59

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

cHier COUNSEL

The Honorable Wally Herger
House of Representatives, APR 23 1906
Washington, D.C. 20515-0502

Dear Congressman Herger:

Thank you for your March 21, 1996 letter in which you
expressed concern that the § 1374 timber issues involved in a
ruling request submitted by one cf your constituents, Sierra
Pacific Industries, be resolved in a timely and orderly fashion
We appreciate your concerns in this matter ana assure you that we
are dedicated to resolving the complex issues involved in this
matter as soon as possible.

In your letter, you expressed two particular concerns
regarding your constituent’s ruling request. First, you
expressed concern that our temporary ruling suspension on § 1374
timber issues may have inadvertedly cut off the flow of
information from other taxpayers that could prove helpful in
resolving those very issues. We do not intend to close off the
flow of factual information or decide these issues in a limited
factual setting. We are willing to meet in a presubmission
conference with any taxpayer contemplating a ruling request to
learn of that taxpayer’s factual setting and hear any arguments
they wish to make. In fact, we held such a presubmission
conference with your constituent on January 30, 1996, in which we
learned a great deal about the timber industry in northern
California. At that conference, Sierra Pacific Industries’ tax
representative submitted a well’ thought out memorandum discussing
a number of the complex issues involved. This memorandum is
being thoroughly considered in resolving the § 1374 timber
issues.

Second, you pointed out that the President has proposed
legislation that would make it prohibitively expensive for
companies such as Sierra Pacific Industries to elect $ status on
or after January 1, 1997. You stated that it is therefore
imperative that we conclude our review of this matter in a timely
and orderly fashion. We assure you that the § 1374 timber issues
are receiving our foremost attention, and we are confident that a
resolution of these issues will occur well before the January 1,
1997 effective date of the President’s proposed legislation.
Furthermore, you can rest assured that once a resolution has been
reached, your constituent will be promptly notified. If your
constituent resubmits the ruling request, we also intend to grant
expeditious treatment to ensure that they receive our response
well before January 1, 1997.

If you have any further concerns or questions regarding this
matter, please feel free to contact me at (202) 622-7720 or
Attorneys Mark Jennings and Gene Raineri of my staff at (202)
622-7530.

Sincerely,

Thigpln
(acting) Deputy Assistant
Chief Counsel (Corporate)


25

he mission of the Internal Revenue Service is to collect the proper amount of tax
revenue at the least cost; serve the public by continually improving the quality of our
products and services; and perform in a manner warranting the highest degree of public
‘confidence in our integrity, efficiency and faimess. To achieve its mission, the Service has identified
three strategic objectives,

A. Increase Voluntary Compliance. IRS encourages and assists taxpayers to file timely and
accurate returns and pay on time. When taxpayers do not comply, appropriate enforcement
action needs to be taken.

B. Maximize Customer Satisfaction and Reduce Burden. The Service works to reduce the time
and expense to taxpayers, tax professionals, and others in complying with the tax laws, while
increasing their satisfaction with the tax system.

C. Achieve Quslity-driven Productivity through Systems Improvements and Employee
Development. IRS is using systems improvement tools and techniques to develop a highly-
trained work force.

UL Performance Measures Hierarchy — Results-Based Budgeting

scone of the country’s largest financial services organizations, the IRS needs to be a
leader in managing its own finances. The IRS volunteered to serve as a pilot for the
|Government Performance and Results Act (GPRA), which requires agencies to.
formolate strategic plans that articulate their mission, goals, and objectives; develop annual performance
plans that spell out annual targets against the strategic goals, measure program performance against
their strategic goals and objectives; and hold themselves accountable for achieving results.

As part ofits GPRA responsibilities, and to integrate its planning, budgeting and assessment
processes, IRS has developed a hierarchy of performance measures. At the top of this hierarchy of
measures is a barometer of overall Service performance. This indicator compares the amount of
revenue collected during a fiscal year, minus the IRS costs of collecting that revenue and minus the
‘monetized value of the burden hours placed on taxpayers in meeting their tax obligations, with the
‘amount of revenue that would have been collected if all taxpayers had paid their full tax liability

‘The second level of the measures hierarchy contains measures for the Service's three strategic
objectives. Also at this level are measures that require the interrelated efforts of multiple functions.
‘The mission and objective level measures and performance targets for FY 1997 are shown in the
following table. The multi-functional measures can be found in Appendix B--Performance Measures
Hierarchy.


COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois SAM M. GIBBONS, Florida

BILL THOMAS, California CHARLES B. RANGEL, New York
E. 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
JIM 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 LF. PAYNE, Virginia

JENNIFER DUNN, Washington RICHARD E. NEAL, Massachusetts
MAC COLLINS, Georgia MICHAEL R. MCNULTY, New York

ROB PORTMAN, Ohio

JIMMY HAYES, Louisiana

GREG LAUGHLIN, Texas

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska
Piutiar 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
ROB PORTMAN, Ohio BENJAMIN L. CARDIN, Maryland
JIM RAMSTAD, Minnesota JIM McDERMOTT, Washington
DICK ZIMMER, New Jersey MICHAEL R. MCNULTY, New York

GREG LAUGHLIN, Texas
JIMMY HAYES, Louisiana

ap


68

IRS officials subsequently decided that the budget impact on ACS
was too severe. To mitigate the impact, IRS negotiated with the
National Treasury Employees Union to allow the detail of about
300 revenue officers and other compliance staff to ACS. These
details are to remain in effect for at least 1 year. IRS
officials said that they plan to revisit this agreement with the
union once IRS knows its budget situation for fiscal year 1997.

THE_1996 FILING SEASON SEEMS
‘LAST YEAR'S IN CERTAIN KEY RESPECTS

On the basis of our past filing season reviews, we had several
questions going into the 1996 filing season

-- How will IRS* staffing reductions for fiscal year 1996
affect its ability to process returns and assist taxpayers?

-- Will last year's drop in the number of electronic filings be
reversed?

-- What _can taxpayers expect in the way of refund delays in
19967

-- Will the steady decline in the accessibility of IRS’
telephone assistance over the past several years continue?

-- Has the performance of IRS’ Service Center Recognition/Image
Processing System (SCRIPS] improved?

As discussed below, preliminary information addressing these
questions indicates that, in certain key respects, the 1996
filing season is progressing more smoothly than did the 1995
season. As also discussed below, however, there are still
several concerns that we will be monitoring during our continuing
assessment of filing season activities. Specifically, (1)
although telephone accessibility is up, it is still very low; (2)
IRS closed many walk-in sites this year that had provided
assistance to taxpayers in the past; and (3) SCRIPS is stili not
meeting its original expectations.

Effect_of staffing Cuts on Filing Season

In deciding where to make the staffing cuts for fiscal year 1996,
IRS wanted to make sure it had enough staff to do its most
critical functions--process returns and issue refunds--in a
timely manner. Available data indicate that IRS has been
successful in that regard. As of March 15, 1996, IRS’ 10 service
centers had processed 71 percent of the paper individual income
tax returns they had received (the same percent as last year),
and the centers were processing that workload in about the same
cycle time as last year (within an average of 8 to 13 days,
depending on the type of individual income tax return filed)

IRS service center officials told us that refunds may be going
out a couple of days slower than last year but still within the
40 days that IRS promises taxpayers in its customer service
standards. Service center officials told us that IRS had decided
to focus on meeting the 40-day standard in 1996 rather than incur
the extra costs associated with trying to beat it. However, we
were unable to verify whether the refund cycle time has changed
because the data we use to track refund timeliness were not
available at the time we prepared this statement.

Although IRS has apparently been able to process returns and
issue refunds this year without any significant problems,
staffing cuts in other areas could be affecting its ability to
serve taxpayers and identify questionable refund claims


79

accounts. It would help not only reduce taxpayer frustration in
dealing with the IRS, but also would allow IRS to more efficiently
address taxpayer concerns.

I will ask Dr. Stillman to elaborate, but my understanding at
this point in time is that we do not have any confidence in when
IRS will be able to provide that service to taxpayers.

Ms. STILLMAN. As a level 1 organization, which IRS itself knows
it is, IRS develops systems without using disciplined processes. It
doesn’t use tools to estimate how systems will perform, on what
schedule they can deliver, and what they will cost, and therefore
there is no basis for any confidence in any of their estimates in any
of those areas.

Mr. LAUGHLIN, Last year the IRS experienced problems in the
testing of SCRIPS. It is my understanding SCRIPS is supposed to
image the data on Form 1040EZ, Form 941, and Form 1040PC.
How well is SCRIPS performing during this filing season? And does
it catch all the data on the forms it scans or only part of the data?

Ms. WILLIS. This filing season SCRIPS is working better than it
did last year. In the five centers where SCRIPS is in place, it has
less downtime than it did last year. In the two centers that ceased
using SCRIPS last year, they are reporting they are able to con-
tinue using it, but it is operating at a much slower rate than what
they had anticipated.

Right now they are capturing about 50 percent of the 1040EZ
forms through the SCRIPS process, and the rest are being done
through manual data entry.

Mr. LAUGHLIN. How effective was the IRS Antifraud Compliance
Program during the 1995 filing season? And in connection, how
many taxpayers who filed accurate returns last year nevertheless
had their refunds delayed? Earlier in your testimony, you talked
about invalid Social Security numbers and refunds, if you can work
that into your response. And I have got to tell you in my area of
the country, which is south Texas—you probably thought I was
from the North—we hear a lot about Americans retiring to Mexico,
and then their Social Security numbers getting jumbled up, and
never having paid into the system. Can you respond to that? _

I asked too many questions. Let me start over.

How effective was the IRS antifraud program? And talk about
the—

Ms. WILLIS. The IRS 1995 fraud detection efforts were effective.
As the Commissioner noted in her testimony and we noted in ours,
there was a reduction in the number of dependents claimed. There
were a number of fraudulent or noncompliant refunds identified
and held up. However, there were also a number of taxpayers who
filed accurate returns with appropriate Social Security numbers
who also had their tax returns held up while IRS intended to look
for duplicate uses of SSNs. That match was never done, and as a
result, these refunds were held up and were ultimately released
without any follow-up checks being done.

In addition, for some of the returns where there were missing or
invalid SSNs, IRS went and worked with the taxpayer and discov-
ered there was a fairly high no-change rate. By that I mean that
the information on the return, while the missing or invalid SSN


15

+ 13% ($11.7 billion) is currently being collected by sending notices to
taxpayers;

+ 13% ($11.2 billion) is being collected through installment agreements;

+ 2% ($4.6 billion) is lower value cases that will be collected through
systemic monitoring, such as refund offsets and yearly notices to
taxpayers.

