean DDI often
was a pre-condition for a bank to issue a refund anticipation loan,

The IRS also has increased its scrutiny of EITC claims, In particular, it is performing
extensive cross-checks of all names and social security numbers to determine whether or not
they match. A taxpayer’s failure to supply accurate social security numbers could result in a
delay of the person’s tax refund.

DISCUSSION:

The IRS fiscal year 1996 budget request represents an increase of 888 employees and
$726 million over the comparable levels in fiscal year 1995, The Subcommittee will review
how these resources will be applied to carry out the mission of the IRS. In particular, it will
review the status of the Tax System Modernization (TSM) program which is earmarked to
receive over $1 billion in fiscal year 1996. TSM is the program to upgrade the computer and
information handling capability of the IRS.

The Subcommittee also will review the staus of the 1995 tax return filing season.
Special attention will be paid to the steps which the IRS is taking to curb refund fraud. It
will review the consequences of the decision to suspend the issuance of DDIs and the closer
scrutiny of EITC claims. It also will examine ways to reform the EITC to reduce fraud.

DETAILS FO} WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed
record of the hearing should submit at least six (6) copies of their statement by the close of
business, Monday. March 13. 1995. to Phillip D. Moseley, Chief of Staff, Committee on
Ways and Means, U.S. House of Representatives. 1102 Longworth House Office Building,
Washington, D.C. 20515. If those filing written statements wish to have their statements
distributed to the press and interested public at the hearing, they may deliver 200 additional
copies for this purpose to the Subcommittee on Oversight office, room 1136 Longworth
House Office Building. at least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Bact for pou to the by a wines, any writen exit or the prota record
yin cumen arg oes win cman mente Qe ud Bid We. ay Smet
‘xu otto ‘il not he printed. bo el be rr ‘las for review and use bythe
Commitee,

Al stants and any accompanying eis for printing mast be typed in sagt space on legalaan paper and may aot
coco wa 1 gee

2 ‘Copies of whole documents snbmied as exhibit mara wil not be accepted for priadng. tastend exhibit watsral shoud be
referenced and quotd or paraphrased. All exhibit material nt meeting theteapecificatons wil be malntaned ta the Commie Nes for
review and use Oy we Commins.

2 Anon wou pots bang. ving stan i een of pe hang. va tat
tn request for bythe must icin oa is « ato a)
teat pron ropa o wont bball he whee appears.

« A mupplamenil sbeet must accompany each statesmen lating tbe name, fll addres,  aepbons umber where the witness
or te desguate roprosentative may be reached ané a tplal online or mummary af ihe commen and recommendations inthe fll
‘tauement This suppemeatl shoot wil set be include i the pried record.

Tee adore ane apply oly to maura bag fer pening, and enti oF
‘mauarta submited siely for dscibuiu to te Members the press and ha pale uring the coor of «public hesring may be submited lo
cocker forms

Note: All Committee advisories and news releases are now available over the Internet at
GOPHER.HOUSE.GOV, under "HOUSE COMMITTEE INFORMATION’


Prepared for a Hearing before the House Ways and Means
Subcommittee on Oversight

Madan Chair and members of the Subcommittee, my name is Harry
W. Buckley, President and Chief Executive Officer of H&R Block Tax
Services, Inc. I appreciate the opportunity to appear before you
today to present H&R Block's views on the 1995 tax filing season,
IRS' efforts to combat refund fraud, and reform of the earned
income tax credit program.

H&R Block is headquartered in Kansas City, Missouri and is the
nation's largest income tax preparation firm. We serve
approximately 1 out of 7 U.S. taxpayers. H&R Block has over 8,000
company-owned and franchised offices in the United States employing
over 89,000 people during the tax filing season. Last year, we
prepared 12% of all individual U.S. tax returns for a total of over
13 million returns. We also transmitted over 1/2 of the returns
filed electronically last year with the Internal Revenue Service.

We have been serving America's taxpayers since 1955 when Henry
Bloch, and his brother, Richard, founded the company. We have more
experience working with and listening to middle and low income
taxpayers than any other firm. As a result, we are in a unique
position to learn of the particular problems and concerns faced by
America's taxpayers.

I would like to begin my testimony by stating that H&R Block
would recommend the Subcommittee support IRS' FY '96 Budget
requests for both Tax Systems Modernization and funding to combat
fraud. After the Subcommittee's hearing last year on tax refund
fraud, we were pleased to see that IRS's budget request included
‘additional funding for staffing of refund fraud detection. we
encourage Congress to strongly consider making the investment IRS
has requested for the purchase of computer software and hardware.
Both refund fraud elimination and tax systems modernization efforts
are extremely important investments in future IRS operations and
their service to the American taxpayer.

In the forty years we have been serving America's taxpayers
this is without a doubt the most difficult tax season in terms of
our internal preparations and customer dissatisfaction. At H&R
Block, we believe the reason we are the world's largest tax
preparation firm, assisting over 18 million taxpayers last year, is
because of our commitment to providing outstanding service to our
clients. ‘This tax season we have received a substantial number of
customer complaints due to IRS’ inability to effectively
communicate the procedural changes made this tax season. While the
purpose of these changes was to eliminate tax refund fraud,
millions of innocent taxpayers have been penalized and
inconvenienced. It appears that the IRS is out to catch fraud
rather than preventing the filing of fraudulent returns.

H & R Block is very concerned about tax refund fraud and
supports the Administrations’ efforts to combat fraud by
implementing procedures such as cross-checking social security
numbers. Historically, we have worked closely with IRS’ Criminal
Investigation officials in preventing and identifying potential


110

APPENDIX IV APPENDIX IV

standards for the number of hours employees were expected to be
‘on the telephones and the number of calls answered; (3) standard
hours of operation, often extending beyond a 9-hour work day; (4)
nationwide standards and uniform ways to measure operations and
performance; and (5) nationwide call routing and easy access to
customer information.

IRS has not used many of the management practices commonly used
by the organizations we contacted. And, in cases where IRS did
use a practice similar to those in the other organizations, it
was not applied with the same emphasis on customers’ needs. For
example, IRS has had specific goals for answering more calls for
the past 2 years, but these goals are based on the resources IRS
has available, not on taxpayers’ demand for service. IRS
officials believe the gap in the number of calls they are able to
answer compared to the number of calls made by taxpayers is so
great that it would be unrealistic for them to establish goals
based on taxpayer demand.

IRS has, for the first time, provided access to its telephone
assistors for 10 hours per work day during the 1995 filing
season. This may allow more taxpayers to reach IRS, although
there has been no increase in the number of assistors available.
IRS has also been working to improve customer service by
overcoming the lack of nationwide access to taxpayers’ account
information. This has been a major barrier to routing calls
among IRS call sites. Specifically, in February 1995, IRS
provided its assistors the ability to access taxpayers’ accounts
no matter where the taxpayers filed their returns. Thus, IRS can
now route calls to any call site and an assistor will be able to
retrieve any taxpayer's account, which should increase taxpayers’
chances of being served. ‘These are all positive steps, but it is
too early to assess their impact on answering more calis.

Despite the progress made, IRS lacks the capability to centrally
monitor and route nationwide call traffic on a real-time basis to
available assistors anywhere in the country. IRS also still
lacks some basic management practices for its telephone
assistance program, including standards for the number of hours
assistors should be on the telephone and for measuring
performance. We believe that implementing these practices would,
over time, allow IRS to answer more taxpayer calls with its
existing level of resources, but it is unlikely that IRS would be
able to answer all of the calls it receives.


February

69

1994 (cont'd)

Electronic Filer’s Report, ELF Executive provided responses to
questions posed by reporter Rob Hamel on RALs, EITC returns, DDI
and split refunds with the second payment by paper check

Industry telephone contacts with NELCO, Drake, Electronic Filing
Coalition of America and Beneficial Corp.

Numerous telephone conversations with outside stakeholders re:
Revenue Protection and general Electronic Filing, These external
stakeholders were primarily practitioners from across the country
calling in regards to the DDI decision.

IRS Executives briefed local Congressional Representatives on
Revenue Protection Strategy.

Commissioner's letter to Industry providing background on Revenue
Protection Strategy and delay of refund

Commissioner's letter to Members of Congress providing background
‘on Revenue Protection Strategy

Communication audiovisual products addressing overall accuracy,
correct SSN and refund delay message include

+ PBS Tax Clinic aired February 5th on 176 PBS stations; 116 other
PBS stations, numerous cable stations and Armed Forces Television
are scheduled to air it later. The February 5th airing resulted in over
35,000 calls to the Taxpayer Service Toll Free area

+ Public Service Announcements have been distributed to over 8,800
radio stations and 2,400 television stations.

+ Videoguide to Taxes - approximately 5,000 have been distributed to
libraries, 2,500 copies to video outlets, such as Blockbuster, and 2,600
copies to IRS field Public Affairs Officers and Taxpayer Education
Coordinators for local use. GEMSTAR Development Corp. also made
it available to VCR Plus users in three regional markets and several
smaller markets.

Chief Compliance Officer interviewed by Associated Press and
Washington Post reporters about the Revenue Protection
Strategy. News Release IR 95-16 issued, urging accuracy to avoid


24

claims prior to issuing the refunds. We are using the knowledge
gained in recent years to identify indicators of questionable
refunds. With the Los Alamos National Laboratory -- the premiere
authority in computerized pattern detection -~ we are building
more Sophisticated screening techniques. Obviously, we cannot
discuss the specific screens without compromising the
effectiveness of these new tools.

We regret that for some taxpayers, perfectly legitimate
refunds will be delayed this year because the initial screening
criteria flag their returns. But I want to emphasize that
taxpayers who are entitled to refunds will receive them -- as
soon as possible. For true hardships, the Problem Resolution
Program is available for assistance. We estimate that up to
eight percent of all refunds may be delayed this year.

When we have delayed a refund in whole or part, we are
letting taxpayers know why. Our notice explains that the full
refund or remaining refund amount will be sent within eight weeks
unless we determine additional contact with the taxpayer is
necessary to verify the claim.

At our hearing before this Subcommittee last February, we
outlined our four- part refund fraud strategy:

+ First, we are developing a better understanding of patterns
of fraud -~ our work with the Los Alamos National Laboratory
is an example of this.

+ Second, we want to prevent occurrences of error or fraud.
Checking the accuracy of SSNs is an example of this.
Assuring that we have policies and procedures for screening
Electronic Return Originators before permitting then to
access the IRS electronic filing system is another example
of fraud prevention.

+ ‘Third, we want to detect fraud before refunds are paid.

+ The fourth part of our strategy is that we will take
vigorous enforcement action when we uncover fraud. Working
with the Department of Justice and the U.S. Attorneys, we
are actively pursuing criminal violations. In the federal
system, approximately 98 percent of the indictments
involving refund fraud result in conviction, and the average
incarceration is 17 months.

As I stated, we have spent a lot of time this filing season
urging taxpayers to be very careful to file accurate returns
using the correct SSNs for themselves and their dependents. In
addition to including this cautionary information in our tax
packages and in all of our filing season publicity, we also
worked extensively with the tax preparer community and with
financial institutions before the 1994 filing season even ended,
to let them know we would be taking additional steps this filing
season to protect tax revenues against fraud and soliciting their
assistance about how to better accomplish this goal in a way that
would be the least burdensome to taxpayers

ADVANCED EARNED INCOME CREDIT

I could not conclude without mentioning a subject that I,
the Treasury Department and the Administration have worked hard
to promote -- the Advanced Farned Income Tax Credit (AEITC).
Workers who qualify for the AEITC can get up to $105 per month in
their paychecks ~~ whether they get paid weekly or bi-weekly --
by filling out a very simple Form W-5, Earned Income Tax Credit
Advance Payment Certificate and providing it to their employers.
Sixty percent of the total credit available to workers with a
qualifying child is distributed as an addition to their
paychecks; the other 40 percent is paid in a lump sum when they
file their returns. By Claiming the earned income credit on an


143

In response to questions posed to them during the hearing,
two witnesses who were convicted of preparing false Federal
income tax returns made the following comments:

"I am a tax preparer, but I didn't need to apply for
any tax preparer (sic)..."