Included in these numbers is $18.5 billion of accrued penalties and interest.

The improvements we have made in the collection process, that | described
eatlier, not only helped us increase our Collection yield over the last several years but
these improvements are also helping us manage the accounts receivable inventory.
‘And we will continue to increase our Collection yield through the use of technology in
our field collection operation. In FY 1995, the Integrated Collection System (ICS),
which provides on-line access to current account information to our revenue officers,
was used in two districts. In these two districts, productivity increased more than 30
percent. This productivity translates directly to additional tax collections “in the bank.”
In FY 1996, seven additional districts will be using ICS, and it should be fully installed
nationwide in FY 1999. Through FY 2004 this initiative alone will suit in an additional
$2 billion in revenue collected.

Our FY 1996 appropriation required us to conduct a pilot project to contract out a
part of our collection activity. On March 5, we issued the Request for Proposals for the
pilot, We intend to award up to five contracts and initially deliver approximately 125,000
cases relating to taxpayers who are delinquent in paying their tax obligations.

Payments under the contracts will be performance based; however, they will not be
contingency fee contracts. Contractors and their employees will be subject to the
disclosure laws, the Privacy Act, the Taxpayer Bill of Rights and applicable sections of
the Fair Debt Collection Practices Act. Information provided to contractors by the IRS
r collected by contractors from taxpayers cannot be used for any purposes other than
fulfilment of the requirements for the awarded contract and cannot be sold or otherwise
transferred by the contractor.

Examination

Our compliance program is not only about our collection activities or our
traditional efforts to audit taxpayers. We continue to refine our compliance programs by
developing new compliance approaches. Through programs like Advanced Issue
Resolution and Advance Pricing Agreements, we are stressing early resolution of
issues ~ a practice that saves everyone money. With Advanced Issue Resolution, we
can accelerate the collection of the largest corporate assessments by resolving
recurring issues and simply carrying the resolution forward to later years. Reducing the
number of issues under examination is a cost savings for both taxpayers and for us.
Under this procedure, taxpayers have agreed to pay about $1.1 billion during FY 1993 -
FY 1995

The Advance Pricing Agreement pragram was developed as a new way to
resolve intercompany pricing issues. As a cooperative process, both taxpayers and the
government derive significant benefits. Taxpayers welcome certainty in a complex area
and avoid a lengthy debate with the IRS. At the end of FY 1995, we had entered into
22 Advance Pricing Agreements, more than the number that had been completed in all
the previous years of the program combined. Everything this year points to even higher
levels of production, and we currently have 109 Advance Pricing Agreements in
process.

‘We are also responding to taxpayer concems, for example, those raised by the
‘small business community. | participated in numerous town meetings with small
business owners and the White House Conference on Small Business, where small
business owners described one of their primary concerns as the worker classification
issue -- whether workers should be classified as employees or independent contractors.
We are doing what we can to respond to these concems by revising our training


14

requested for TSM in fiscal year 1997, IRS' budget request
contains some general information on its plans for the $155
million increase over the proposed operating level for fiscal
year 1996. However, the information provided raises additional
concerns. In this regard, IRS is requesting an additional $29
million for Cyberfile, an'electronic filing system. Earlier this
week, we testified that Cyberfile is a poorly developed system
that does not adequately address the security requirements needed
to protect taxpayer data.!

EISCAL YEAR 1997 BUDGET REQUEST INCLUDES
‘$352 MILLION FOR REVENUE PROTECTION INITIATIVES

In every year but one from 1990 through 1995, Congress has
appropriated IRS funds for various compliance initiatives aimed
at increasing IRS’ enforcement staff with the expectation that
the increase would produce more revenue. For fiscal year 1995,
Congress appropriated $405 million for compliance initiatives.

In estimating the revenue that would be generated from those
initiatives--$9.2 billion--IRS assumed that Congress would
continue to provide $405 million for the additional staffing over
the next 4 years. However, Congress did not provide the second-
year funding installment for fiscal year 1996

IRS’ fiscal year 1997 budget request includes $359 million for
“revenue protection initiatives*. Although the name has changed,
these initiatives are directed toward achieving the same goal as
were previous compliance initiatives--to increase revenue. To
help Congress deliberate on this portion of IRS’ budget request,
you asked that we summarize our past work on compliance
initiatives. That work focused on the following issues:

-- Before fiscal year 1995, IRS consistently used at least some
of the compliance initiative funds for purposes other than
those that Congress intended. Specifically, IRS used these
funds to cover budget shortfalls in base operations. As a
result, many of the past compliance initiatives were never
fully implemented. To ensure that IRS spent fiscal year
1995 compliance initiative funds as intended, the
Appropriation Committees restricted IRS’ ability to use
those funds for other purposes

-- Before fiscal year 1995, IRS only tracked the staffing and
revenue associated with an initiative. Using this approach,
IRS could claim that compliance initiatives had met their
revenue goal even if IRS’ base staffing had declined, which
was often the case. We recommended that IRS provide
Congress with information on the total revenue achieved--
from both base staffing and compliance initiative staffing-
to ensure that Congress had a more accurate picture of IRS*
total compliance program.” IRS revised its tracking
approach for fiscal year 1995

~- Although IRS revised its tracking approach, we cannot yet
comment on the accuracy of the revenue figures in IRS'
tracking reports. Until recently, IRS had to estimate the
amount of revenue derived from its compliance efforts
because it was unable to track actual revenue--regardless of
whether it was generated from compliance initiative staff or
base staff. For the last several years, IRS has been
implementing an Enforcement Revenue Information system
(ERIS) that is intended to report the actual revenue from

‘Tax Systems Modernization: Management and Technical weaknesses
Must Be Overcome to Achieve Success (GAO/T-AIMD-96-75, Mar. 26,
1996).

‘Tax Administration: Congress Needs More Information on
Compliance Initiative Results (GAO/GGD-92°118, July 31, 1992).


32

BUDGET OVERVIEW

FY 96 Labor Vs Non-Labor

FY 97 Labor Vs Noa-Laobr

FY96 Dollars By Appropriation

‘FY91 Dollars By Appropriation

(Peseang haben vd Management 1D neat at tagt
‘Tere Eacomet| ren
eaten Byosns a

Dots w Thousands Dollars w Thousands


103

announced in its revenue protection strategy have indeed had the desired effect of involving
fewer taxpayer delays in processing. The Problem Resolution officers with whom we have
spoken report far fewer problems this year.

‘We were advised of some problems with the processing of TeleTax returns earlier in the season
but now believe those difficulties have been addressed and resolved.

Allin all, our members have reported that the current filing season is proceeding rather smoothly
from a processing standpoint. When one considers the difficulties the Service confronted this,
year -- bad weather in the East, possible tax law changes, and significant budget reductions —- it
deserves a round of applause for the relative ease of the current filing season.

Summary
We thank the Committee for the opportunity to appear before you today and provide our views

on these vital topics. We remain committed to assist in any additional matter where the general
taxpaying public has an interest. We will be happy to respond ta questions from the Committee.


39

Many fraud experts estimate that at least 10 percent of all funds expended
‘on health care is lost to fraud. This would mean that over $100 billion is lost
annually to fraud.

IRS’ current criminal investigations reflect that the scope of health care
fraud is extraordinary, not only in the financial losses incurred, but also in the
malicious intent of the perpetrators who prey on the most vulnerable members of
our society.

IRS currently has 183 health care fraud cases under criminal investigation,
‘The number of cases under investigation has increased from 76 in FY 1993 to 183
currently. The current inventory of cases consists of the “classic* types of health
care fraud schemes involving fraudulent claims made by physicians, clinics, and
others involved with the health care industry. In addition, they also encompass a
broader range of related industries, such as ambulance and patient transportation
services, which are not commonly thought to be a part of the health care industry.
Since health care fraud is a multi-faceted problem that is pervasive throughout the
industry, we anticipate an even greater commitment of IRS’ criminal resources in
the future.

The cornerstone to combating health care fraud is cooperation between
federal law enforcement agencies and industry. Cooperative efforts magnify the
results which could be achieved through individual agency efforts and represent
the most effective use of IRS’ scarce resources. The cooperative efforts currently
underway are best exemplified by the Health Care Fraud Task Forces mandated by
the Attorney General. These task forces have been established in every judicial
district under the leadership of the respective United States Attorney. IRS agents
are members of these task forces where their unique skills are in demand in the
investigation and prosecution of these complex financial crimes.

The diversity of health care cases under investigation by the IRS are
illustrated by the following examples:

+ On February 28, 1996, a former dentist was sentenced to two years
in prison for defrauding the Medicaid Program and income tax
evasion, To generate fraudulent Medicaid billings, the dentist
extracted, filted, and installed crowns on healthy teeth of poor
children. This scheme began in 1985 and continued until 1992. IRS’
investigation established that in tax years 1987-1989, the defendant
failed to report over $219,000 in income annually.

+ Taxicab Scheme - On October 20, 1995, forty-two individuals were
indicted with cheating the Medicaid system out of at least $4 million
by falsifying transportation costs. The investigation substantiated
several types of fraud including submitting claims for services not
performed and over billing Medicaid for services when actually
provided. Defendants face prison terms ranging from one to thirty
years and fines from $100,000 to $250,000.

+ Pharmacist - On October 12, 1995, George A. Dileo, a former
pharmacist, entered into a plea agreement with federal prosecutors by
admitting he defrauded $350,000 from state and federal government
insurance programs and failed to report $274,000 in income to the
IRS. DiLeo was sentenced to 8 months in a halfway house, 3 years
probation, and 200 hours community service.



64

though IRS reduced the number of revenue officer positions in its
1995 compliance initiative, it planned to hire about 750. IRS is now
diverting some revenue officers to ACS to mitigate the impact of
ACS’ 1996 staffing reductions.

The $359 million is expected to fund 3,830 additional compliance
staff. According to IRS, most of those staff are for areas such as
ACS and document matching that were significantly affected by the
1996 staffing cuts. However, IRS’ budget shows that total compli-
ance staffing is expected to increase by only 2,390 positions in
1997. Almost all of the difference is because the budget also in-
cludes a decrease of over 1,300 FTEs for law enforcement. Accord-
ing to IRS, the decrease will come from more traditional enforce-
ment job categories such as revenue officers.

One effect of the increases and decreases in the 1997 budget, if
implemented as described, would be to alter the mix of collection
staffing toward the kind of mix we have advocated in the past.

In conclusion, although IRS has made some changes, certain
questions remain regarding the revenue initiatives. Specifically,
one, will IRS spend the additional funds for additional compliance
staff? Two, does IRS have reliable data on the revenue generated
by its enforcement activities? And, three, will IRS be able to
achieve the new staffing mix?