“E filled out 1040s and signed as the preparer of the
returns. That is all that is necessary in the system.”

"the idea would be for tax preparers, if they (IRS)
could oversee them better. I am not an enrolled tax
preparer (sic) with the IRS. I can go ahead and sign
someone's return. Anyone in this room could sign
another person's tax return as information supplied to
them to the best of their knowledge and sign a return
as a preparer."

The Subgroup also examined preparer penalty data and found
the number of return preparer penalties assessed for fiscal year
1993 numbered 2,392. Interestingly, only 80 of these were
assessed against Enrolled Agents, attorneys and CPAs
(practitioners regulated under Circular 230). ‘Thus, it can be
inferred that 96.65% (2,312) of all return preparer penalties
assessed for fiscal year 1993 were assessed against commercial
tax return preparers. The 1989 CAG looked at similar data from
fiscal year 1988 which indicated that 90.30% of all return
Preparer penalties assessed were assessed against commercial tax
return preparers.

The Subgroup likewise took into consideration the recently
released General Accounting Office (GAO) report which analyzed
the compliance rates of sole proprietors. ‘This report included a
break-down of voluntary compliance, reported as a percentage, by
type of preparer and was extracted from the 1988 Taxpayer
Compliance Measurement Program (TCMP) data. The voluntary
compliance percentage for the “other paid preparers" and
“National Tax Service" categories, which include commercial tax
return preparers, was among the lowest.

Finally, the states of Oregon and California currently have
licensing programs in place for tax return preparers. ‘The Ethics
in Business Practices Subgroup has solicited input from the
administrators of each of these programs to determine their
success or failure. The Oregon State Board of Tax Service
Examiners responded to several questions we posed to them. These
questions and answers are attached to this report as Appendix A.
In light of the current concern regarding refund fraud, the
statement included in answer #2 "Since licensees can be easily
found, fraud is generally low." is particularly interesting.

Having concluded that the regulation and registration of
commercial tax return preparers is highly desirable, the Ethics
in Business Practices Subgroup presents the following model
program to regulate and register commercial tax return preparers.

DESCRIPTION:

Cirewlar 230 would be amended to prescribe rules for the
registration of "Commercial Tax Return Preparers".

1, "Commercial Tax Return Preparer" (CTRP) defined:

‘The current definition of income tax return preparer
found in Internal Revenue Code section 7701(a) (36) (A)
would apply. Practitioners currently covered under
Circular 230 (Enrolled Agents, attorneys and CPAs)
would be exempt.


10

The filing season begins with taxpayers filling out their returns
and sending them to the IRS. Earlier, I described what we are al-
ready doing to process some returns more efficiently. I also want
to describe some steps we have taken to make filling out forms and
complying with the law less burdensome for taxpayers.

We recognize that an easier filing season starts with simpler,
more understandable forms and instructions. We have concentrated
especially on making improvements in forms for small businesses.
Examples of those improvements to date include a new streamlined
schedule C-EZ for sole proprietors and a much simpler form 940,
which is the Federal unemployment tax return, that can be used
by two-thirds of all the form 940 filers.

Last year I created an Office of Small Business Affairs, run by
Barbara Jenkins, who I believe is here with me today. Her office
is working with small businesses to address paperwork and regu-
latory problems and locking for opportunities to apply technology
and increase communications with small business communities.

We are also working with the Social Security Administration and
the States to simplify the tax and wage reporting system to elimi-
nate the need for multiple reporting. Last year, the Social Security
Administration extracted wage information from the W-2s submit-
ted from 12 States and redistributed this information not only to
us, but also to some of the States, eliminating the need for employ-
ers to send paper W-2s to those States. This filing season, 28
States have enrolled in the program.

Where we can, we are using technology to get information to tax-
payers as quickly and as easily as possible. For example, we now
can provide the public with a CD-ROM version of tax forms, publi-
cations, and instructions. This means that copies of forms, publica-
tions, and instructions, even seemingly hard to find ones, can be
printed on demand without having to leave your home or your of-
fice. This year forms and instructions, as well as up-to-date infor-
mation, are available on the information superhighway through
FEDWORLD, which is an electronic bulletin board service. That
gives the public access to files of tax forms, instructions, and publi-
cations which they can print out on their own computers.

This year we expect to respond to 70 million taxpayers through
our phone centers. Our telephone assisters will respond to 36 mil-
lion taxpayer inquiries over our toll-free system, but regrettably
this is stil only 52 percent of the customers who will request the
services of an assister. We want to be able to serve those other 48
percent, too.

Because we understand and feel very strongly that taxpayers
must be informed if they are going to file accurate and complete
returns, I often say that the front end of compliance really is our
taxpayer service function. We are planning to answer 1.3 million
more calls this year than we were given the money to do. Unfortu-
nately, as you will hear later from the General Accounting Office,
this is still far short of the demand.

We have also expanded our hours of service this filing season.
Our telephone lines are now open at least 10 hours a day each
work day, and all IRS telephone sites will provide telephone help
during three Saturdays in April.


141

PROBLEM

In fifteen years, we have come full circle from the IRS discouraging the use of refund
anticipation loans because of the potential for abuse to the IRS creating the environment
where refund fraud could exist by encouraging and fostering the use of RALs. The fact that
approximately 70% of electronically filed returns request RALs shows the popularity of that
program. In fact, because of that popularity, the very future of the Electronic Filing
Program may be in jeopardy unless a way is found to bring the program back to its
performance of the last two years. The question now is how to curtail the filing of
fraudulent tax returns while at the same time meeting the demand that has come into
existence for rapid refunds.

LONG TERM SOLUTION

NAEA suggests that there are two solutions to this problem which wil work in tandem. ‘The
first is enhancing the IRS's ability to perform the necessary checks by computer. ‘The second
‘would be to institute a regulation requirement for all tax preparers.

We realize that this subcommitiee is not specifically charged with the IRS budget. However,
we wish to take this opportunity to recommend to each member of the subcommittee the real
Jong-term solution to this problem. That is the IRS’s Systems Modernization Program. The
funding of this program will give the IRS the computer capability to perform SSN matching
and verification in a short enough period of time to issue the refunds promptly while
simultaneously safeguarding the tax system from the type of refund fraud experienced during
the last two years.

We believe the second part of the solution would be the universal regulation of tax return
preparers. We cite the report of the Sub Group of the Commissioner's Advisory Group
dated January 18, 1995. (A copy of that report is attached.) In that report, the sub group
cited the statistics that 96.5% of all accuracy related tax preparer penalties were assessed
against commercial tax return preparers who were neither EAs, CPAs nor attorneys. The
sub group’s report also cited a GAO study based on the 1988 Taxpayer Compliance
Measurement Program data which showed compliance by commercial, unlicensed tax return
preparers significantly lower than other groups. Finally, the sub group cited the experience
of Oregon and California which have tax return preparer licensing programs and have found
reduced incidence of fraud

We, therefore, urge this subcommittee to support the CAG’s recominendation to begin a
program of registering and regulating commercial (ax return preparers.

SHORT TERM SOLUTIONS

‘The IRS has already taken steps to curtail the opportunities for fraud in the electronic filing,
program. New this year are procedures requiring those preparers who are not currently
regulated and held to the standards of Circular 230, and who participate as electronic filers,
to submit fingerprints and pass a credit check,

The IRS bas also instituted a program of surprise inspections of offices and files of
Electronic Return Originators (ERO) who are electronic filers. ‘These inspections are random
and are not predicated ‘on any evidence or suspicion of wrong doing on the part of the ERO.
‘These inspections are very time consuming for the ERO and can completely disrupt a whole
day of appointments, We question the IRS's right to "browse" through the records of any,
taxpayer whose return was prepared by the office being inspected. If these investigations
could be focused on practitioners where there was a greater likelihood of uncovering
erroneous filing practices, rather than simply at random, they might be more effective. After
ail, the IRS's examination program focuses on returns where there is a larger possibility of
error. Why not apply the same standards to the review of electronic filers?

‘The IRS has instituted the Questionable Return Program where they are performing more
verification on the types of returns which in the past accounted for the preponderance of the
refund fraud. “This program is causing a great hardship among the legitimate filers of refund


Administrative Cost Reduction

In 1993, the President issued Executive
Order 12837, which required all agencies to
reduce administrative costs by not less than 14
percent between 1994 and 1997. The mandated
reduction for FY 1996 is three percent (as it
was in FYs 1994 and 1995) which will reduce
the Service by $34 million,

Streamlining/NPR Reductions

As part of IRS’ implementation of the
recommendations included in the Vice
President's National Performance Review
(NPR), IRS is reducing 442 FTE and $27
million to seduce the overall size of
These FTE will be supervisors
it personnel,

Non-Recurring Costs

When resources are no longer needed by the
Service for the purposes for which they were
originally provided, they are removed from our
budget. For FY 1996, this includes $22
million and 9 FTE, including $11 million for
expected telephone savings and $9 million for
furnishing/equipment in our new office
building.

Productivity Savings

‘As new automated systems are brought on-
line, Service activities realize productivity
savings which are removed from our budget.
For FY 1996, productivity savings are
associated primarily with Automated Criminal
Investigation (ACD), Totally Integrated
Examination Systems (TIES), Integrated
Collection Systems (ICS), Service Center
Recognition/Image Processing System
(SCRIPS), and Counsel Automated Systems
Environment (CASE).

FY 1996 PRODUCTIVITY SAVINGS
(Total Savings = $19.2M and 313 FTE)

‘TIES 10%
Other 7%
y
CASE 198, AE ACI
RSS 2%
SCRIPS 7B
1S 20%
Postage

A postal rate increase went into effect in
January 1995. This budget includes an
additional $5 million to fully fund postage
costs in FY 1996.

Inflation

Each year, our budget request includes an
increase based on expected cost growth
(inflation) over the current year. The IRS
budget includes $59 million for inflation for
FY 1996.

Service Center Workload Growth

In FY 1996, the IRS will need to process an
additional 2.8 million primary tax returns and
issue 1.2 million more refunds than in
FY 1995. We also expect that supplemental
documents (amended returns, extensions to
file, etc.) will increase by 0.2 million. This
workload increase is directly related to the
growth in the taxpayer population. In order to


98

OTHER BUDGET ISSUES

In appendix V, we discuss three other issues related to IRS‘
fiscal year 1996 budget request:

assume the receipt of at least $92 million from new
installment agreement user fees in both years. To the
extent the user fees do not generate the expected revenues,
activities included in IRS* appropriation for processing
returns and assisting taxpayers will be underfunded.

IRS' operating plan for 1995 and its budget for 1996 both

A proposed change in legislative language restricting the

use of money appropriated for tax law enforcement could have

an adverse impact on IRS' continued implementation of its
fiscal year 1995 compliance initiatives.

If the federal employee pay raise for 1996, including
locality pay, exceeds the budgeted 2.4 percent, IRS will
have a funding shortfall in fiscal year 1996
in fiscal year 1995.

That concludes my summary statement. We welcome any questions
that you may have.

just as it has


140

‘STATEMENT OF MICHAEL MARTIN, ENROLLED AGENT
NATIONAL ASSOCIATION OF ENROLLED AGENTS

Madam Chair, Members of the Subcommittee, thank you for your invitation to testify on
behalf of the National Association of Enrolled Agenis, regarding the topic of income tax

refund fraud, and specifically the delay some taxpayers are experiencing in receiving their
refund checks due (0 the IRS's "Questionable Refund Program”

This testimony is being presented on behalf of approximately 9,000 members of the National
Association of Enrolled Agents (NAEA). Members of NAEA are professional individuals
‘whose primary expertise is in the field of taxation. They have established this expertise by
either passing the Internal Revenue Service's comprehensive two-day examination on federal
taxation or by serving as an IRS employee in an appropriate job classification for at least five
years. NAEA members maintain this level of expertise by completing at least 30 hours of
Continuing professional education each year. As you may know, our members are the only
classification of tax professional who ate licensed by the Treasury Department. Our
members represent more than four million (4,000,000) individual and small business
taxpayers annually. It is in our role as the voive for the general taxpaying public that NAEA
provides this testimony,

HISTORICAL PERSPECTIVE

In the late 1970's the tax preparation industry was rocked by a scandal in some ways similar
to the one disclosed last year. It seems that many financial organizations offered (ax
preparation services to clients. As an incentive to potential as well as existing clients these
institutions offered to loan the amount of the refund to the taxpayer as Soon as the return was
completed. The taxpayer would then endorse the refund check in favor of the lender in
order to satisfy the debt,

1k was found that because the tax preparers were paid more for placing loans than preparing
the tax returns, they were inflating deductions and exemptions thus producing refunds larger
than actually due.

‘As a reaction to this abuse, Congress enacted the Tax Preparer Penalties sections of the
Internal Revenue Code (IRC Sections 6694-96 & 6701) whiclt punishes preparers for filing
false returns, negligent preparation or endorsing a refund check.

In the 1990's the IRS was seeking ways lo encourage taxpayers and tax preparers to
participate in the electronic filing program. ‘The IRS has maintained that the ELF program
Feduces its expenditures for processing returns and also increases the accuracy of those
returns.

Electronic filing gave rise to a new industry composed of many more than the traditional tax
return preparers. Rushing to seize this new business opportunity were third party
transmitters of returns, collection sites for preparing and transmitting the returns, and what
became knows as “refund milis". In fact, as recently as 1993, one District Office of the IRS
sent letters to all of the real estate agents in the District encouraging them to offer electronic
filing services to their clients. ‘The letter stated that all they needed was a 2400 baud modem
on their computer. No tax knowledge was required, nor was any licensing, registration or
regulation.

When the concept of the Refund Anticipation Loan (RAL) was conceived by the newly
‘emerging electronic filing transmitter industry, it was not quashed by the IRS. The IRS
indeed adopted and supported the program. The IRS agreed to fuither facilitate the RAL
program by issuing Direct Deposit Indicators (DDI) to verify to the lenders that no offsets
‘would reduce the amount of the claimed refund and thus essentially guarantee the loan.

‘Thus in their zeal to expand the use of electronically filed returns, the IRS promoted the
growth of a new industry that was not subject to many of the preparer penalty rules adopted
in the late 1970's to preclude the problems we see today. ‘The IRS either did not or could
not set up the systems needed to monitor not only the returns being filed but the électronic
transmitters of those returns.



91

Chairman JOHNSON. I am going to submit for the record Mr.
Ramstad’s opening statement.
[The prepared statement follows:]

Statement of Rep. Jim Ramstad
Oversight Subcommittee of the Ways and Means Committee
Hearing on FY 96 Internal Revenue Service Budget
February 27, 1995

Madam Chair, thank you for calling today’s hearing to discuss the budget proposals for the
Internal Revenue Service (IRS).

1 have strong concerns about the dramatic increase in this year's IRS budget proposal. As
‘Congress seeks ways to dramatically reduce the federal deficit -- with spending control that should
affect every government agency -- the IRS has submitted a request for $7.5 billion, a 10 percent
increase over last year.

The IRS, which has 113,963 “full time equivalent" employee positions, has remained isolated
from the federal workforce reduction President Clinton hails. Even worse, the agency is
requesting funding to add 922 full time equivalents.

Perhaps most disturbing, the IRS intends to spend a massive sum on an expensive computer
system, which may not be necessary if this Congress succeeds in simplifying the tax code.

Madam Chair, Dr. James Payne, a leading scholar of our tax system, estimates that the
"overhead" costs of operating our current system consume around $65 of every $100 in revenue
raised. By continuing to build up a massive IRS, it will becoming increasingly difficult to
fundamentally reform our existing tax system.

‘Thank you again, Madam Chair. I am anxious to exploring these critical issues with our
witnesses today.


11

TSM funds are allowing us to replace our equipment with a
state-of-the-art telephone system that provides the capability to
transfer calls among our toll-free sites so that we can reduce delays
and answer more calls. Where that system has been installed, we
are already improving productivity by 10 percent, allowing us to
answer more taxpayer calls. We also have after hours routing to
our automated Tele-Tax system that can address 140 tax topics, as
well as provide refund status information.

We are foing to be responding to more than 22 million pieces of
correspondence this year, and we expect to help more than 7 mil-
lion taxpayers at our walk-in assistance sites. To further our goal
to reduce the burdens on taxpayers, we have expanded the num!
of our assistant sites this year, offering no-cost electronic filing
from the 42 we had last year to 232 this year. Electronic filing at
no cost is also available at over 1,000 volunteer income tax assist-
ance sites.

Clearly, our biggest challenge this filing season has been to put
in place better methods to protect the tax revenue from those who
want to commit fraud. Although the IRS has addressed tax refund
fraud through its questionable refund program for many years,
technology has significantly improved the capabilities of both gov-
ernment agencies and private financial institutions to deliver
money faster. Those shorter payment cycles, coupled with the ca-
pacity for electronic payments, require both public and private in-
stitutions to be more vigilant than ever in guarding against fraud.

Since 1990, the IRS has steadily increased its efforts to control
refund fraud. Significantly more fraud has been identified and
stopped by the IRS and more new schemes have been identified. In
May 1998, shortly after I was confirmed, I appointed an IRS execu-
tive, Ted Brown, right behind me, to coordinate our refund fraud
prevention and detection efforts, and we established a coordinating
group to assure that our entire organization worked in concert to
address problems contributing to refund fraud.

Last spring, in consultation with this subcommittee, the Sec-
retary of the Treasury established a special task force to further
study the problem of refund fraud and propose additional preven-
tive actions. In reporting to the Congress last October, the task
force estimated that erroneous and fraudulent returns could be
costing the Treasury between $1 and $5 billion a year. Since the
hearing on the subject of refund fraud before this subcommittee
last February, we have taken many steps as part of an agencywide
strategy to protect the revenue.

For example, we established new qualification criteria for elec-
tronic return originators. We have used both IRS and outside ex-
pertise to analyze patterns indicative of erroneous or fraudulent re-
funds, and we have reprogrammed a series of filters and screens
into our processing system. Also, we have made additional staff
available to our processing criminal investigation and examination
activities to reinforce our refund protection strategy.

One thing all experts on fraud will tell you is that fraud is
everchanging. We will continue to use the knowledge we gain about
fraud to identify indicators of questionable refunds.

With the Los Alamos National Laboratory, the premier authority
in computerized pattern protection, we are building even more so-


97

delays to EIC-related refunds and (2) telling taxpayers whose
refunds were being delayed because of an invalid SSN what they
must do to correct the situation and get their refunds.

IRS is asking for an increase of $28.3 million and 323 FTEs in
fiscal year 1996 to combat refund fraud. An IRS official told us
that the additional resources would be targeted toward prevention
rather than detection. We agree with such a focus, because it is
less costly and more efficient, in our opinion, to stop a
fraudulent return from being filed than to identify and deal with
the fraud after the return is filed.

Because most of the refund fraud cases IRS identifies. involve the
EIC, you asked for our views on what could be done to make the
EIC easier to administer and less subject to fraud. Refundable
credits, like the EIC, pose a challenge for tax administrators.
In addition to the concerns about fraud, there are equally
important concerns that not all those eligible for the BIC are
receiving it.

We have made several recommendations in the past that could help
to make the EIC less of a problem for IRS and taxpayers. As
discussed more fully in appendix III, those recommendations
called for greater clarity in IRS' forms and instructions;
eliminating differences between the definition of a qualifying
child for EIC purposes and the definition of a dependent for
purposes of claiming a dependency exemption; encouraging the
advance payment option, whereby persons eligible for the EIC can
choose to receive it in advance as part of their paycheck; and
moving toward timely computer matching of employer wage
information with tax return data.

‘TELEPHONE ASSISTANCE

An important indicator of filing season performance is how easily
taxpayers who have questions or who want to order forms and
publications are able to contact an IRS assistor on the
telephone. In reports on past filing seasons, we discussed the
inaccessibility of IRS' telephone service (i.e., the difficulty
taxpayers had in reaching IRS by telephone).’ ‘To determine
whether telephone service was again a problem during the early
part of this filing season, we tested the accessibility of (1)
the toll-free system that IRS tells taxpayers to call if they
have questions about their account, the tax law, or IRS
procedures and (2) the toll-free system IRS tells taxpayers to
call if they want copies of tax forms and publications.

Results of both tests showed that accessibility is still a
problem. Of the 1,166 calls we placed to the toll-free
assistance number, we reached an IRS assistor 156 times--a 13
percent accessibility rate. We were more successful accessing
IRS’ forms ordering system, but even then we were able to reach
an IRS assistor only 47 percent of the time. Our testing
methodology and results are discussed in more detail in appendix
ve

IRS is asking for $17.4 million and 239 FTEs in fiscal year 1996
to help it answer 1.3 million more telephone calls. Although
these additional resources might help improve accessibility, it
will not make an appreciable difference in the large and growing
gap between the number of calls coming into IRS and the number it
answers. We believe that more taxpayers could get through to an
assistor if IRS adopted some of the basic management practices
used by other organizations that operate large telephone
assistance programs. This is also discussed in more detail in
appendix IV.

*See, for example, GAO/GGD-94-65 and GAO/GGD-95-5.


Table IT.1:

102

APPENDIX IT APPENDIX IT
REFUND FRAUD

Over the past few years, more attention has been focused on
refund fraud. Fraudulent refund schemes are generally based on
false claims of federal income tax withheld or refundable
credits, such as the Earned Income Credit (EIC) or the Fuel Tax
Credit.’ Perpetrators of schemes include individuals who make
false Claims using their true names and Social Security Numbers
(SSN) and individuals who make false claims using (1) the names
and SSNs of unsuspecting, legitimate taxpayers or (2) fictitious
names and SSNs.

Although fraud affects all types of returns, much of the
attention has been on electronic filing because the speed with
which those returns are processed has made it more difficult for
IRS to detect the fraud before the refund is issued. Also,
although only about 12 percent of all individual income tax
returns were filed electronically in 1994, about 43 percent of
the returns IRS identified as fraudulent that year were filed
electronically.

Table II.1 shows the growth in identified fraudulent returns and
refunds since 1990. From 1990 through 1994, as indicated by the
information in the table, $102.6 million in identified fraudulent
refunds were issued before IRS could stop them. Of that total,
$78.7 million (77 percent) related to electronic returns.

Number of Detected Fraudulent Returns and Deleted* Fraudulent

Refunds in Calendar Years 1990 Through 1994

Dollars in millions

Paper Electronic Totals?

Refunds | Refunds. Refunds | Refunds Refunds | Refunds
vear_| returns | clained | deleted | Returne | claimed | deleted | Returns | clained | deleted
1990 s.202| s1s.9 | $14. 43 si2| sos] 5,713] si7.1] $15.3
1991 5,422 | 32.3 30.7] 5,746 30.7 2.6| 32,168 42.9 33.3
as9z_ | 12,204] 33.2 30.9| 12,725 33.6| 22.5] 24,969 66.8 53.4
isa | 51,003 | 62.8 73.0| 25,957 s4.0| 29.1| 77,840] 136.8] 102.1
iso4 | 44,137] 90.7%] 1.5 | 33,644 es.e| _35.9| 77,701] _i60.5| 317.4

‘a deleted fraudulent refund is one that IRS has detected and stopped before
the refund is paid out.