That concludes my statement. I would be happy to answer any
questions you may have.

[The prepared statement follows:]


35

Appendix B

eT ee

L_sg

‘Aqoueie]y] Soinseow ooueUOEg


67

returns and issue refunds in a timely manner. As a result, most
of IRS' staffing cuts affected its compliance programs, with some
cuts in the taxpayer service area.

According to IRS officials, the two compliance programs that
employ the largest number of seasonal and term staff are (1) the
Document Matching program, through which IRS identifies taxpayers
that either underreport their income or do not file required tax
returns, and (2) the Automated Collection System (ACS), through
which IRS staff try to contact delinquent taxpayers or nonfilers
by telephone and resolve the delinquency. Because IRS’ cost-
cutting measures for fiscal year 1996 focused on seasonal and
nonpermanent staff, these two programs were significantly
affected.

Pocument matching

‘Through the Document Matching program, IRS matches income
reported on tax returns with information provided by third
parties, such as wage information from employers and interest and
dividend information from financial institutions. Those matches
are to identify taxpayers that underreported their income
(underreporters) and those that did not file required tax returns
(nonfilers) -

According to IRS, it spent about 1,950 staff years on
underreporter activities in fiscal year 1995 and closed 4.1
million cases with recommended tax assessments of $1.7 billion.
Because of staff reductions, IRS estimates that it will spend
about 1,300 staff years on underreporter activities in 1996
about a 33-percent reduction--and close about 1.5 million fewer
cases. IRS estimates that its assessments from closed cases will
be $1.4 billion, $300 million less than in 1995. IRS" matching
program also identifies taxpayers who have not Claimed refunds to
which they are entitled. in fiscal year 1995, IRS issued $120
million in refunds through that program. IRS’ expects that amount
to drop to $95 million in 1996 because of staff reductions.

Also under the Document Matching program, IRS creates returns for
nonfilers using information documents provided by third parties
According to IRS, it spent about 600 staff years on that effort
in fiscal year 1995, closed about 810,000 cases, and assessed
$1.9 billion. Because of staff reductions, IRS estimates that it
will spend about 370 staff years on this effort in fiscal year
1996--about a 38-percent reduction--and close about 180,000 fewer
cases. IRS estimates that assessments from closed cases will be
$1.3 billion, $650 million less than in 1995.

Automated Collection system

once a tax delinquency or delinquent return is identified, IRS
uses a three-stage process to collect the tax or secure the
return. In the first stage, taxpayers are mailed a series of
notices. If the case is not resolved at this point and meets
certain criteria, it is transferred to ACS. At this stage, IRS
staff in call sites contact the taxpayer or nonfiler by
telephone. Tf the case remains unresolved at this point and
meets certain criteria, it is transferred to a revenue officer,
who is to visit the taxpayer or nonfiler or take other steps to
secure the delinquent return and/or collect the delinquent tax.

Because of various factors discussed in the appendix, ACS had a
significant number of seasonal, term, and other than full-time
permanent staff at the end of fiscal year 1995--66 percent more
than it had at the end of fiscal year 1994. As a result, ACS was
targeted for a significant staff reduction when IRS decided to
reduce the number of hours for seasonal staff and not extend
appointments for term employees.


104

Chairman JOHNSON. Thank you, Mr. Lane. I appreciate your tes-
timony, and I appreciated your enumeration at the end of it in
more detail of your comments about the things they have accom-
plished and the ways in which the current filing system is going
better than past filing systems. And I thought your comment about
the difference between what the Service offers to those with com-
puters and modems and what it offers to others was very helpful.
Certainly it offers a nice small business opportunity for our local
libraries and some of our community-based organizations that have
good computer capability. And that may be one area that we want
to pursue to assure that all of our libraries are properly equipped
in this era in which I think IRS service delivery is going to go in-
creasingly toward use of tools that computers offer rather than in-
dividual people, as important as that is.

You do also make some very strong statements about morale—
I think that really is a problem—and about the callousness that
you find in some of the IRS people, in excess of anything you have
ever seen. I do think the IRS people, as most Federal employees
have, have taken some really unfair blows through the budget proc-
ess. It is really unfortunate that much of the discussion about tax
reform also involves maligning very good, hard-working, competent
public employees who are on the whole doing a pretty good job with
limited resources.

I would mention to you that the IRS has just come out with new
guidelines governing the use of the economic reality audits or life-
style audits. I made some very strong statements in the Full Com-
mittee hearing when we worked on the Taxpayer Bill of Rights,
and the IRS has chosen to include my remarks in the distribution
with their manual. So people will see how terribly important it is
to not only elected officials but also the general public and folks
like you, that these audits be used when there is a cause or a rea-
son or an indication and not randomly or erratically. And that is
important, especially in an era when there is dissatisfaction, much
of it legitimate, in not letting that spill over onto the taxpayers.

Unfortunately, I have to leave. I appreciate your testimony, and
when we come back to that hearing in the future, we may look to
you for further input at that time.

Mr. LANE. We would be happy to provide it.

Chairman JOHNSON. I am going to recognize Mr. Hancock, and
if he will take over the gavel, he and Mr. Portman may have ques-
tions.

Mr. LANE. Thank you again for the invitation.

Mr. HANcockK. I have just got a couple of questions about your
statement that transactions over the Internet can’t be traced.

Mr. LANE. That is right.

Mr. Hancock. I don’t understand how that works. I mean, if you
put something on the Internet, almost anybody can pick it up if the
information is there.

Mr. LANE. Well, the encryption, as I understand it—I am not a
software engineer, but I am fairly familiar with this information.
But as I understand it, the encryption technology is so far ad-
vanced now that you are going to see, probably within the next 2
or 3 months, a major jump in the number of transactions on the
Internet that are encrypted so they are anonymous. Basically there


45

are required by law that are no longer needed? And I think on that
last point, you and I had this discussion yesterday.

Ms. RICHARDSON. Right.

Mr. LAUGHLIN. If so, what can we do to eliminate those that are
no longer needed because of changes that you have either imple-
mented through technological advances or new programs?

Ms. RICHARDSON. As I mentioned to you yesterday, we will give
some thought to those on the question that they may not be needed
because of changes in the law and I will get back to you.

Mr. LAUGHLIN. And that will include elimination of some pro-
grams that we may not need anymore because of either new pro-
grams or new innovations that the Service has implemented.

Ms. RICHARDSON. Right.

Mr. LAUGHLIN. You have also spent a great deal of time on devel-
oping a business plan for tax system modernization. I understand
you are working on a plan to make sure that you develop inte-
grated systems to implement the business plan. When do we get
to the implementation itself? Do you have the contractors you need
to do the development work?

Ms. RICHARDSON. Again, the reports that will be coming out
within the next 30 days should hopefully address the overall plan,
the blueprints, and I believe we have most of the contracts in place
that we feel we need in order to accomplish our objectives under
that business plan. I would ask the Associate Commissioner, Judy
Van Alfen, if she would like to elaborate on that.

Ms. VAN ALFEN. Yes, we do have contracts in place that will help
us deliver our goals. As both the Commissioner and the Deputy
have mentioned, we have been very much involved in looking at all
of our investments and laying them out on a 5-year plan, and also
breaking them down in a 2-year rollout. We have also strengthened
our processes so that we can do a better evaluation of those invest-
ments as we move forward.

The contract that we have in place will assist us greatly in mov-
ing out of the integrator role which we have chosen to take in the
past and moving our integration contractor into that rule.

Ms. RICHARDSON. One project I might mention, Mr. Laughlin, is
our integrated collection system which is being used by collection
officers. It was used last year in two districts and is being rolled
out to more districts this year. But in the two districts where it
was fully operational last year, productivity actually increased by
over 30 percent, which translates into money in the bank.

Mr. LAUGHLIN. The Federal Government has been pursuing for
some time a long-term exercise to reduce the size of the Federal
work force, yet the 1997 fiscal year IRS budget proposal proposes
to increase the work force at the Internal Revenue Service by 2,699
employees. Why should the IRS be exempt from the downsizing
that is occurring throughout the Federal Government? And, second,
what effect has the reduced 1996 appropriation had on IRS person-
nel? Does the Service expect any furlough days or any reduction in
force?

Ms. RICHARDSON. Mr. Laughlin, I think in fiscal year 1991 we
had about 119,000 FTEs in our budget. This year in fiscal year
1996 we have 106,000 FTEs. So we have certainly not been exempt
from any reductions in the Federal work force.


87

Statement of

Robert P. Clagett
Chairman of the Committee on Continued Review of the Tax
Systems Modernization of the Internal Revenue Service
National Research Council,
Member of the National Academy of Engineering,
and
Lecturer at the University of Rhode Island

Good Morning, Mr. Chairman and members of the Committee. 1 am Robert P. Clagett,
lecturer at the University of Rhode Island and chaitman of the National Research Council's Committee
on Continued Review of the Tax Systems Modernization of the Internal Revenue Service, 1am also a
member of the National Academy of Engineering. The National Research Council is the operating arm
of the National Academy of Sciences, National Academy of Engineering. and Institute of Medicine,
chartered by Congress in 1863 to advise the government on matters of science and technology

‘The project that I chaired involved an original committee followed by an extension with some
‘membership changes. 1k produced six reports over a period of five years, My remarks today will draw
from the February 1996 publication, Continuing Review of the Tax Systems Modernization of the Internal
Revenue Service, which was released to the Internal Revenue Service in December 1995. The IRS was
the sponsor for this project, but consistent with NRC policy did not preview the findings and
recommendations. The committee, original and extension, that I chaired was rich in private sector
experience with large systems development and management as well as technological expertise.

‘My committee and I strongly believe that modernization of the information systems of the IRS is
very important. The Service sill has a lot of old computer equipment, which is difficult to maintain,
Only a part of returns processing is computerized, with taxpayer paper files the main mode of operation.
Modernization would enable better customer service and better agency and government performance, In
the course of our work we focused om the ability of the IRS to modernize. while monitoring its progres.
We made several recommendations relating to IRS structure and management that have been
implemented. Among them, for example. are establishment of focused units to address needs in
architecture and privacy and elevation of positions with responsibility for human resources and for
‘management of Tax Systems Modernization (the Modernization Executive position. now with Associate
‘Commissioner status). Through such actions the IRS has improved its organization.

A central concer of our committee was management, running across a spectrum from vision
through planning and implementation. Quoting from our 1996 report, “The committee believes that
‘success’ starts with a concise business vision, 2 well-organized modernization process, a clear systems
architecture, a complete development plan, and a strong set of metrics to determine progress.” The IRS
has created a vision statement and it has begun a process of re-engineering its business processes.
However, these efforts remain somewhat disjointed from TSM.