"This figure excludes two returns claiming refunds totalling $347 million.

*Totals may not add due to rounding.

Source:

IRS data.

Although the number of identified fraudulent returns is less than
1 percent of the total number of individual income tax returns
filed in any year, we have been concerned about the growth in
identified fraud and the uncertainty as to how much fraud is not
being identified. Accordingly, we have made several
recommendations directed at improving IRS' controls, some of
which IRS has implemented, and have included filing fraud on our
list of high risk government programs. Because the Subcommittee
shared our concern, the Secretary of the Treasury established the
Task Force on Tax Refund Fraud. On October 6, 1994, the Task
Force testified before the Subcommittee and presented numerous
recommendations of its own.



118

Chairman JOHNSON. No, there is not. But they are going to be
talking together and we will have another round about this.

Mr. Levin. Because I am not sure that they would agree with
this description. They gave the example of laptop computers. I do
not quite see why those cannot be plugged into a new system.

Ms. EpwarDs. The hardware may very well be useful. The point
that we are making is about the software, if you will, the engine
that is going to help the hardware provide that service. It is the
software that must integrate. So it is the software, the systems
that have been developed and delivered already, that will have to
be rewritten.

Mr. LEviN. Are you saying it could have now been written so it
could have plugged into an ultimate system?

Ms. Epwarbs. That is correct.

Mr. LEVIN. Well, it seems to me it is fairly easy to get some back
and forth on that.

Chairman JOHNSON. If you will yield?

Mr. Levin, Please.

Chairman JOHNSON. But you yourself said that they have not set
the technical standards, that there is a lot of this plan that they
have not refined and finalized. So I don’t know how they could
have Programmed to the larger plan when the larger plan is not
thoroughly developed.

Ms. Epwarps. That was the point, Madam Chairman, that we
made last year, and we had made the year before as well with re-
gard to the need for IRS to focus on more of the fundamentals, the

ndamentals being those factors that would allow IRS to build
systems that would tie together, and that a lot of attention needed
to be placed there.

Over the past year IRS has made some significant strides in get-
ting those technical standards in place, and they are saying now
that April of this year they will able to give those technical
guidelines.

They are essentially rulings of the road; how do we build things,
how do we write code, what are the norms, if you will, for building
the system. Those guidelines will be available to the project teams
in April of this year, in a couple of months.

Mr. Levin. So you and I are working on the staple points, and
while it seems a bit detailed, it is a really a major issue now.

I do not think, then, you are criticizing their transitional efforts
as much as you are saying they were not careful to make sure what
they are doing transitionally would plug into the ultimate.

Ms. Epwarbs. That is exactly correct.

Mr. LEvIN. Well, why do you not all converse and let us know?
I mean, really, give us—you are all part of the same government,
eventually, and one would hope you could get your heads together
and work this out. You are not so critical of what they have done
transitionally, are you, in terms of the steps they needed to take?

Ms. Sraruis. Mr. Levin, let me say that people who reacted to
this took our term “marginal improvement” as being a criticism.
We are trying to describe to you the facts as we see them in terms
of what has been produced to date. It is not necessarily a criticism,
it is just describing to you what has been produced with the sys-
tems that have been delivered.


October

65

1994 (cont'd)

Briefing of SSA by the Director, Office of Refund Fraud and staff
outlining filing fraud initiatives and potential impact on SSA, stressing
coordination efforts.

Advance notification of ERO changes to states with joint electronic
filing and national practitioner associations.

National press contacted and News Release (IR-94-100) issued,
addressing ERO changes, SSN accuracy and refund delays.

Tax Symposium - Ogden, Utah: brief overview of the Revenue
Protection Strategy emphasized SSN accuracy and refund delay.

Meeting with Commissioner's Advisory Group (CAG) members
discussed general issues on filing season strategies, including potential
for two payments and potential refund delays due to additional filters.

Under Secretary Noble testified before the Oversight Subcommittee -
recommended IRS take the time necessary to review refunds before
issuance.

CERCA meeting discussed Revenue Protection Strategy

Meeting with representatives from the Fraud Service Bureau (FSB) tc
discuss Revenue Protection issues

Press Conference conducted by Treasury Secretary Lloyd
Bentsen, Under Secretary for Enforcement Ronald K. Noble, and
IRS Commissioner Richardson regarding EITC and DDI.

Calls made to industry stakeholders explaining reasons for elimination
of DDI

Correspondence mailed to notify EROs of changes and application
procedures

FTA Board of Trustees meeting discussed ELF strategies, emphasis on
DDI and Revenue Protection Strategy, emphasis on SSN validity and
refund delay

A news release on SSN accuracy and refund delays, developed jointly
with SSA, was distributed to 1300 SSA field offices for local use


71

Mr. ZIMMER. This is a fact.

Ms. RICHARDSON. It was in December we put out press releases.
We met with the people in the industry.

Mr. ZIMMER. Can you tell me why you send the second check as
a paper check?

Ms. RICHARDSON. I can say that the taxpayer is entitled to the
refund, and we send the refund to the taxpayer.

Mr. ZIMMER. But the taxpayer has requested that the entire re-
fund go to the lender. Can you explain why you are disregarding
the taxpayer’s request?

Ms. RICHARDSON. This is the subject of a lawsuit so I have been
advised not to discuss it.

Mr. ZIMMER. So you can’t—OK.

At what point did you inform the public that you would delay re-
funds on so-called questionable returns?

Ms. RICHARDSON. Again, before the end of last year’s filing sea-
son we said we were going to take steps to do that. Throughout all
of our meetings last summer I think with the industry groups, from
the time we began focusing on this issue, we made it very clear
that we would delay refunds, take any other steps necessary to
make sure that only the people entitled got them.

Mr. ZIMMER. How do you define questionable as in questionable
returns?

Ms. RICHARDSON. I beg your pardon?

Mr. ZIMMER. How do you define a questionable——

Ms. RICHARDSON. Where, on the face of it, it appears that some-
one may not be eligible for a refund.

Mr. ZIMMER. How long a delay can a taxpayer anticipate if there
is something—.

Ms. RICHARDSON. Where we have held up the refund funds, we
have sent letters to taxpayers informing them that it.could be up
to as long as 8 weeks.

Mr. ZIMMER. Do you have enough——

Ms. RICHARDSON. If there is additional information that we need
from them, it may even be longer, but we are trying to process
things as quickly as possible and get the money out as quickly as
possible to the people who are eligible.

Mr. ZIMMER. Do you have enough experience to know how long
the average delay is at this point?

Ms. RICHARDSON. We don’t.

Mr. Zimmer. OK. Thank you very much, Madam Chair.

Ms. RICHARDSON. Thank you.

Chairman JOHNSON. Thank you.

Mr. Hancock.

Mr. Hancock. Yes. I had a question asked to me over the week-
end that I just remembered, and I figured that maybe we can get
it on the record right now. This particular question was the State
of Missouri now is requiring a copy of the Federal income tax re-
turn to be submitted with their State income tax return if it is
itemized. The question is, since the Federal return is supposed to
be confidential, can a State legally require a copy of the Federal
return?

Ms. RICHARDSON. We will get you an answer.


16

improve IRS’s ability to maintain accurate taxpayer accounts and
correct errors; and 3) to
authorized employees to improve customer service and compliance.

TSM is an integrated approach that combines updated business
practices with updated technology to improve the current tax
administration system. Some TSM projects are already a reality.
without this integrated approach to modernization, the IRS will
be forced to merely replace in a piecemeal fashion the antiquated
system we have today without overall improvement. Despite the
progress made so far, we recognize that we have more work to do.
As I am certain each of you recognizes, taking full advantage of
technology and business system innovation is not an easy task; it
takes much careful planning and investing over tine.

Before turning to specific details about TSM, I would like
to share with you how we accomplish our mission today, and our
plans for accomplishing our mission in the year 2001. The IRS is
like a large multi-national corporation -- larger than all but a
few Fortune 50 companies -- and, like other large multi-
nationals, the IRS engages in many different lines of work to
accomplish its mission.

We are in the financial services business -- like a bank or
credit card company -~ and we maintain approximately 200 million
taxpayer accounts. As part of this line of business, the IRS
responds to taxpayers’ account questions, adjusts accounts, sends
out bills and processes payments.

PROCESSING RETURNS AND PAYMENTS

In addition to our financial services business, we process
tax returns and payments. During 1995, we will process
approximately 1.1 billion information documents and approximately
208 million returns, and our “gross receipts" will be over $1.2
trillion. To accomplish this monumental task, the IRS currently
uses a factory assembly line-like process. Today processing
takes place at ten Service Centers and two Computing Centers by
round-the-clock, seven-day-a-week shifts during the height of the
filing season. ‘In the days just before and right after April
15th, mountains of mail arrive at our Service Centers by convoys
of tractor trailers.

To reduce the burden on taxpayers and enhance voluntary
compliance, the IRS must accurately and promptly accomplish this
massive processing job. Between 1986 and 1994, the number of tax
returns filed increased by almost 15 million, while the staff
processing these returns decreased. As a result, the IRS
recognized a real productivity improvement of 12.6 percent during
that period. The result of this eight-year focus on productivity
is that our ten Service Centers are currently operating at
virtually their maximum levels of efficiency and quality. with
the limitations of our current system, there is little or no
further room for productivity increases at the Service Centers.

By the year 2002, the IRS will be receiving 27 million
additional tax returns, more than the entire workload of one of
our 10 Service Centers today. We are concerned that this
increased volume could put at risk our ability to accurately ana
promptly process returns and payments, particularly since our
current system cannot be modified quickly to adjust to tax law
changes.

TSM has already begun to help us meet the increased demands
on our overburdened infrastructure by providing alternative
methods of filing and receiving tax returns and payments. A
Paper return must travel by mail to the Service Center, be
processed through our mail room, transported to a data entry
clerk and key punched into the system. This process is not only
outdated and labor intensive, but also prone to errors by both
taxpayers and the IRS. In contrast, nearly 16 million


160

assistance in working with the Internal Revenue Service 10 develop a reasonable regulation that
will solve this problem.

‘Communications Issues
‘The problems that have arisen this year as a result of poor communications regarding the new
steps that the IRS has taken to stop refund fraud are best explained by looking first at an
example of how well the Service can communicate on these issues when it has the time and the
resources, This year, as part of its efforts to control refund fraud, the IRS placed new
restrictions on electronic return originators (ERO's), the practitioners who register to transmit
returns electronically to the Service. New applicants would have to go through a substantial
review process and even those renewing prior year’s applications could find themselves
submitting substantially more information. ‘The new rules would affect many practitioners and
getting the information out to them was of critical importance both to the IRS and to
organizations like NSPA.

‘The day before the IRS made its formal announcement of the new rules, a meeting was held
with practitioner organizations in Washington, DC. The Service released to the organizations
advance copies of the Revenue Procedure describing the application provess and the
background check requirements. Several top level IRS staffers familiar with the program
made themselves available to answer any questions that arose either at the meeting or later.
This outreach effort was successful because it enabled the associations to carry accurate
information to our members almost before they heard it anywhere else and it empowered the
‘groups to accurately answer the question of those members who had heard bits and pieces of
Information elsewhere. It recognized the fact that on many Key issues, the JRS and the
practitioner community are in fact partners in the administration of the tax system.