‘Of greatest concer are the enduring deficiencies in technical management. It isin this area that
progress must be made if TSM is to succeed. ‘Those deficiencies show up in the IRS” own software and
system development organization, is lack of a concise statement of the system architecture, its approach
to and slow rate of improvement in development processes. and its incomplete attention to system and data
security. The committee frequently expressed concern about the lack of experience in large systems
development and implementation within IRS management. This deficiency shows up in the rate of
internat progress and in the nature and effectiveness of interactions with contractors involved in TSM
development

T would say here, as I have said repeatedly to the IRS, that the Service should not have had the in-
house capability o take on such a large project when it started. That condition was no embarrassment
‘But it should have assessed the size and complexity of developing such a large project and then acquired
the (ined, experienced management team needed to ditect it. Instead, it relied on competent in-house
managers who were—and are—generalists who have advanced within IRS for many years. These are
‘good people who know how to run the IRS as it exists today. At the same time, they have not grasped
fur recommendations as to what it takes to develop a huge information system such as TSM.


8

Our TSM investments are putting a new infrastructure in place.
A number of initiatives are currently underway with substantial
long-term benefits. During the past 4 years, we have awarded con-
tracts that upgrade computer center hardware, modernize oper-
ations, and allow us to utilize commercial expertise for software
and hardware support, information engineering, telecommuni-
cations, and security. As of today, about $1.7 billion in new equip-
ment and software has been installed across the country.

Over the past several years, our technology modernization efforts
have benefited from oversight of the General Accounting Office, the
National Research Council, and from the Congress. On balance, we
agree with the assessments that have been made. We take them
seriously but, more importantly, we are doing something about

em.

During the past year, management of the Tax Systems Mod-
ernization Program has changed significantly. Modernization man-
agement has been centralized under the Associate Commissioner
for Modernization who has been given all of the responsibility and
authority to manage and control consistently all systems develop-
ment and reengineering efforts within the IRS. We also have a new
Chief Information Officer, Arthur Gross, who will be working with
the Associate Commissioner for Modernization, and he is joining us
on April 15. He was most recently the deputy tax commissioner in
New York, responsible for systems and processing in that State. He
had led a broad modernization effort in that State for the past sev-
eral years, and we look forward to having his counsel and exper-
tise.

But a vital aspect of updating our technology is enhancing capa-
bilities for safeguarding taxpayer information. We very much con-
cur with the National Research Council’s advice regarding the se-
curity of tax processing systems and the privacy of tax information.
We are also relying heavily on private sector expertise to assist our
technology modernization projects. We have developed a plan with
the help of outside experts from other government agencies and the
private sector to aggressively expand the work of our current inte-
gration support contractor. Under this new approach, the integra-
tion support contractor will assume as much of the systems inte-
gration role as our current contracts permit. This will include the
architecture, systems engineering, integration, and test activities
that are essential to successfully integrate the systems.

I would like to briefly touch on our 1996 budget and our fiscal
year 1997 budget request. The fiscal year 1996 budget decrease we
experienced posed a particular challenge to us since we require
about $200 million more each year for cost increases that are be-
yond our control, such as pay raises and rent increases, just to
maintain the current level of operations. Our current budget allows
us to run our basic operations and will not affect the processing of
returns or the payment of refunds within our customer service
standards of 40 days for paper filing and 21 days for electronic fil-
ing during this filing season.

But what we will not be able to accomplish again are the impres-
sive results we achieved in the deficit reduction last year through
our compliance initiative funding. We collected an additional $803
million, more than double the $331 million we had promised. We


IRS BUDGET FOR FISCAL YEAR 1997 AND THE
1996 TAX RETURN FILING SEASON

THURSDAY, MARCH 28, 1996

House OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:14 am., in
room 1100, Longworth House Office Building, Hon. Nancy L. John-
son (Chairman of the Subcommittee) presiding.
(The advisory announcing the hearing follows:]


42

I think they are valid criticisms. I would like to get Mr. Dolan to
tell you what efforts we have had underway this past year to
refocus the program and reprioritize the various projects.

Mr. DOLAN. One of the things we did, Mr. Laughlin, is we looked
at—as this endeavor started, as the Commissioner said in her testi-
mony, back in the late eighties, it was, I think, designed originally
more as a replacement of technology, and what we have done very
aggressively in the last several months is put the cart maybe a lit-
tle bit back behind the horse in the sense of looking at some of our
very basic business choices and looking at the parts of our business
for which we most wanted to leverage the technology.

We went through last summer something we called a rescoping
effort which essentially had us take all of our projects and prior-
ities and apply them against a metric that the General Accounting
Office had advanced to us as a best practices set of metrics. We
evaluated our investments both in terms of their business value to
us and their risk on a cost and schedule basis. And we essentially
have redone our entire suite of investments in what we now think
is a much tighter focused set of increments that both are high
value on the side of achievability and high value with respect to
the benefit they bring to the customer and customer service, to
compliance, and then to us in terms of productivity.

Mr. LAUGHLIN. Well, could you give us the list of the programs
where you are now going to focus as a result of these efforts?

Ms. RICHARDSON. I would be happy to submit these to you for the
record. We have four reports that we are in the process of finalizing
for the Appropriations Subcommittee, and one of those reports will
have that list in it. We would be happy to provide that to you as
well.

Mr. LAUGHLIN. Provide it to the Chairwoman, if you would.

[The following was subsequently received:]


3

establish expectations for improvements in processing rates or
reductions in system down time that should result from the
enhancements made for the 1996 filing season. Without those
expectations, it will be difficult for IRS to determine which
enhancements were cost beneficial. We are currently reviewing
SCRIPS and plan to report our results later this year.

ADDITIONAL INVESTMENTS IN_TSM_ARE_AT RISK
GIVEN CURRENT MANAGERIAL AND TECHNICAL WEAKNESSES

‘TSM, which began in 1986, is key to IRS' vision of a virtually
paper-free work environment in which taxpayer account updates are
rapid and taxpayer information is readily available to IRS
employees to respond to taxpayer inquiries. IRS’ fiscal year
1997 request for TSM is $850 million, a $155 million increase
from IRS' proposed operating level for fiscal year 1996. We
continue to believe that TSM is a high risk and are concerned
about how effectively IRS can use the requested funds until it
corrects some fundamental technical and managerial weaknesses.

‘The Treasury, Postal Service and General Government
Appropriations Act for 1996 "fenced" $100 million in TSM funding
until the Secretary of the Treasury reports to the Senate and
House Appropriations Conmittees on IRS’ progress in responding to
the recommendations we made in a July 1995 report on TSM."

Many of our recommendations were intended to correct critical IRS
management and technical weaknesses by December 31, 1995

Without these corrections, IRS will not have the sound management
and technical practices it needs to successfully meet TSM
objectives in a cost effective and expeditious manner. A recent
National Research Council report on TSM had a similar message.”
The Council's recommendations parallel the recommendations we
made involving IRS' (1) business strategy to reduce reliance on
paper, (2) strategic information management practices, (3)
software development capabilities, (4) technical infrastructures,
and (5) organizational controls.

In our March 14, 1996, testimony before the Subcommittee on
‘Treasury, Postal Service and General Government, House Conmittee
on Appropriations, we assessed IRS' progress in responding to our
recommendations.” Because IRS’ progress report on implementing
our recommendations was not finalized, our assessment was based
on several follow-up meetings with IRS officials and a review of
various planning documents. According to the Deputy Secretary of
the Treasury, the Department is currently reviewing IRS’ progress
report and plans to submit it to Congress "as soon as possible.*

IRS has initiated a number of activities and made some progress
in addressing our recommendations to improve management of
information systems; enhance its software development capability;
and better define, perform, and manage TSM’s technical
activities. However, none of these steps, either individually or
in the aggregate, has fully satisfied any of our recommendations.

As a result, we do not believe that IRS can make effective use of
TSM systems development funds at this time. Our concern is
heightened by the fact that IRS would not give us specific
information on its plans for spending the $850 million being

GAO/ATMD-95-156.

= , Computer Science and
Telecommunications Board, National Research Council, 1996.

T tems Modernization: Status of Tax svstem:

Eree Filing (GAO/T-GGD/AIMD-96-88, Mar. 14, 1996)


82

SCRIPS with input from the frontline people, from the users? Or
was that not a problem?

Ms. WILLIS. That is one of the issues that we are looking at right
now. To date, our work has been focused more on how well SCRIPS.
is performing, whether it is meeting the performance expectations
processing the returns that IRS expected it to process.

Chairman JOHNSON. I realize it is not the same issue as ICP, but
I wondered if there was a parallel there.

I am sobered by your comments in your testimony. You believe
that “None of the steps that have been taken, either individually
or in the aggregate, has fully satisfied any of our recommendations.
As a result, we do not believe that the IRS can make effective use
of TSM systems development funds at this time.”

Are there no projects under the Systems Modernization Program
that you think can benefit from additional investment this year?

Ms. STILLMAN. When we evaluated IRS’ capability and maturity
to develop systems in general, we asked them to identify specific
pockets of expertise that they had, centers of excellence where we
would go and assess how well, at those centers of excellence, IRS
developed software. It turned out they had none, and nowhere
within IRS are they developing software using disciplined repeat-
able processes. Nowhere.

Chairman JOHNSON. And you also go on to say that the IRS
would not give you specific information on its plans for spending
the $850 million?

Ms. STILLMAN. That is correct. The kind of information that
would have provided some evidence of progress would be a
prioritized list of investments and for each their cost and their ben-
efits and how they would contribute to the overall business goals
of tax systems modernization.

We would have liked that list prior to their rescoping and
postrescoping efforts so we could evaluate the value added | by those
rescoping efforts. We have gotten none of that, not before and not
after, and no explicit criteria for making those prioritizations. They
say they have done that, and we have asked them precisely what
criteria they used. We have been unable to get that information.

Chairman JOHNSON. Thank you very much. Are there other ques-
tions by the Members of the Subcommittee?

{No response.]

Chairman JOHNSON. We will adjourn this panel, and I thank you
for your testimony. It was very helpful to us at a difficult time.

Ms. WILLIS. Thank you. .

Ms. STILLMAN. Thank you.

Chairman JOHNSON. I thank the panel.

I would ask Mr. Clagett to make his opening statement before we
go to vote, and then we can be thinking about that. That is a 5-
minute window for you, Mr. Clagett. But then we will all hear that,
and whenever there is a series of votes, it is harder for Members
to return. So some of us will be back, but it will be at least 20 min-
utes. Perhaps the staff meanwhile can find out how many votes
there are, and we will be able to give people a better idea of what
time we will resume.