Unfortunately, this level of communication on the new fraud contro! programs this year did
not continue. Since the introduction of the new ERO rules, three examples of inadequate
communication between the Service and the practitioner community have arisen that clearly
demonstrate the importance of this partnership.

‘One new too! implemented this year was the 1040-V voucher form, designed to help the
Service bewter track payments for balance-due returns filed electronically and for other
specialized types of individual returns, The Service has also run several experimental
programs in different districts aimed at more efficiently processing payments, including
providing different addresses to which taxpayers can mail their return depending on whether
they are getting a refund or paying a balance due. ‘The Service did not adequately publicize
these programs before filing season began, though, and groups like NSPA have fielded a
considerable number of questions trom confused practitioners who, after many years in the
business, find themselves in the embarrassing position of not knowing where to send their
clients’ returns.

Asa result, the IRS released on February 7 a "Practitioner Alert” attempting to clear up the
confusion caused by the new procedures. While the release did answer the questions of most
Practitioners, the timing makes the release less than fully effective. Many practitioners, even
‘at the beginning of February, are so immersed in tax preparation that few outside sources of
information reach them effectively. in order to effectively support these IRS tests, the
practitioner community must be brought into the loop much earlier in the development of the
new procedures.

Another new procedure that the IRS put into use this year to control fraudulent claims for the
earned income tax credit (EITC) is a split payment of refunds that include a questionable claim
for the credit. ‘This extra time allows the Service to perform more detailed checks on these
questionable claims while still refunding withheld taxes to the taxpayer as quickly as possible.
While these new checks will undoubtedly save the Treasury from paying out fraudulent claims,
inadequate communication regarding the process has led to considerable confusion among the
taxpaying public and the practitioner community.

‘The Society would like to make perfectly clear that we do not question the right of the Service


99

APPENDIX I APPENDIX I
TAX SYSTEMS MODERNIZATION

IRS first articulated its plans for modernization in the mid-
1980s and laid out a more specific vision in the early 1990s.
IRS' vision calls for a work environment that is paper-free and
where taxpayer information is readily available to IRS employees
wherever and whenever it is needed. The focus of any TSM systems
investment, then, should be on delivering the capabilities of
this vision, such as paperless processing, rapid update of
taxpayer accounts, and instant access to taxpayer data when
responding to taxpayer inquiries.

IRS is funding 41 projects in fiscal year 1996 under the auspices
of TSM. Thus, TSM has grown to more than double the 18 projects
funded in fiscal year 1993. It is reasonable to expect that any
project funded under TSM would be focused on providing essential
SM capabilities. Instead, some projects funded under TSM have
focused on the current systems environment.

The systems that IRS has delivered to date under TSM, including
the Electronic Filing System, the Automated Underreporter System,
the Integrated Collection System, and Corporate Files On-Line
(CFOL), have marginally improved IRS' current tax processing and
compliance operations. However, they were not built to be an
integrated part of the comprehensive TSM program and they have
not delivered the large increases in capability and customer
service that IRS hopes to have in the future.

For example, CFOL, which provides on-line access to taxpayer
account information in the existing IRS master files, brings some
marginal benefits to IRS. Tt speeds return processing by
permitting electronic verification of taxpayers’ names and
addresses, and it gives telephone assistors access to taxpayer
account information to help answer questions. However, CFOL's
information cones from master files only and does not reflect
taxpayer data that may be in other systems, such as the
collection and examination systems. Thus, a telephone assistor
may not have all relevant and current information when answering
a taxpayer's questions. A future TSM module is to provide on-
line access to complete taxpayer information.

The fiscal year 1996 budget request for TSM includes other
systems that will enhance the current environment but not be an
integral part of the future TSM program. These systems include
the Examination Automated System, which automates the field
examination processes; the Integrated Collection system, which
automates the field collection process; the Corporate Systems
Modernization and Transition, which replaces and upgrades the
Martinsburg and Detroit mainframe computer systems; and the
Service Center Recognition/Image Processing System, which
replaces the current optical character recognition of simple tax
returns and documents. ‘The examples cited account for $156
million, or about 15 percent of the 1996 request for TSM
development.

We believe that these systems should not be funded as part of
TSM. We do not dispute the value these systems could add to the
current. environment, but as part of TSM, they shift agency and
oversight attention away from the critical path of actions
necessary to achieve the ultimate TSM objectives. Specifically,
progress in the stand-alone, current-environment systems is not a
barometer of progress in activities essential to achieving the
TSM objectives.

TSM COSTS ARE UNCERTAIN

IRS has been unable to provide us and the Congress with reliable
estimates of what the overall cost of TSM will be. As of October
1992, IRS was estimating that TSM would require about $8.9
billion for systems development and a total of $23 billion


21

In our recent testimony before the House Appropriations
Subcommittee on Treasury, Postal Service and General Government,
the GAO expressed three basic concerns it had about the
successful completion of TSM. The first concern focused on
technical and management expertise and skills. Madame Chairman
we have worked hard to assure that we not only have the IRS
personnel necessary to do the job, but that we are also including
outside experts in the project.

About 75 percent of the proposed TSM budget would pay for
contractor provided products and services. Two major support.
contractors, the Illinois Institute of Technology and the TRW
Corporation, have worked with us for some time to develop and
manage the TSM effort. We also are relying heavily on oversight
and guidance from the National Research Council, as well as the
GAO.

The second concern was that new technology would be
introduced without making improvements in underlying business
processes. We recognize that upgrading information systems alone
is not the answer to meeting current and future challenges.
Consequently, we have rethought the fundamental way we carry out
our mission. We are not only redesigning business systems but
are also reconfiguring our organization to take full advantage of
modern technology. Taxpayers are already benefitting from the
combination of new business approaches and applied technology,
for example, with more filing and payment choices and improved
customer service.

Maybe the most important step I have taken as Commissioner
in connection with TSM has been the appointment of Larry Westfall
as the Modernization Executive. On June 30, 1994, T issued a
memorandum throughout the IRS detailing his role in managing TSM.
He reports directly to me and my memorandum made it very clear
that everyone in the IRS reports directly to him in all matters
concerning TSM. In other words, he is the TSM program manager
and has the responsibility for overseeing every aspect of
modernization, including the use of outside contractors.

Under his leadership, we have also established management
control processes for modernization that demonstrate our
commitment to change and our understanding of what it takes to
make change happen. We believe this addresses GAO’s third
concern ~- that the IRS set system development priorities and
establish performance measures.

As part of this new approach, we have conducted a number of
critical project reviews to ensure the early identification and
resolution of issues. These reviews will enable us to better
identify and control risks involving modernization and ensure
that we remain on track.

We now have schedules for implementing TSM, monitoring the
program and measuring its success. Our Business Master Plan
Integrated Transition Plan and Schedule, and the Concepts of
Operations were prepared this past year and these documents
provide the program and project level priorities for TSM. They
clearly identify the milestones and accountability for
development of the operational capabilities that create the
modernized IRS. They also form the baseline set of plans and
schedules against which our performance can be monitored and the
success of TSM may be determined.

The Modernization Executive is working with the
Infrastructure Project that was established in the Chief
Information Officer organization to complete delivery of the
remaining architectural and integrated design components of TSM
by summer 1995. Next month, as we committed to the Subcommittee
on Treasury, Postal Service, and General Government, we will
provide Congress a timetable for the systems architecture and
integration requirements and comprehensive data standards.


50

Chairman JOHNSON. Mr. Levin of Michigan.

Mr. Levin. Thank you.

Let me continue the Chair’s discussion of TSM, and I very much
agree with her that every hearing doesn’t have to be entirely adver-
sarial. We do have a stake in an IRS that collects. It is the basis
of compliance. We want to be sure others pay. So let’s focus for a
few more minutes on the GAO report.

You have responded about marginal improvements, but they
then go on to say that you seem to be focusing on automating old
processes, and you need to focus better. They say they are con-
cerned about potential management problems. You don’t have the
management skills to handle it.

By the time you do so, new systems will take over the present
systems. All of us I think know about that. New processes occur
faster than we can update our own. Again, you should direct your
attention to a small number of projects that address critical gaps
in mission performance.

Try to get to the nub of this. I am not sure—if you read your tes-
timony and the GAO’s report, it is really hard to understand what
is the gist of all this. I mean, forget all the kind of fancy language.
What are they saying and what are you saying in response?

Mr. WESTFALL. I believe that a significant amount of this issue
goes to current systems improvements, as opposed to those that
might be focused on the fully integrated solution. I will give you
an example.

There is a system that is developed and basically, for the most.
part, is an automation of existing processes as opposed to being a
major business reengineering endeavor. It is called the integrated
collection system. That system is programmed, and it is prototyped
and proven. We have spent money and would hope to continue to
spend some amount of money in rolling that system out nation-
wide.

Now, in doing that, we don’t do it recklessly. There is a nearly
10 percent Productivity implication in that system going online
based on the fact that having the access to a laptop and the infor-
mation stored in laptop form when a revenue officer goes to the
field significantly improves the efficiency of a revenue officer.

It has also been proven in prototype that a revenue officer, work-
ing in this automated environment and with access to the addi-
tional information as they work in the field, is producing more than
20 percent additional average revenue per case closed, per case
worked. So not only are the cases being worked faster, but the rev-
enue generation out of the cases is greater.

We have made a decision in that particular case that this short-
term system is worthy of spending TSM funds, investing in the
gains that are there today in that particular system as we move
forward toward the ultimate system of the future.

That is an example I think of some of the contention—I believe
GAO might assert. It might be an example of a system that they
would view as not worthy of continuation; that they believe that
our money would be better spent on the longer term TSM initia-
tive. GAO can speak for themselves. I believe that is a fair trans-
lation of where they might come out on that particular system.


95

TESTIMONY OF JENNIE S. STATHIS, DIRECTOR
TAX POLICY AND ADMINISTRATION ISSUES
GENERAL ACCOUNTING OFFICE,
Madam Chairman and Members of the Subcommittee:

We are pleased to be here today to participate in the
Subcommittee's inquiry into the administration's fiscal year 1996
budget request for the Internal Revenue Service (IRS) and the
status of the 1995 filing season.

our statement addresses four main issues--the status of IRS' Tax
Systems Modernization (TSM) program, IRS' efforts to control tax
refund fraud, steps that might be taken to make the Earned Income
Credit (E1C) easier to administer and less susceptible to fraud,
and the ability of taxpayers to reach IRS by telephone. We also
have some discussion of other issues related to IRS' budget
Foquest. Each issue 1s discussed in an appendix and summarized
below.

BUDGET OVERVIEW

IRS" budget request is for about $8.2 billion and staff of
114,885 full-time equivalents (FTEs), an increase of about $739
million and 922 FTEs over IRS' expected fiscal year 1995
operating level. This overall increase is a net of various
increases and decreases, including (1) increases to enable IRS to
maintain current operations, (2) several reductions that
represent IRS' share of the administration's initiatives to
reduce the size and cost of government, and (3) increases to fund
program changes.

Of the $521.3 million in requested program changes, $475.6
million is for automation projects, and the bulk of that ($420.7
million) is for projects that IRS considers part of TSM. The
other $45.7 million is intended to help IRS deal with the two
most predominant filing season issues so far this year and in the
recent past--the need to better control refund fraud and the
difficulties taxpayers experience in trying to reach IRS by
telephone.

TSM

IRS is requesting $1.03 billion in fiscal year 1996 for TSM
development, an increase of 66 percent over IRS' proposed
operating level for fiscal year 1995. IRS is also requesting
$61.2 million for the operation of completed TSM systems.