Mr. Clagett, chairman of the Committee on Continued Review of
the Tax Systems Modernization of the IRS, the National Research


IRS BUDGET FOR FISCAL YEAR 1997 AND THE
1996 TAX RETURN FILING SEASON

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

MARCH 28, 1996

Serial 104-59

Printed for the use of the Committee on Ways and Means

ee

U.S. GOVERNMENT PRINTING OFFICE
95-609 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC. 20402

ISBN 0-16-054066-6



108

Mr. HaANcock. Right.

Mr. LANE. Yes.

Mr. Hancock. Thank you. I am going to think about that a little
bit. We just might put together something on that order.

Mr. PorTMAN. I think I just figured out what Mel is going to be
doing next year.

As you may know, Mr. Lane, Mr. Hancock has a long history in
the tax area, and he is retiring from Congress. But it sounds like
he is going to be busy. You will probably be testifying before us
next year at this time, Mel.

Mr. LANE. They could probably arrange a desk for you at the
Cato Institute down the street.

Mr. PoRTMAN. He is even more radical than they are.

Mr. Hancock. Well, I just don’t think—pardon me, Rob. I just
don’t think that filling out your income return ought to drive a per-
son to drink. I mean, they ought to be able to do it without getting
so frustrated that they have to go get a shot of bourbon after they
have filled it out.

Thank you.

Mr. PorTMAN. I am going to miss him.

Mr. Lane, first of all, thanks for coming back again. It is always
a pleasure to have you before the Subcommittee and Committee.

Mr. LANs. My pleasure.

Mr. PorTMAN. You worked for the Service at one point, didn’t
you?

Mr. LANE. Yes, I did.

Mr. Portman. Yes, as I recall, he is one of those guys that got
hired away. Where is Mel?

I just had a couple of quick questions. First of all, you should
give yourself more credit for not having your clients audited. You
might have had something to do with it. But back home, I have
gotten a number of letters from people about date stamping, and
this is in connection with the budget cuts you talked about. I just
wondered if you had had that experience with some of your mem-
bers, folks who are calling or writing and saying at our local of-
fice—this is in Cincinnati, Ohio—there used to be a clerk behind
the counter, and you could take a return in and have it date
stamped, which avoided having to send it by certified mail.

Had you heard that complaint raised from any of your members?
That the date stamp service has been eliminated?

Mr. Lane. It is happening in California right in an office near
us. They used to have a person that would man that desk, and that
desk is closed now. It is gone.

Mr. PorTMAN. Is it still closed?

Mr. LANE. Yes.

Mr. PorTMAN. OK. I think, again, so much of the blame for the
way our current system works resides up here because we are
passing the laws and we are providing the budgets and, therefore,
forcing the Agency to look for places to cut. But I think from what
I understand about this particular problem, it doesn’t make any
sense to make that decision not to have date stamping because it
actually will end up saving the Service money over the longer haul.
It is an interesting way to wake people up as to the budget prob-
lem, because a lot of these professionals, many of your members,




109

I am sure, were shocked when they found out those desks were
closed. And I wanted to check and see if that was also a problem
elsewhere.

It is my understanding in Cincinnati that has been resolved, al-
though I am not sure and will now look into it more.

You mentioned two things in your testimony. One is that the
1995 calendar year filing is going pretty well. In fact, I think you
even say that it is going smoothly, rather smoothly from a process-
ing standpoint. You also, though, then talk about, Mr. Lane, this
attitude of callousness that is far in excess of the usual indiffer-
ence. And I just wanted to touch on that briefly.

You mentioned a morale problem. You talked about the imme-
diate budget cuts and the impact that might be having. You talked
about the reorganization, the RIFs. I am in an area, as I suppose
most if not all members are, where there has been reorganization,
and I didn’t oppose that. In fact, I was supportive of it with the
idea that we could get some efficiencies out of the system and have
more bang for the buck, in a sense. But to what do you attribute
this callousness? Do you think it is a combination of all these fac-
tors? How would you pinpoint it?

Mr. Lane. I think it clearly is a reflection of employee frustration
with the system and uncertainty about their job future, and to a
certain degree, it is almost acting out. You can have a situation
where there is no other way they can get back at the system, so
the way they do it is make sure they follow the book right down
the line or be unreasonable in the way that they are making de-
mands on people. This is a very small minority of the employees
there, but we see it on a national level because our members fax
these situations on to us and say, can you get us some help on this?

It just seems to me the level of e-mail and telephone calls I am
getting and the volume we are seeing in our government relations
office here in Washington indicates an increase in the sort of un-
reasonable behavior on the part of some of these enforcement peo-
ple. And it is a callousness. It is a disregard for the impact their
actions have on the taxpayer.

Now, in some cases when we get into these things, the actions
are warranted. In other cases, they are not warranted. If they are
clearly not warranted, we have to go to upper management to get
them to back off.

But my concern is I am trying to look at it in a macrosense.
Every one of these individual cases on a case-by-case basis you can
see some justification as to why the employee has taken that posi-
tion. You can also see some justification why the taxpayer is taking
the position. But on a macrolevel, when I look at the totality of the
complaints that we are starting to see from members, it confirms
feedback I am getting from friends of mine that are still within the
Service and from employees that I am dealing with on a regular
basis, which reflects that there is a real morale problem within the
organization.

Now, you know, part of the problem in terms of any enforcement
effort you are involved in is the insularity of thinking within the
organization. Partly it is a function of reality. My dad was a police
officer, a career police officer. You know, all of his friends tended
to be other cops, and the reason for that was partly because they


30

2. Annualization. This increase is
needed to annualize the FY 96
pay increase. Total cost is $28
Million. Without this increase
the Service would be forced to
reduce FTE and disrupt
program delivery.

Most MCLs Related to Labor
[tmater Bios fr Nom-Laber and Bervne Carter Workiad

‘Non-Pay Baise Labor
Increases. IRS has
experienced $61 Million in
labor cost growth in excess of
that budgeted for in the usual
pay raise and personnel benefit
ination, This is because
‘promotion costs result from
career ladder advancements, above journey level promotions, and within grade increases.
Without senior graded employees, the Service would be hampered in working higher graded
cases in Examination, Collection and other budget activities. Absent this increase the Service
would be forced to reduce FTE. and programs

B. Service Center Workload Growth. Resources will cover the projected increase in Service
Center workload (processing tax retums and issuing refunds) which is due to growth in the
‘taxpayer population and tax law changes. Primary tax returns are expected to reach
108.3 milion in FY 1997, an crease of24 milion fromthe caren year estimate of 197.1

million. Supplemental documents (amended returns, extensions to file, et.) are projected to

increase .5 million from the FY 1996 level of 12.1 million.

VIL Program Decreases

here are two categories of decreases, First, there is « program reduction that represents
the Service's portion of a base program cut applied to most Departmental bureaus to
help balance the Federal budget over the next seven years. Second, there isthe fourth
year’s installment of administrative cost reductions mandated by Executive Order.

‘A. Program Reduction. Because a base reduction cannot be achieved through further
administrative savings, the out is being taken as a program reduction that could have some
impact on the Service's ability to collect revenue in FY 1997. This reduction is being taken in
the more traditional enforcement job categories—those that engage in face-to-face examination
and collection activities. While these positions continue to be vital to the overall enforcement
efforts, and will always play a major role in collecting revenue, the IRS business vision calls for
shifting the balance of the enforcement programs toward those that are featured in the Revenue



89

Chairman JOHNSON. I would like you to discuss more fully Rec-
ommendation 4, The scope, level of effort, management attention,
and tools devoted to security development, but also perhaps in the
context of developing also that management effort and the tools in
other areas as well.

Mr. CLAGETT. You heard from the Commissioner and her staff
that they have, indeed, after, I must say, substantial urging, devel-
oped what they call a security architecture. Early on in our discus-
sion, they had not done what has to come first. In fact, you have
to establish what level of privacy and privacy criteria you need be-
fore you can develop a security strategy. That took a lot of discus-
sion, and I mentioned early on that one of the areas of organization
that they improved was to bring in a high level privacy person, and
that person immediately started with his staff to develop those sets
of privacy criteria.

After that—and this has now only been 1¥2 years or so—they
began to develop security requirements, and they do now have a se-
curity architecture document. What must follow that, however, is
taking that security architecture document and now move down
some levels to what are the specific security systems and system
standards that are going to be used by the developers in each of
those modules of TSM. That has not been done.

So as you see in the report, if you go into the field and talk to
developers, they do not now have guidelines on what secure system
is going to be used, either for their own projects or much less one
that would be standardized across all the developments. And so
they are doing what you would expect them to do. They don’t wait.
They go ahead and establish their own approaches to security.

Chairman JOHNSON. So the subcontractors or the contractors
that IRS is working with have not been given the security docu-
ment, the architectural document that the IRS has developed?

Mr. CLaGETT. They have been given an architectural document,
but that does not establish specific standards that are going to be
used throughout TSM. Those are not yet established.

Chairman JOHNSON. So the contractors really need a far more
specific document?

Mr. CLAGETT. That is a need both inside and outside. I must say
that many of the systems are still developed and/or guided by in-
ternal IRS people. In fact, I think every one of the current service
centers has a software development team, a large software develop-
ment team. Their old mode used to be that they farmed out all of
their development, essentially, to their regions. In those days, that
was a strength in that it did, as you mentioned earlier, involve the
field. But even in the old days, there was a lot of local input to a
local design. However, it was designed for one area, and they had
a lot of problems then duplicating it across all the other service
centers.

They still use those development capabilities, and they are good.
But our concern is that, absent a fully set group of standards for
TSM, neither good interfaces nor communication among all those
systems is going to happen nor will you see an effective security
system.

Chairman JOHNSON. How do you explain that?


84

progress.” The IRS has created a vision statement, and it has
begun the process of reengineering its business processes. However,
these efforts remain somewhat disjointed from TSM.

Of greatest concern are the enduring deficiencies in technical
management. It is in this area that progress must be made if TSM
is going to succeed. Those deficiencies show up in the IRS’ own
software and system development organization, its lack of a concise
statement of the system architecture, its approach to and slow rate
of improvement in development processes, and its incomplete atten-
tion to system and data security. The committee frequently ex-
pressed concerns in the six reports that I have mentioned over the
5 years about the lack of experience in large systems development
and implementation within the IRS management. This deficiency
shows up in the rate of internal progress and in the nature and ef-
fectiveness of interactions with contractors involved in TSM devel-
opment.