IRS initiated TSM in 1986 because its tax processing system, the
same system still in use today, was outdated and in desperate
need of repair. This processing system has remained virtually
unchanged since it was automated in the early 1960s. For
instance, most of the 200 million returns that IRS receives each
year are’still submitted in paper form, and only part of the
information from these forms is keyed into computers. ‘The
processes that IRS employees use are paper-driven and labor
intensive, and employees must contend with taxpayer data that are
sometimes difficult to access and that may be outdated and
incomplete. Taxpayers, too, are frustrated by often futile
attempts to get information when they contact IRS.

TSM is intended to change all this by creating a new tax
processing system that virtually eliminates the reliance on paper
and that makes taxpayer information available to IRS employees
wherever and whenever it is needed. IRS top management has
provided a vision of this new workplace and has redefined the
organization to be more responsive to taxpayers’ needs and
mission demands. In addition, IRS is planning to improve key
business processes with a goal of achieving dramatic gains in
service and productivity, However, after 8 years and an
investment of almost $2 billion in TSM systems, IRS has realized
only marginal improvements in its operations.

Some initial systems have been completed with TSM funds, but most
of these systems simply automate old processes without
substantially improving service to taxpayers. We do not dispute


Conclusion

FY 1996 is a critical year for tax
administration, and the Service's budget
request responds to this challenge. Continued
modemization of our existing overaged tax
systems, timely and effective enforcement of
the tax laws, and strong support for customer
service are the bases of this budget. As the
IRS re-engineers itself for tax administration in
the 21st Century, we are committed to fair,
effective, efficient and constantly improving
revenue collection.

33


133

fraud before the returns are filed. Our quality control associates
are trained to subject each W-2 brought in by our clients to a
stringent review process. Our computer systems are programmed to
check the reasonableness between wages and withholdings on tax
returns we prepare.

THE 1995 TAX FILING SEASON

As I mentioned, millions of taxpayers are finding that their
tax refunds are being delayed because of changes in IRS policy that
have not been effectively communicated. Let me give you sone
examples of individuals who were unaware of the recent changes in
IRS procedure and were negatively impacted by these as a result.

one taxpayer served by our Akron, Ohio office is an BITC
recipient who needed her refund to bury her grandson, but has found
out that her full refund will be delayed.

A taxpayer here in Washington, DC who has received EIC every
year and uses it to pay his bills and daughter's college tuition,
received only a $100 refund and is waiting for the EIC portion of
$2,000. Meanwhile his bills are going unpaid and his interest
costs are escalating.

Another taxpayer is a single parent, divorced, with three
children (including one preschooler in day care). This individual
has moved several times in the last few years, has misplaced birth
certificates, and has to use post office boxes because her mail has
been stolen.’ For her to receive the EIC portion of her refund, she
is likely to be required to complete a two page questionnaire and
submit pages of documentation.

This will require her to do the following:

© Obtain and make a copy of her divorce decree.

© Obtain a copy of her post office box application.

© Obtain and make copies of her childrens’ birth
certificates.

¢ Obtain and make copies of report cards or other school
records for her two school-aged children.

© Obtain a notarized statement from her day care provider.
© Obtain ex-spouse's social security number and address.
@ Mail all these documents in a package to IRS within 30
days.

I want to call your attention to the fact that the 9598 form
indicates that if IRS does not receive the information they have
requested from the taxpayer within 30 days of date of the letter,
the credit will be disallowed. The 30-day time frame seems
unreasonable considering the paperwork that must be gathered to
complete this form and the fact that the clock starts running with
of the date on the letter, not upon taxpayer's receipt. We have
been unable to find out if IRS is considering EIC validation for
documentation received after the 30-day period for taxpayers with
extenuating circumstances that prevented them from meeting the
deadline.

Normally, the filing season is very hectic for H&R Block,
but in the past we have had the benefit of the knowledge of the IRS
rules and procedures well in advance. I want to cite some examples
of new procedures we have had to implement this tax season.

¢ For the first time, Block has put into service a Voice
Response Unit to handle over 5 million phone calls from
clients checking on whether they qualify for a Refund
Anticipation Loan (commonly referred to as a RAL).

© For the first time, I personally had to sign 4,000 (Form
8633's twice for a total of 8,000 signatures) for each of our


17

electronically filed documents, including 14 million individual
tax returns, bypassed these costly and inefficient steps last
year. As a result, these electronically filed documents were
Processed with an accuracy rate of 99.5 percent -- significantly
higher than the accuracy rate for paper returns. Errors, by both
IRS and taxpayers, represent re-work at a significant cost and
burden to the Service and possible cost and burden to taxpayers
if we have to contact them to correct errors.

By changing the way we do our business through increased
productivity and various alternative electronic filing methods
the IRS is already processing some tax returns and payments more
efficiently. But without full implementation of TSM,

we will be severely limited in our ability to achieve additional
breakthroughs due to the age and capacity of our current systems.
The current systems used for receiving and processing returns and
payments are nearing or beyond their life expectancy. In
contrast, the IRS‘s modernized system will use fewer resources
and accurately capture up to 100 percent of return information
that will be available immediately

Although we are making significant progress modernizing the
way we conduct our business, we need your continued support to
completely transform our current 1960’s assembly-line processing
operation into an automated, efficient operation worthy of the
2ist century. A fully implemented TSM program will enable us to
fundamentally change the way we manage taxpayer accounts, and
funding our FY 1996 Budget request will help to ensure that the
TSM program is completed in a timely fashion.

TAXPAYER ASSISTANCE

Another way we are changing the way we do business is by
finding new and better ways to interact with taxpayers.
Recognizing that correspondence is labor- intensive, costly, and
burdensome, the IRS has focused on making significant, meaningful
improvements to its telephone operations. Taxpayers should be
able to get through to IRS on the first call and have their
issues resolved. We have already enhanced our systems through
TSM, so today IRS representatives anywhere in the country can
research and update taxpayers’ accounts regardless of where
taxpayers live. Future TSM enhancements will include expanded
safeguards designed to protect access to taxpayers’ accounts and
a fuller access to available data.

To improve the way we interact with taxpayers, we have
studied and are implementing the best practices of private
industry. Our actions will result in better service and
increased revenue collection. For example, we can now transfer
telephone traffic among 27 sites nationwide to balance workload
and maximize service availability to taxpayers.

Although we have made progress in the way we interact with
taxpayers, we know that we can and must do more. Much of the
progress to date can be credited to Tax Systems Modernization,
and, to continue this progress, we must fully implement the
modernization program by the year 2001.

Future TSM improvements planned specifically to help the IRS
better interact with taxpayers include adding interactive
capabilities to our telephone system which will provide taxpayers
with secure, self-help account information capabilities, much
like those available today with other financial institutions.

For example, taxpayers will be able to use their telephone keypad
24 hours a day to access their accounts to determine any
outstanding balances, receive refund status, or arrange for a tax
payment plan.


61

Mr. ZIMMER. Obviously. That is a very good idea. But, by the
same token, do you not feel that it is your obligation to inform tax-
payers of a change in the procedures so that they can put their fi-
nancial affairs in order?

There are a large number of taxpayers who applied for loans in
anticipation of their refund. There were banks and other financial
institutions that lent them the money, and now they find that a
portion of the refund is being sent directly to the taxpayer by
check—by paper check rather than by electronic transmission to
the lender. This is not only a problem for the lenders but for the
taxpayers as well.

If I get a check from the IRS, I am going to cash it. Sometimes
my wife asks me what it is for, but I usually—the first impulse is
to cash that check. That is money that is owed to the financial in-
stitution they borrowed from in anticipation of the refund. These
taxpayers, by definition people of modest means, are really imperil-
ing their credit rating as a result of that portion of the loan not
being repaid.

Now, could you tell me what steps were taken in 1994 by the IRS
to inform the taxpaying public and the relevant financial institu-
tions that this change was about to take place?

Ms. RICHARDSON. Maybe you aren’t aware, we are currently in
litigation over many of the issues you have just talked about, so I
am not in a position to comment other than fairly generally.

But, beginning even before the end of the filing season Yast year,
as the concerns about refund fraud were voiced by this subcommit-
tee, by other committees, the Treasury Department set up a task
force; and we announced and worked with a number of the practi-
tioner groups, the public.

Any time I have ever spoken and had the opportunity, I have in-
dicated that we were going to be changing our procedures and proc-
esses for this filing season, that we would be taking whatever steps
we thought would be prudent and appropriate to assure the integ-
rity of the refund system.

In the tax package this year we indicated the importance of filing
accurate information, accurate Social Security numbers and that
we might have to do some compliance reviews on certain returns.
So I think we have worked—my filing season press conference, we
had a significant amount of publicity about the fact that we were
going to be changing our approaches this year and stepping up our
efforts.

So, as I said earlier, I am sorry that there are some people who
have legitimate claims who are going to have their refunds held up,
but we really do think it is important to promote integrity in the
system.

Mr. ZIMMER. When did the IRS inform the public that it would
issue some of the refunds in two installments, one that could be
electronically transferred to the lender and the second is a paper
check? When was that information made public?

Ms. RICHARDSON. I believe that was in December, perhaps.

Mr. ZIMMER. How was it promulgated?

Ms. RicHarpson. I will have to get you the specific information.
Again, this is a subject of a court proceeding and—but I will—

The following was subsequently received:]


130

believe the reason we were the world’s largest tax preparation firm
assisting over 18 million taxpayers last year is because of our com-
mitment to providing outstanding service to our clients.

This tax season we have received a substantial number of cus-
tomer complaints due to the IRS inability to effectively commu-
nicate the procedural changes made this tax season. While the pur-
pose of these changes was to eliminate tax refund fraud, millions
of innocent taxpayers have been penalized and inconvenienced. It
appears that the IRS is out to catch fraud rather than prevent the
filing of fraudulent returns.

We are very concerned about tax refund fraud and support the
administration’s efforts to combat fraud by implementing proce-
dures such as cross-checking of Social Security numbers. Histori-
cally, we have worked closely with the Internal Revenue Service
criminal investigation officials in preventing and identifying poten-
tial fraud before the returns are filed.

Our quality control associates are trained to subject each W-2
brought in by our clients to a stringent review process. Our com-
puter systems are programmed to check reasonableness between
wages and withholdings on tax returns.

As I mentioned, millions of taxpayers are finding their tax re-
funds are being delayed because of changes in IRS policy that have
not been effectively communicated. Let me give you some examples
of individuals who are unaware of the recent changes in IRS proce-
dure and were negatively impacted by these as a result.

One of our clients in Akron, Ohio, is an earned income tax credit
recipient who needed her refund to bury her grandson, but has
found out her full refund will be delayed. A taxpayer here in Wash-
ington, D.C., who has received EITC every year and uses it to pay
his bills and daughter’s college tuition received only a $100 refund
and is waiting for the EITC portion of $2,000. Meanwhile, his bills
are going unpaid and his interest costs are escalating.

Another taxpayer, a single parent, divorced with three children,
this individual has moved several times in the last few years, mis-
placed birth certificates and has to use post office boxes to receive
the EJTC portion of her refund because her mail has been stolen
from her. She is likely to be required to complete a two-page ques-
tionnaire and submit pages of documentation including obtaining
and making a copy of her divorce decree, obtaining a copy of her
post office box application, obtaining and making copies of birth
certificates, obtaining and making copies of report cards or other
school records for her two school-aged children, obtain a notarized
statement from her day care provider, obtain her ex-spouse’s Social
Security number and address, and then mail all these documents
in a package to the IRS within 30 days.

Normally, the filing season is very hectic for H&R Block, but in
the past we have had‘ the benefit of knowledge of the IRS rules and
procedures well in advance. I want to cite some examples of new
procedures we have had to implement this year.

For the first time, we have had to put into service a voice re-
sponse unit to handle over 5 million phone calls that we haven’t
had in the past. For the first time, we have to keep copies of all
W-2s. I personally had to sign 4,000 form 8633s twice for a total


114

Ms. STATHIS. Yes.

Chairman JOHNSON. So the real issue is, is 2 months too long?

Ms. Staruis. I think the issue is going to be whether even what
they are doing is enough.

fhairman JOHNSON. That may be so, but in terms of the current.
criticism, would you say 2 months is too long?

Ms. STATHIS. No, I think it is probably not long enough.

Chairman JOHNSON. Now, to get. back to the phone system brief-
ly, because your evaluation of their accessibility through their
phone system and their evaluation of their accessibility from their
phone system are very different. On the other hand, in their testi-
mony they point to a number of things that are fairly recent
changes on how they manage phone calls.

Have you talked to them recently? How can you explain to me
the discrepancy between your two positions?

Ms. STATHIS. What IRS is telling you is that they have an esti-
mating methodology where they try to estimate the number of tax-
payers who are calling in rather than the number of phone calls
that are made. That estimating methodology has enough guess-
work in it that we quit using it.

But I think our estimates on our 2-week phone call pretty much
matched their estimates. So I am warming to their number. If you
take the five attempts that we made, our number comes up to
about a 45-percent success rate on the five calls. If the same tax-
payer tries five times to call at least during the 2 weeks we were
testing, they would get in maybe 45 percent of the time according
to our test, and that is pretty close to the number that they are
using.

But in terms of the absolute number of calls, we got through 156
times out of more than 1,000, which is a 13-percent number. We
started using——

Chairman JOHNSON. So behind your 13 percent number is, for an
individual taxpayer, a 45-percent shot?

Ms. STATHIS. The 45 percent is probably a good indication of
what a single taxpayer would experience if they tried as much as
5 times to get in.

Chairman JOHNSON. Well, we certainly are discussing variations
in still an unacceptable range.

Ms. STaTHIS. The basic point is the same, which is that tele-
phone access is pretty poor.

Chairman JOHNSON. Last, has GAO made any specific rec-
ommendations in terms of modernization of phone services that
might address this problem?

Ms. Sratuis. I do not think so, not on modernization alone. Let
me have Lynda Willis respond.

Ms. WILLIS. Madam Chairman, the recommendations that we
have made to IRS focus on how using management practices we
found in companies that we looked at that also have significant
telephone operations, how those management practices could actu-
ally improve IRS’ current level of service without the additional in-
crements that would be brought about by modernization of their
equipment, et cetera. These practices included such things as
standard hours, more expanded hours of phone coverage, and


116

Chairman JOHNSON. Yes, just one moment.

So, in essence, your choice, then, is, given limited resources, that
we should dedicate the resources to the TSM goals even at the ex-
pense of improving the quality and effectiveness of some of the cur-
rent systems that are going to be there for a considerable transi-
tion period.

Ms. Epwarps. Actually, Madam Chairman, we are suggesting
that for those improvements that need to be made to the current
environment, to keep the operations moving along or to make some
very essential changes now, that those decisions need to be made
on a one-for-one basis; that is to say, if the ICS or integrated collec-
tion system is something that is really needed, it needs to stand
on its own, not as part of the TSM arena. It should not be pre-
sented in that construct because it gives the impression that more
is being done for the long term than is actually happening.

So we are suggesting that the IRS focus on those current initia-
tives that need improvement and for which business decisions
would dictate that they make some short-term automation effort,
but, got justify it in terms of TSM because it is not a contributor
to .

In terms of phasing, as we talk about the integrated collection
system, it is being perceived in a logical sense as a phasing toward
the long term, but, again, that system technically does not fit into
the long-term system. So in terms of a technical building block, it
is not that.

Chairman JOHNSON. Let me yield to my colleague from Texas,
Mr. Johnson.

Mr. JOHNSON of Texas. Thank you, Madam Chairman.

I was interested in the comment you made that this big system
we are building is not going to be accessible except right here. Is
that true?

Ms. Epwarps. When I was sharing about the integrated collec-
tion system?

Mr. JOHNSON of Texas. Right.

Ms. Epwarps. I was saying that that system is only available to
people in a particular function, so that if it is a taxpayer assister
that is at an 800 number, for example——

Mr. JOHNSON of Texas. Right.

Ms, Epwarps. They would not have access to information which
might be——

Mr. JOHNSON of Texas. So they could not help them, in effect.

Ms. Epwarps. They would help the taxpayer, but if there were
significant information in that collection system related to a recent,
contact, the tax assisters would not have access to that informa-
tion.

Mr. JOHNSON of Texas. The other question, Madam Chairman, is
are there segmented parts of this computer modernization that we
are seeing? It is not an integrated system.

Ms. Epwarps. That is the point we are making with regard to
the systems that have been delivered to date.

Now, the objective, the goal as presented by Mr. Westfall earlier,
is that ultimately the tax system modernization initiative would be
an integrated system. But what we are saying is that based on the


4

Chairman JOHNSON. Good morning, Commissioner, and welcome
everyone to this morning’s hearing on the fiscal year 1996 budget
proposal for the IRS (Internal Revenue Service), and on the 1995
tax return filing season.

The size of the budget increase sought this year is noteworthy.
The budget will move from $8.2 billion and almost 115,000 employ-
ees to collect $1.3 trillion in revenue to a 10-percent dollar increase
and a 922-person increase in the work force.

The size of the increase is noteworthy for several reasons: First,
the increase is much larger than the inflation rate. Therefore, the
budget proposal goes far beyond keeping pace with inflation and,
instead, contains real growth in spending.

Second, the increase in the work force comes at a time when the
overall Federal work force is undergoing a major downsizing. The
fact that the IRS budget runs counter to the prevailing trend in
Federal budgeting is no accident, but the expression “it takes
money to make money” applies to the IRS as it applies to the busi-
ness world.

This morning we want to learn how the IRS intends to use its
resources in fiscal year 1996. Most IRS programs show only small
changes but a few programs have significant increases. The budget
proposal proposes a $441 million, or a 67-percent increase in the
'TSM (tax systems modernization) program. .

The modernization program is supposed to upgrade and expand.
the IRS’ computer and information handling capability. While it is
absolutely essential to do so, it is important to understand the
enormity of the challenge that the IRS faces year after year. With-
out this modernization program, it would certainly be crushed by
the burden of processing over 1 billion documents every year.

Something I read mentioned that if you put the documents the
IRS processes end to end you could circle the globe 36 times. It is
a powerful amount of paper that has to be processed accurately,
and so, Commissioner, we are very interested in the tax systems
modernization program and in the progress you are making, as
well as the problems you are encountering. Unfortunately, it is one
of those programs that must be done, but a small mistake, as in
the space program or other complex programs, could also have cat-
astrophic consequences.

Second, the 1995 tax return filing season is now well under way
and one major feature of this year’s filing season is the activity of
the IRS to curb fraudulent refund returns. The administration’s
testimony before the subcommittee in October 1994 revealed that
refund fraud could be a $5 billion problem. We could fund most of
the IRS’ budget out of money the government is currently failing
to collect.

Furthermore, a lot of the refund fraud is associated with the
electronic filing program. In addition to the fact that 43 percent of
the fraud is associated with electronic refunds, as I understand it,
a large percentage of that fraud is associated with the EITC
(earned income tax credit). It is important for this subcommittee to
understand, because refundable tax credits are apparently turning
out to be much more vulnerable to fraud than other kinds of taxes.
With a number of refundable credits before us, this hearing today


93

Willis and on my left is Hazel Edwards. I will briefly summarize
my statement, if I may, and submit it for the record.

First, I will talk a little bit about the tax systems modernization
program.

We do believe that modernizing IRS’ systems is absolutely criti-
cal. The tax processing system was designed in the early sixties. It
is outdated. It is paper driven. It is labor intensive. It is hard to
get information from it, and when you get it, it is often outdated.

‘0 this is absolutely a critical program. TSM is intended to change
all of that. It is intended to eliminate the reliance on paper and
make information available whenever and wherever it is needed.

RS has been at this for about 8 years and about $2 billion has
been invested, and we believe that marginal improvements have
been made as a result of it. That is because the systems that have
been brought online so far are ones that automate old processes or
they make information available out of old systems. While they im-
prove the current environment, they do not get us much closer to
the environment of the future, the ultimate objectives that TSM is
intended to provide.

Probably more important to us, Madam Chairman, however, is
the next point in our testimony. IRS has devoted a great deal of
its efforts to getting prepared to build these new systems, and we
believe that over the past year they have made some encouraging
progress in these areas, but we remain concerned that these future
efforts are still at risk for a number of reasons that we list in the
testimony: IRS still lacks sufficient technical skills to implement
such a large, complex undertaking as TSM; the development of sys-
tems is proceeding at the same time as process improvements are
being identified; and, third, there are not good priorities for which
systems will give us the biggest bang for the buck, if you will. So,
as a result, there are lots of things that are going on at the same
time. There are also still not the fully established technical guide-
lines that are so critical to making sure that each piece of this fits
together and works.

‘ow, the 1996 TSM budget request is for more than $1 billion
and it is to fund about 41 projects. Given the lack of sufficient
skills to really manage such a large effort, and because there are
still problems with getting all of the technical guidelines in place,
we are recommending that IRS focus its efforts on the critical few,
try to identify the particular Projects that will give the atest
benefit in terms of the objective where they want to go in the long
run, and to try to focus the resources that they have on bringin;
those systems online in a short period of time. We think that IRS
will get closer to the ultimate TSM objective that way and will get
there faster.

The second area is refund fraud, which you have talked about a
little bit this morning, and IRS has taken a number of steps this

ear to deal with refund fraud. Those come after our reports and

earings of this subcommittee. We believe that those actions, if
they are implemented effectively, could help reduce the number of
fraudulent claims and they could help improve the detection of
fraudulent claims.

IRS has delayed at this point about 1.5 million returns of tax-
payers. They will delay the refunds of many more before the filing


38

business objective that we are moving toward. The first point I
make from this is that during the years 1992-95, with the systems
that we have already put online, we have generated productivity
gavings in excess of 11,000 full-time equivalent positions that have
been declared and given up from the IRS budget base. That is also
a large amount of money.

To show progress made in one particular area, we seek to make
80 million tax returns and essentially all of the remittance activity
in our system electronic. To date we have 16 million returns that
are active electronically in the system, nearly 1 million of which
this year will be filed by telephone for taxpayers capable of filing
the simple 1040-EZ return utilizing telephone access.

This year, we also will have 2.2 million taxpayers in 29 States
who will be capable of filing a single tax return electronically that
will satisfy both the Federal and the State obligation simulta-
neously. This is a major burden reduction issue for the taxpaying
public. It is something that we do not view as marginal, in terms
of the progress being made and putting a choice in front of tax-
payers to file electronically, to get access in some cases to telephone

ling, and to be able to satisfy both a Federal and State obligation
at one time.

The other thing that we will do this year is put about $160 bil-
lion electronically in the Federal tax deposit system. Essentially,
that is a major step toward the $1.2 trillion total amount of reve-
nue that we handle each year.

In closing. we believe that the progress made has been major, not.
marginal. Although it may not in some cases be the full future sys-
tem in terms of the ultimate TSM integrated environment, we be.
lieve that the progress made thus far is essential. We cannot wait
until TSM is fully implemented at a point in the future to be more
responsive to the public, to satisfy the problems, and to improve
the system incrementally over the years.

That is Grobably a substantial amount of the issue as it relates
to the GAO observation—whether we are building the ultimate sys-
tem and putting all of our resources there or transitioning the ex-
isting system by moving through a series of phased steps to get to
where we will go with TSM at approximately the year 2000 to

Chairman JOHNSON. Thank you very much for your presentation,
Mr. Westfall. It was very interesting.