I would say here, as I have said repeatedly to the IRS, that the
Service should not have had in-house capability to take on such a
large project when it started. That condition was no embarrass-
ment. But it should have assessed the size and complexity in devel-
oping such a large project and then acquired the trained, experi-
enced management team needed to direct it. In fact, that is the
way most private industries approach such a project. Instead, it re-
lied on competent in-house management who were—and are—gen-
eralists who have advanced through the IRS through many years.
They are good people. They know how to run the IRS as it exists
today. At the same time, they have not grasped our recommenda-
tions. as to what it takes to develop a huge information system such
as .

1 Quoting again from our report, “The IRS must implement the fol-
lowing”——

Chairman JOHNSON. Excuse me, Mr. Clagett. You are at the
point in your testimony where you are going to go into detail on
your recommendations.

Mr. CLAGETT. Fine.

Chairman JOHNSON. I am going to ask you to suspend because
we only have 3 minutes left to vote.

Mr. CLAGETT. Fair enough.

Chairman JOHNSON. We have two votes, and we will reconvene
about 12:30.

Mr. CLAGETT. That is fine.

{Recess.]

Chairman JOHNSON. Mr. Clagett, we will resume. We have Mr.
Hancock here and myself, and we will resume. Please feel free to
take your time.

Mr. CLAGETT. Thank you very much. I will start off where I
stopped.

Quoting from our report, “The IRS must implement the following
recommendations immediately and forcefully; otherwise, the goals
of the TSM effort are in serious jeopardy’—and that is a quote, of
course, from our report. And I am going to comment and tick off
those basic recommendations.

Recommendation 1, Acquire more technical management exper-
tise, through both hiring and contracting, starting with a highly


12

Beginning in FY 1994, taxpayers could file from their home computers through a
thitd party transmitter. As of March 22, 1996, about 102,000 taxpayers had used this
filing method, a significant increase from the 1,000 that filed through this service last
year. Also this year, taxpayers in 31 states can satisfy both their federal and state tax
obligations with a single electronic transmission, an increase from the 15 states where
joint electronic filing was available in FY 1993. As of March 22, 1996, 2.7 million joint
Fed/State returns have been filed — more than double the 1.1 million filed last year

Electronic filing is not just limited to individuals. tis also available to businesses.
Employers nationwide can now file their "Employer's Quarterly Tax Retum" (Form 941)
electronically, and almost 200,000 of these returns were processed for 1995. A
TeleFile option for the simpler Form 941 returns is in the works.

Electronic filing offers advantages for both taxpayers and the IRS. Taxpayers file
more accurate returns and get their refunds faster, and we receive more accurate
information more quickly and eliminate the need for expensive paper processing,

Electronic commerce means more than just receiving returns electronically, it
includes electronic payments as well. Most of the more than 90 millon taxpayers
getting refunds this year can have them directly deposited into their bank accounts.
Taxpayers enjoy the safety and ease of ditect deposit, and we save the expense of
printing and mailing checks,

‘The TaxLink/Electronic Funds Transfer Payment System, used by employers to
pay employment and other depository taxes electronically, is faster, easier and more
accurate for tax collectors and taxpayers alike. In FY 1995, more than $232 billion was
deposited electronically, a major increase over the $6.2 billion deposited in FY 1994.

Despite these new electronic options, the number of paper tax retums filed has
increased since 1982. The good news is that the staff needed to process these returns
has decreased, and in the past three years we have realized a productivity
improvement of 12.4 percent in processing paper returns.

‘We are also using other ways to process tax payments. By directing many
payments to bank lockboxes, whereby banks process payments and credit them to the
Treasury Department, the deposit process has been accelerated and accuracy has
been increased. In FY 1995, over $125 billion went through the !ockbox payment
system, an increase of $18 billion over the prior year.

Taxpayer Bill of Rights 2

Making it easier for taxpayers to both file their returns and communicate with us
is only part of our effort to improve our relationships with taxpayers. During the last
year, we have had the opportunity to work with you, Madame Chairman, and Members
of this Subcommittee on the Taxpayer Bill Of Rights 2 (TBOR 2), and | was pleased to
learn that the legislation was reported out of the Ways and Means Committee last
week. When last year's efforts to enact TBOR 2 were not successful, working together
with this Subcommittee, we administratively adopted the proposals that did not require
Congressional action.

In January 1996, we published Announcement 96-5, entitled “Administrative
Actions to Enhance Taxpayer Rights”, to identify the TBOR 2 proposals that the IRS
had either already adopted or could adopt administratively with no legislative action.
‘The Announcement also included IRS regulatory and guidance projects that were
similar in nature to the TBOR 2 proposals developed by the Committee.

As a result of this approach, the IRS has been able to provide taxpayers with
some of the benefits of TBOR 2 until legislation can be enacted. For example, the IRS
has already taken steps to strengthen the role of the Taxpayer Ombudsman in the IRS.
The IRS has limited the number of IRS officials who can overrule a Taxpayer
Assistance Order ("TAO’) to only the Commissioner, Deputy Commissioner or
‘Ombudsman, The IRS clso clarified that the Ombudsman may issue a TAO to direct
the IRS to pay a refund to a taxpayer to relieve a severe financial hardship and to stop
a collection action to ensure review of whether the action is appropriate. The
Ombudsman now also has greater power over the selection and evaluation of local
Problem Resolution Officers. Finally, the Ombudsman is now required to prepare
annual reports on the most serious taxpayer problems and suggest administrative and
legislative solutions to those problems.


54

Mr. LAUGHLIN. Let me tell you why I am asking this question.
I saw in the newspaper today where the Postal Service is using not
tax money but revenue money from postage and the Postal Service
talking about funding both political conventions. And I am not sug-
gesting that the IRS is doing——

Ms. RICHARDSON. We are not going to do that, I promise you.

Mr. LAUGHLIN. I think that is an absolute misuse of postal reve-
nues to fund political conventions or the World Series or the Rose
Bowl or the Cotton Bowl, if it is ever played again in Texas. But
the concern I have is: Where is this money going?

Then I read a report today that some of the labor unions have
outfitted a brandnew jet, or the head of some union, I am hopeful
that we will get a report that all of this is going to modernization
of equipment and not recarpeting of the Victoria, Texas, IRS office,
which happens to be down the hall from my office.

Ms. RICHARDSON. Right.

Mr. LAUGHLIN. I don’t suspect that is happening, or my staff
would have told me.

Ms. RicHarpson. No, I can assure you——

Mr. LAUGHLIN. Do you see where I am headed? I think this Com-
mittee is entitled to know where is this $2 billion going.

Ms. RICHARDSON. Absolutely. And I would be happy to provide
you great detail for the record. But I might ask Judy Van Alfen to
give you some sense of it.

Ms. VAN ALFEN. Yes, we have been appropriated $3.54 billion.
We have spent $2.77 billion, and we have in our budget for this
year $695 million. We have spent money on telecommunications,
including expansion of telecommunications so that we could deliver
our integrated case projects and our ADP acquisitions and oper-
ations costs, off-the-shelf software. It pays for contractor costs for
development of software, engineering and integration, strategic
planning and support by our contractors. It also pays for site prep-
aration to be able to install our initiatives. It does cover IRS sala-
ries, travel, and training in connection with the various projects,
and we have some other supports costs. We will be happy to give
you further breakdowns on that.

Mr. LAUGHLIN. Fine. And, Commissioner, again your written tes-
timony says, “We have developed a plan with the help of outside
experts from other governmental agencies and the private sector to
aggressively expand the work of the current Integration Support
Contractor. Under this new approach, the Integration Support Con-
tractor will assume as much of the systems integration role as the
existing contract permits.”

I want to key in on “existing contract permits,” because my ques-
tion to you is: Why not modify the contract to make the contractor
a real integrator by making him the prime contractor? It is my un-
derstanding that the outside contractors can’t implement anything
without IRS permission. And it seems to me you don’t get good
input or innovation if the den mother has to approve everything.
It occurs to me that we ought to have more flexibility and consider
modifying the contract.

Ms. RICHARDSON. As I understand it—and I am certainly not a
contract lawyer, and I would be happy to provide you with some
people who can give you much more detail, we cannot unilaterally


96

Now, we applaud the Service’s efforts this year to make forms
available through CD-ROM and through the Internet. I under-
stand that some 25,000 forms a day are being downloaded. But not
everybody has a computer, and one of the concerns we have is the
reductions in the taxpayer service forms distribution at the local
level, the closure of some of these offices, the movement of some of
the personnel from what were smaller rural offices into major cen-
ters has really necessitated a search and destroy mission on the
part of some taxpayers just to be able to comply with their tax fil-
ing requirements. We have some problems with that.

I think one of the things we enjoy in this country is a very high
compliance rate. Part of the reason we do that is because the
American taxpayers are willing to go ahead and go through this
self-assessment process. Part of the cost of that system ought to be
providing them access to information to allow them to meet those
responsibilities without going to too much trouble on their own and.
also making it easy for them to file.

Now, the Service has made some major steps in the last couple
of years in making it easier to get online to get information. Their
new Web site is a vast improvement over their prior FedWorld site.
The information they have now made available to people who have
their own tax software programs and computers to file by modem,
we applaud that. But the average person does not have a computer.
The average person does not have access to an Internet account.
The average person probably does not have a CD-ROM hooked into
their computer, if they have a computer. And that person can’t get
service.

When we are looking at a telephone system in taxpayer service
that answers 35 percent of the calls that come in, that is a prob-
lem. I dare say if I only answered 35 percent of the phone calls I
had, I wouldn’t be in business very long. I would submit to the
Members if you only answered 35 percent of the calls that came to
your office, you wouldn’t be elected next time.

So there is a concern that that level of service needs to be ad-
dressed because you cannot have taxpayers trying to get in repeat-
edly, because I think eventually it affects voluntary compliance.

This light is——

Chairman JOHNSON. It is just a warning. When it gets red, you
will have had 5 minutes. You don’t have to stop immediately, but
it is to give us all some indication.

Mr. LANE. OK. So we are concerned. We believe that part of a
well-designed taxpayer service component within the Service is a
necessary component for the voluntary compliance system. People
have to be able to access the system, get information to fulfill their
requirements.

I think also in hearing some of the testimony today, the Service
obviously is focusing on getting the tax returns they get processed,
depositing the checks that they get, and having some degree of con-
trol over compliance. So what they have had to do in terms of their
allocation of resources is focus on the money that is owed and the
processing of the tax returns that come in the door. That makes
sense. But somewhere along the line, the short end of the stick has
been given to the taxpayer service function, and that has really had
a dramatic impact on the average taxpayer out in the street. So I


15

various compliance programs. In the past, we have discussed
concerns about the reliability of ERIS data, and IRS has
been working to resolve those problems. We plan to test the
reliability of ERIS data as part of our audit of IRS’ fiscal
year 1996 financial statements

-- Although we generally supported the fiscal year 1995
compliance initiatives, we did not support hiring more
revenue officers. For several years, we have encouraged IRS
to shift its collection focus from revenue officers, who
generally collect delinquent taxes through face-to-face
contact with taxpayers, to more productive processes like
ACS, that emphasize early telephone contact. Although IRS
subsequently reduced the number of revenue officers for that
initiative, it still planned to hire about 750 in fiscal
year 1995." As noted earlier, IRS is now diverting some
revenue officers --who are paid at higher rates than ACS
staff--to ACS to mitigate the impact of ACS staffing
reductions.

‘The $359 million included in IRS' fiscal year budget request for
the revenue protection initiatives is expected to fund 3,820
additional compliance staff. According to IRS, most of those
staff are for areas, such as ACS and Document Matching, that were
significantly affected by fiscal year 1996 staffing cuts.

Despite the 3,820 additional staff associated with the revenue
protection initiatives, IRS budget shows that total compliance
staffing is expected to increase by only 2,390 positions in
fiscal year 1997. Almost all of that difference is because IRS’
budget also includes a decrease of 1,341 full-time equivalents
for tax law enforcement. That decrease is part of IRS"
contribution to reductions in base programs to reduce the federal
deficit. According to IRS, the decrease of 1,341 positions will
come from the more traditional enforcement job categories~-those,
such as revenue officers and revenue agents, that engage in face-
to-face audit and collection activities. IRS" budget states that-
although "these positions still comprise the lion's share of IRS
enforcement efforts, they also represent, on the margin, the
least efficient use of IRS resources." According to IRS
officials, these staff reductions will be achieved through
attrition.

Thus, one effect of the increases and decreases in IRS’
compliance staffing for fiscal year 1997, if TRS’ budget request
is approved and is implemented as IRS has described, would be to
alcer the mix of that staffing. IRS would have fewer revenue
officers, for example, and more ACS staff--the kind of mix that
we have advocated in the past

In conclusion, although IRs has made some changes, there are
certain questions that remain appropriate in discussing the
revenue protection initiatives: (1) will IRS spend the
additional funds for additional compliance staff? (2) does IRS
have reliable data on the revenue generated by its enforcement
activities? and (3) will IRS be able to achieve the new staffing
mix?

That concludes my statement. We welcome any questions that you
may have.


Appendix B

36

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48

had to be not just for the technology piece of it but for the business
side of it as well.

As I mentioned, that position was actually created last year.
Judy began in October after her predecessor retired. I think that
having that single point of accountability has made a significant
difference because it has allowed her and her staff to really take
charge of all of the resources for technology, not just what would
fall under the Tax Systems Modernization Program.

Chairman JOHNSON. Not by way of criticism, but just by way of
information, was there not a single point of accountability sooner
because you really thought communication would do it? Or what
prevented that from happening sooner? Was it lack of real under-
standing of the sort of vertically integrated process that has to
make change?

I do appreciate that you have done that now. I don’t understand
why that didn’t happen sooner, why it wasn’t clear to the Agency
that more authority had to be invested in the person or in the
group that was going to lead this.

Ms. RICHARDSON, I can’t speak to this situation prior to my time.
I think that one of the issues and one we touched on earlier—and
it is not, I think, unique either to the Federal Government or to
the private sector—is that the project began as an upgrade of tech-
nology without a lot of thought given to changing business proc-
esses. And I think it was in part viewed within the province of the
Information Systems Division and the Chief Information Officer.
People on the business side, compliance, taxpayer service, and
other parts of the organization, were interested in modernizing
technology, but I don’t know that they were integrated into what
was happening with the technology modernization that was being
led by the Chief Information Officer’s efforts.

Chairman JOHNSON. OK. Let’s get that a little clearer because
that makes a lot of sense to me. What I hear you saying is that
it started out as a technology project.

Ms. RICHARDSON. Yes, ma’am.

Chairman JOHNSON. But it became a review of how the whole
agency does its business.

Ms. RICHARDSON. That is correct. The technology modernization
began—or thinking for it began certainly in the late eighties, but
I think in response to both criticisms from the General Accounting
Office as well as the National Research Council, the organization
realized that it needed to really rethink its business processes and
then be able to leverage technology. You didn’t just automate old
ways of doing business. That caused a real change in approach,
change in thinking, and change in the way we began to look at the
whole process of modernization.

Chairman JOHNSON. And in addition to appointing a single point
of accountability, what changes are you going to make to ensure
that there is much deeper involvement from the Agency itself? Be-
cause it is a fairly recent comment that was made that the ICP is
going to have problems and is not ready to go operational because
there wasn’t enough frontline employee involvement in its develop-
ment.

Ms. RICHARDSON. I might let Mr. Donelson take a crack at some
of this, but he and I were both out at our Fresno Service Center


53

The amount obligated on TSM through the end of FY 1995 was $2.77 billion, with $84
milion of the funds appropriated between FY 1988 -1995 available for expenditure
during FY 1996. Below are the amounts expended (and obligated) through FY 1995.

Amounts Expended through FY 95
(Dollars In Millions)

Category Dollars
Salaries/Benefits (FTE) $647
Computer Hardware/Operations $623
Software, Commercial Off the Shelf $76
(cots)

Service Contracts $560"
Telecommunications $331
Site Preparation Costs $279
Support, Training and Travel $262

“Includes contracts for Engineering/Integration, Strategic Planning/V&V,
and Software Development.

In addition, TSM was appropriated $695 million in FY 1996, of which $265 million has
been committed/obligated to date. An additional $317 million has been distributed to
the Financial Plan and is being committed; $100 milion is fenced pending submission
of the report to Congress on the Status of IRS' Management and Implementation of Tax
Systems Modernization by the Secretary of Treasury. The balance of $13 million will be
distributed within the next few weeks based on Investment Review Board (IRB)
priorities. Below is a delineation of the total amounts obligated through March 22,

1996,

FY 1996 Obligations To Date (as of 3/22/96)
(Dollars In Millions)

Category Dollars
Salaries/Benefits $48
(payroll data thru

2196)

Equipment $53
Services $157
‘Supplies $3
Support $4



49

last week—I think it was last week or the week before—looking at
where we are basically prototyping our customer service and the
use of ICP. We very much have taken into account what frontline
employees think, want, and need in trying to make ICP accessible
to the people who will actually have to use the system, not just the
people who were designing the system or who were developing the
software.

We have two prototypes—one in Nashville, which is a district of-
fice, and one in Fresno, which is a service center. We have moved
ahead with the prototype in order for our frontline employees who
are using the systems to obtain experience and help in the develop-
ment process so that we can make a system that works for the ulti-
mate customer, that is, the frontline employee, as opposed to some-
one sitting back in Washington or sitting hack in a design studio.

Chairman JOHNSON. What specific role did those employees have
in the process of change?

Mr. DONELSON. The employees have input into the various
changes that are made as we try to improve the product. We have
had a version we call 1.5 that has been operating in Fresno, and
suggestions from employees as to how that should be enhanced——

Chairman JOHNSON. And is the suggestion process informal or
formal?

Mr. DONELSON. It is formal. And they-—

Chairman JOHNSON. What form does it take?

Mr. DONELSON. Well, we have working groups that have been at
this for some time who are a mixture of higher level managers as
well as employees, union representatives as well as managers.

Chairman JOHNSON. When you hear that kind of criticism of
your ICP, your Integrated Case Processing Project, does it concern
you?

Mr. DoneLson. I will answer that. Absolutely. But one of the
reasons the Commissioner and I——

Chairman JOHNSON. Because the feedback from outside experts
indicates that the IRS may be trying to go operational with ICP too
quickly, which could be a mistake. For example, there is concern
that frontline employees have not had enough input in its develop-
ment in order to assure its usefulness to end users. This is a big
issue because if this project doesn’t reflect the level of horizontal
involvement in planning and doesn’t come out with a technology
that realy is powerful to the people in the frontline in their daily
lives, then other projects will be seen as in jeopardy.

Mr. DONELSON. Madam Chairman, the Commissioner and I were
out in Fresno just 2 weeks ago because of that kind of criticism
that we have heard, and we both went out to see it live, and the
demonstration that we saw was presented by a union official, as a
matter of fact, an employee who represents his fellow employees.
And I can only describe his enthusiasm as overwhelming. He
walked us through the system, showed us all the terrific aspects
of it from his vantage point, how it makes his job not only easier
but more fulfilling because he gets to solve taxpayers’ problems
with one call. He was extremely enthusiastic about it, and he said
it was very easy to learn. He said he learned it in just 4 hours of
kind of working with the system and teaching himself, as well as
the instruction that he was given. So I think that that was an indi-


78

continue current operations. Major developments over that, I think,
should have to be justified convincingly to the Congress, perhaps
in supplement appropriations requests.

Mr. LAUGHLIN. Is this an area where the existing contracts
should be reviewed for modification to determine whether any of
the outside contracting agencies would be more appropriate to
manage the development of TSM?

Ms. STILLMAN. We made one recommendation in our July 1995
report directly addressing the use of contractors, and that was that
in all new contracts, IRS should require that their contractors per-
form software development at a repeatable level, the Software En-
gineering Institute’s level 2. That would give you some confidence
that, in fact, IRS could deliver repeatably products of reasonable
quality, on time, and within budget.

There is no evidence that IRS requires all its contractors to per-
form at SEI level 2, and, in fact, CyberFile is an example of a con-
tractual effort that IRS has undertaken since our report that does
not Tequire that its contractors build software at SEI capability
level 2.

Mr. LAUGHLIN. Ms. Willis, early in your remarks, you said some
issues remain dealing with TSM, and I am not smart enough or
knowledgeable enough to keep up. Did you address those concerns
later in your testimony?

Ms. WILLIS. The issues that remain with TSM, as Dr. Stillman
alluded to, are the issues associated around the managerial and
technical weaknesses that we identified that we attempted to ad-
dress through our recommendations.

Mr. LAUGHLIN. Are there any other issues remaining that either
you or Dr. Stillman have not testified to at this point in your testi-
mony?

Ms. WILLIS. No.

Mr. LAUGHLIN. What are the advantages and disadvantages of
having the IRS act as its own prime contractor? And would you rec-
ommend that the IRS continue as its own prime contractor, or
would you recommend they seek outside help?