In thinking about modernization and the presentation that you
just made, I was interested in a letter that came to my attention
recently from Commissioner Richardson’s predecessor to my prede-
cessor, Mr. Pickle. In it she comments that in 1990, they identified
128 fraud schemes affecting 411 returns. This is all in regard to
electronic filing. Since that is clearly one of the directions you are
going and must go and have begun to get people together to focus
on how to eliminate fraud, I am curious that as early as—her letter
is 1992—she comments that in 1990 there were 128 fraud schemes
affecting 411 returns against a population of about 4 million re-
turns filed electronically. In 1992, just 2 years later, they projected
that they would identify 1,400 fraud schemes affecting 12,000 re-
turns against a population of 11 million electronically filed returns.

You are now up to 16 million returns.


158

STATEMENT OF WILLIAM STEVENSON, CHAIRMAN OF FEDERAL TAXATION
NATIONAL SOCIETY OF PUBLIC ACCOUNTANTS.

‘On behalf of the 20,000 members of the National Society of Public Accountants (NSPA) and
the 5 million small businesses and individuals they serve, } would like to thank the Chair and
the members of this Subcommittee for the opportunity to express the Society's views on the
IRS budget request and on issues that have arisen to date in the current filing season. NSPA’s
members, individuals providing a variety of accounting and tax services to small businesses
and individuals throughout the nation, would like to express their support for the Service's Tax
‘Systems Modernization (TSM) program. The Society would also like to take this opportunity
to inform this Subcommittee of several concerns that have arisen as a result of fraud initiatives
taken by the Internal Revenue Service this filing season.

‘Tax Systems Modernization
‘Of all the items in the IRS budget, TSM is the one program that has the potential to pay
exponential dividends for the federal government. While the remainder of the Service's
budget request focuses on increasing productivity by increasing staff and resources spent on
production in the current system, TSM requests funding for computer systems that will
empower Service employees to produce at levels far beyond their current output. The new
system, once in place, will greatly improve the Service's ability to administer the tax system,
to apprehend fraudulent taxpayers and to serve honest taxpayers.

‘The Internal Revenue Service needs Tax Systems Modernization because, once implemented, it
will greatly reduce the cost of administering the tax system. Processing of returns will be
more efficient with the addition of new technologies in optical scanning of paper returns as
well as the transmission of electronically filed returns. Examinations will be more effective
when the examiners have ready access to prior year returns at the push of a button on their
portable computers. Returns and refunds will be more carefully and quickly scrutinized by
improved document matching systems, allowing the Service to process legitimate refunds in
less time and to identify questionable refunds before fraudulent filers have a chance to take the
government's money and run. Finally, TSM will allow the IRS to effectively add much more
than the 888 employees they have requested this year, as those employees who currently spend
their days processing paper and inputting data can be retrained to spend their time scrutinizing
returns for key signs of fraud.

Fraudulent filers would be the first to notice the Service’s improved capabilities, as the
increasingly effective computer analysis and the increased level of human analysis will weed
‘out more and more of the fraudulent returns that rob the Treasury of an estimated $5 billion
annually. Today, the Service is charged with using a vintage 1960's computer system to track
‘down sophisticated tax avoidance schemes bora of 1990's technology. With modern
technology, the Service could better process and analyze all of the information returns that it
receives, a key element in finding fraudulent filers. For every one percentage point increase in
voluntary compliance levels, the Department of Treasury estimates that an additional $7 billion
dollars in revenue is collected. Given that estimate, this system could pay for its 1996 budget
estimate more than five times over by simply raising the compliance level by one poirt. Given
that it has the potential to increase voluntary compliance by far more than one percentage
point, TSM represents a great investment in stopping the Fraudulent filer and collecting the
Proper amount of taxes owed to the Treasury.

Aside from the benefit that honest taxpayers receive when fraudulent filers and tax avoiders
are brought into compliance, the honest taxpayer will aso find a much more responsive
Internal Revenue Service once TSM has been fully implemented. The IRS is the only
government agency that, by law. all American taxpayers must contact every year. As such,
the method in which the IRS provides service to the taxpayer will often form a taxpayer's
opinion of the federal government as a whole. Under the current system, Congress hears
annually from the General Accounting Office (GAO) about how the Service is unable to
effectively answer its telephones and that those taxpayers lucky enough to get through once
often find that it takes several calls to resolve their problems.

‘TSM offers an effective remedy to this currently unacceptable state of affairs first by
empowering the Service to answer more telephones and second by enabling Service employees
answering those phones to resolve taxpayer issues in only one call. Effective routing of calls,


125

Chairman JoHNSON. I am stunned, Ms. Edwards, by your com-
ment that you can’t get the data off of the system electronically.
1 never heard of a computer system from which you could not take

lata.

Is that really true that they can’t get this data off in order to
feed it into another system if they wanted to do that?

Ms. Epwarps. Let me answer that question by example and
maybe this will help to clarify it. IRS tried to integrate some of
these systems, the integrated collection system was one of them,
and there are several others that I think are highlighted in the
Commissioner’s and in our testimony.

Their technicians discovered that it was tougher to try to inte-
grate them—to try to make them link up to try to pass the infor-
mation from one to the other—than to rewrite. So they chose to re-
write. That is the point that we are raising. These systems that
have been delivered to date offer value in selected functions, be it
collections at the revenue officer’s site or be it the identification of
underreported income in the AUR application. While they may
offer value there or do offer value there, they are not part of a
broader, more comprehensive, integrated or linked environment.
You can’t pass information among them.

Chairman JOHNSON. Are. you suggesting that they are going to
need to rethink what information they are collecting and what for-
mat it is going to be arrayed in this, the new system?

Ms. Epwarps. That is absolutely part of what they are in the
process of doing now and what we are saying they should place
even more emphasis on.

Chairman JOHNSON. I can see that. I don’t see how they could
have improved the collections system in harmony with this larger
system since the larger system’s criteria are only now being devel-
oped.

Ms. Epwarps. That is true.

Chairman JOHNSON. So it is just a question of you think they
shouldn’t have spent the money on that when they should have
spent the money on some other things.

Ms. Epwarps. That is correct.

Chairman JOHNSON. Two other things just to get the record
clear. First of all, back to the issue of fraud, would you comment
on the vulnerability of the tax system in general to fraudulent col-
lection attempts associated with refundable tax credits? In other
words, is refundability of tax credits a policy that we should steer
clear of because it is hard to implement?

Ms. STATHIS. Refundable credits are a particular problem for a
tax administrator. Normally, credits that are applied against a tax
liability are deducted from money that is paid in and so you are
just returning a portion or evening out, if you will. But a refund-
able credit entitles the person to money that they wouldn’t other-
wise be entitled to whether they paid taxes or not. The earned in-
come credit puts IRS in the role of being more of a welfare-benefit
agency than a tax administrator. Trying to decide eligibility for
that particular benefit is essentially what we are trying to do
through the tax system, and that creates a particular vulnerability
that isn’t there in other parts of the system.


100

APPENDIX T APPENDIX I

through 2008 for acquisition, operation, and maintenance. IRS'
current estimate of TSM costs, as of February 1994, is $9.4
billion for acquisition and $22.3 billion in total. However, we
had some concerns with the cost model that IRS used to develop
the 1992 estimates and expressed these concerns to IRS in 1993.
IRS’ cost model has not been updated to address our concerns or
changes in the TSM vision and scope. IRS intends to have a new
cost model and revised estimates by September 1995. In the
meantime, we continue to use IRS' estimates as an indication of
the investment commitment that TSM entails. We would note,
however, that all of these estimates include the variety of
projects discussed above and many of them do not contribute to
the central Ts vision.

‘TSM RISKS REMAIN HIGH

In the last year, IRS has made some progress in its management
and planning of TSM. However, unmanaged risks continue to reduce
IRS' chances for long-term success. These risks include

-- IRS' lack of sufficient technical and management
expertise and skills to implement TSM;

=- the continued development of systems for TSM without
taking into account changes that could occur because of
process improvements; and

~- IRS' lack of system development priorities or fully
established technical guidelines.

Because of these and other risks, we have placed TSM on our list
of high-risk government programs.

In May 1994, we issued a report that identified a number of
practices that leading private and public organizations used to
manage their information resources more strategically in order to
improve performance and better meet customer needs.’ These
practices included measuring the performance of key processes;
focusing on process improvement; managing information systems
projects as investments; and integrating the planning, budgeting,
and evaluation processes. IRS has begun to study how it can use
these practices to better manage its information resources and
gain greater performance and service improvements.

However, IRS' current approach to TSM contrasts sharply with
these practices. For instance, the successful organizations made
sure that they had skilled and experienced technicians and
managers to guide systems development efforts. According to the
National Research Council (NRC), IRS needs to attract new skills
to transform its software development staff from one of
maintaining antiquated current systems to one that can design and
build the modern, integrated systems that TSM requires.‘ The

NRC also noted that IRS needs to manage its contractors more
aggressively to ensure timely production of high-quality
software. In this regard, the NRC advised IRS to hire people
experienced in managing software development contractors.

Successful organizations also analyzed their business processes
and determined how they could be improved before undertaking
related automation projects, IRS has taken an important step in

*Executive Guide: Improving Mission Performance Through
Strategic Information Management and Technology (GRO/MIMD-94-115,
May 1994).

‘Continued Review of the Tax Systems Modernization of the
Internal Revenue Service (Interim Report), Computer Science and
Telecomminications Board, National Research Council. National
Academy Press, Washington, D.C., 1994.



41

One is that everybody likes computers so why aren’t you doing
it? Two, the code has become much more complex over the last 15
years or so or 10 years or 5 years—whatever. It may be you need
a computerized system in order to deal with it. Three, of course
there is just an increase in the amount of work because there are
just filings being done.

Now those three reasons—and it seems to me that what you
have just described in terms of your system being put in place now
it seems like you are talking about the easier returns. If somebody
can do it over the telephone, it sounds like you can—that is a pret-
ty easy one it seems to me.

Now, perhaps you can kind of explain when we are going to get
to the more complex ones. Am I correct in my analysis so far?

Mr. WESTFALL. I guess the three rationales I would give for why
we do this—stated a little bit differently. I think that we recognize
that we have to be able to take actions within the tax system much
faster than we take them today. The fact that it takes 6 weeks to
get a tax refund, the fact that it takes us 14 years to match infor-
mation documents to verify that the information you claimed on
your return was correct, these are actions that are terribly slow in
the business environment of the country today. That is one.

The second is errors. Speed is one thing. Frequency of error is
another. Because a paper return has to flow through a factory envi-
ronment, be handled more than two dozen times between all of our
handlings and those of the taxpayer before the return was sent to
us, an error rate results of between 15 and 20 percent of the re-
turns. To correct these errors is terribly costly and_ terribly
unsatisfying both to us and to the public. We seek to reduce that
error rate as much as possible, and in the electronic environment,
it is less than 1 percent. Speed is one thing; error frequency is an-
other.

The third is the fact that we don’t have access to enough infor-
mation to effectively administer the system. We seek to put much
more information in our database and then electronically access
that information in order that we can properly manage the account
and be responsive to the public relative to the account.

Now, the 1040. I think I mentioned the form 1040 EZ as being
a return that is currently capable of being filed over the telephone
in some States now. That is a simple return. There is an enormous
range of complexity across the whole return set, and we are moving
incrementally with different approaches on different levels of com-
plexity.

We are, for instance, taking 1040 returns, the more complex re-
turns, through the electronic side of the system. But that particular
return, it currently exceeds our complexity range for what we think
we can effectively control and handle through a telephone ap-
proach. So there are different stage solutions in this for different
ranges of complexity and types of documents over time.

Mr. Matsul. OK. One last question. In terms of your manage-
ment of putting the system in place and the oversight of it, are you
using outside vendors as well or is this something that is all in-
house? We are talking about $20 billion perhaps over the period of
years.