Ms. STILLMAN. We have had some discussions with IRS and its
integration support contractor in the past. It is unclear to me what
IRS means by a prime contractor, what prime contractor respon-
sibilities connote to IRS. It is unclear to me what obstacles they see
in using the integration support contractor as an integration con-
tractor. IRS has explained to me that the integration support con-
tractor acts in an advisory role. I have asked the question, What
precludes IRS from taking the integration support contractor’s ad-
vice in every case or in most cases? And I have never gotten an
answer that I understood.

Mr. LAUGHLIN. When will the IRS be capable of making realtime,
online adjustments to a taxpayer’s account? What benefits would
the taxpayer and the IRS enjoy from such a capability? And do you
have any idea when the IRS will have its computers connected in
such a fashion as it will not have to transport the data tapes
around the country by airplane?

Ms. WILLIS. Mr. Laughlin, I don’t think there is any question
that there are great benefits to the taxpayer and to IRS for IRS
being able to immediately access and make corrections to taxpayer


88

Quoting again from our report, “The IRS must implement the following recommendations imunediately
and forcefully, otherwise the goals of the TSM effort are in setious jeopardy:

“Recommendation 1. Acquire more technical management expertise. through both hiring and
‘contracting, starting with a highly qualified Chief Information Officer to fil the vacant position

| am pleased to note thatthe position has recently been filled. I sincerely hope the new CIO has
the background and experience to help TSM be effective, Qualified, trained, and experienced managers
are needed at other levels as well

Recommendation 2. Effectively integrate operational and technical goals by developing a proper
set of metrics to measure performance

‘Recommendation 3. Develop an adequate architectural definition and design, led by the Systems
Architects Office and enforced by a strong set of interface specifications for key applications or
systems, and a process for maintaining them properly

“Recommendation 4. Significantly increase the scope, level of effort, management attention, and
{ools devoted to security development.

“Recommendation 5. Implement an overall process improvement plan. Specifically, require
‘mature software and systems development processes across the entire development organization
within 2 years, reaching maturity level 2 on the Software Engineering Insticure Capability
‘Manurity Model for Software (CMM) and maturity level 2 on the most pertinent process areas of
the Industrial Collaboration Systems Engineering Capability Maturity Model

"Recommendation 6. Focus efforts on the Integrated Case Processing (ICP) project, applying the
best talent within the IRS, to demonstrate a mature development ability, to develop processes and
procedures for all IRS projects, and to determine the long-term needs of the re-engineered IRS.
Furthermore, TSM funding for projects that do not support the focus project directly should be
reduced until definite improvement is shown."

Absent sufficient follow-through. new approaches to TSM may be necessary. One possibilty
would be to asses, justify, and fund each component project individually. Another possibily sto
‘outsource the whole system as a project. The commie believes, however, that correcting the
deficiencies it as identified and strengthening its management isthe best course of action for the IRS and
the country. It has expressed concer thatthe problems raised her. ike some ofthe specific
recommengations, have been raised previously. We therefore have suggested that some ongoing
mechanism be established that can both advise the Commissioner and foster constructive interaction
between the IRS and its oversight organizations. to assure the best possible focus, decision-making, and
communication


43

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CONTENTS

Page
Advisory of March 19, 1996, announcing the hearing .

WITNESSES

Internal Revenue Service, Hon. Margaret Milner Richardson, Commissioner;
accompanied by Mike Dolan, Deputy Commissioner, Judy Van Alfen, Asso-
ciate Commissioner for Modernization; Jim Donelson, Chief of Taxpayer
Service and Acting Chief Compliance Officer; and Tony Musick, Chief Fi-
nancial Officer .

U.S. General Accounting Office, Lynda D. Willis, Director, Tax Policy and
‘Administration Issues, General Government Division; accompanied by Rona
B, Stillman, Ph.D., Chief Scientist, Computers and Telecommunications,
Accounting and Information Management Division .

61

National Association of Enrolled Agents, Joseph F. Lane .

95
National Research Council, Robert P. Clagett ..

83

any


106

Mr. LANE. Well, to answer part of your question, I believe there
is something in the neighborhood of about 60 million 1040A,
1040EZ type forms filed. I don’t have the exact number. I think it
is in the neighborhood of 60 million.

To the extent that we could establish what portion of that tax
was overpaid because people didn’t take deductions they were enti-
tled to, I don’t know of any study anywhere that took a look at
that.

Mr. Hancock. Well, I am asking you.

Mr. Lane. I see your point, though.

Mr. Hancock. Have you ever had anybody come to you about fill-
ing out their tax return and say, hey, I don’t want to take these
deductions and take a chance. I would just as soon go on ahead and
pay more than I owe. Have you ever had people tell you that?

Mr. Lang. I have heard that from people, people that had prior
audits from IRS, for example, and didn’t want to deal with them
again on it. Yes, I have had that.

Mr. HaNcock. Sure.

Mr. LANE. Let me tell you, about half the taxpayers in the coun-
try seek professional assistance to get their tax returns done every
year. So about half the returns are preparer prepared, and the
other half are sent in by taxpayers.

Mr. Hancock. But even with a professional tax preparer’s help,
how many times have you had people come in and say, look, I real-
ize that I can save maybe a couple hundred bucks, but it just isn’t
worth it. I would rather just go on ahead, send the government the
extra $200, rather than take a chance that I might get audited or
that they might question it, you know, if I get this refund?

Mr. LANE. Well, T could tell you there are several areas where
that absolutely does happen. One of them is anybody that has a
business that has a home office. Until there is some material
change done in the way this home office stuff is administered, you
are going to continue to see taxpayers say, no, I don’t want to start
a fight with them, just leave that deduction off my return, even
though they are entitled to it.

Mr. HANCOCK. Well, they do it with automobile expenses, too.

Mr. Lane. They do it with car expenses, another area. I don’t
have the information to answer what percentage of revenue is over-
collected.

Mr. Hancock. I understand that there is no statistical informa-
tion.

Mr. Lane. But it does happen.

Mr. Hancock. But there are a lot of people who do it. You know,
in my position as a Member of Congress, I run into a lot of people.
And I am not out in the country clubs on weekends. I am out at
the truck stops, and I get a lot of this type of information: Look,
I don’t really feel like I owe the money, but I am just going to go
ahead and do it. And I still maintain computers are great up to a
point, but without computers there is no way we could have an in-
come tax law like we have got.

Mr. LANE. There is no question about that. There is a certain
amount of mythology that surrounds IRS. Some people are doing
what you are talking about because they believe they can stay un-
derneath the IRS radar. They may have income that they are not


66

Although IRS has taken some actions to address our concerns,
some issues remain, particularly in terms of the reliability
of IRS' data.

QVERVIEW OF IRS" PINANCTAL
CONDITION IN FISCAL YEAR 1996

IRS' fiscal year 1996 appropriation was $7.3 billion. That
amount was about $860 miilion less than the President requested
for fiscal year 1996 and about $160 million less than IRS' fiscal
year 1995 appropriation.

In June 1995, anticipating possible reductions from the amount
the President had requested for fiscal year 1996, IRS began
taking steps to reduce its staffing levels. On June 30, 1995,
IRS announced a hiring freeze. Earlier in 1995, IRS had
announced an early-out program without incentives for employees
affected by its district office and regional office
consolidations. After enactment of its final appropriation, IRS
reopened the early-out program through February 3, 1996, and made
it available to all employees. About 1,690 staff retired as a
result of this program.

To further cut costs, IRS officials said that IRS (1) reduced
employee cash awards by 20 percent, for a savings of $11
million;? (2) reduced travel and overtime costs by $49 million;
(3) reduced the workhours of seasonal employees’ by as much as 40
percent; and (4) cut back on the use of nonpermanent staff, such
as term employees.‘ IRS officials also said that the above
actions enabled them to avert a reduction-in-force (RIF).
According to IRS officials, by the time IRS would have been able
to implement a RIF for fiscal year 1996, the cost would have
exceed the savings.

As of March 1, 1996, according to IRS officials, IRS had about
$140 million in unfunded mandatory noniabor costs for fiscal year
1996. Some of those unfunded costs were for telecommunications,
postage, and rent. IRS officials said that they are hoping to
resolve these unfunded costs without having to resort to
furloughs.

Part of the $140 million shortfall stems from lower user-fee
receipts than expected. IRS' fiscal year 1996 appropriation
assumed a receipt of $i19 million from user fees. IRS now
expects to receive from $60 to $70 million in such fees for
fiscal year 1996.

Staffing Cuts in the Document Matching Program

and_at Automated Collection System Call Sites

As noted earlier, IRS' actions to reduce labor costs involved
steps directed at seasonal and nonpermanent staff. Most of IRS’
seasonal and non-permanent staff (1) help process tax returns
during the filing season, (2) assist taxpayers either

at walk-in offices or over the telephone, and (3) work in
compliance programs that do not reguire face-to-face interaction
with taxpayers. IRS officials told us that in deciding which
areas to cut, IRS wanted to ensure that it could process tax

*According to IRS officials, IRS considered eliminating all cash
awards but decided against ‘that option.

‘although IRS‘ seasonal staff work less than a traditional 40-
hour week, 52-week schedule, they are permanent employees

‘erm employees are hired for a finite period of time. During
that time, they have employment rights similar to those of
permanent employees. However, they can be released once their
term expires.


52

studies, and I just want to ask you: Is all of the almost $2 billion
going for salaries and overhead?

Ms. RICHARDSON. We would be happy to supply you with even
more detailed figures for the record. T believe that $3.5 billion has
been appropriated to date, and of that amount, $2.7 billion has
been spent. And when I say appropriated to date, | mean through
this fiscal year.

[The following was subsequently received:]


101

‘The current budget provides for an inadequate level of service on the Taxpayer Service telephone
system, The Service itself estimated that it will be able to answer only 35% of the calls taxpayers
‘make this year. Our members have reported an unprecedented increase in the number of requests
they receive in their offices from taxpayers who are not their clients but who are seeking tax
forms. These are taxpayers who are trying to comply with the law! They should nat have to go
‘ona search and rescue mission to locate forms!

Many of our members report that even the special telephone lines IRS established for
practitioners have been going unanswered for up to 30 minutes at a time. One of our members
reported that he has not been able to get through to the Atlanta Service Center yet this year! The
inability of the practitioner to access the Service through the designated “hotline” merely adds
additional volume to the already overloaded public lines.

Other members have told us about attempts to secure new Federal Employer Identification
‘Numbers (EINs) from Service Centers. This used to be taken care of in a phone call but is now
requiring weeks because the Service had to reassign the employees to other tasks. If taxpayers
are unable to secure EINs in timely fashion, there will be delays in filing of returns or returns
will be filed without EINs resulting in even greater backlogs for the TRS.

Due to cut-backs in Taxpayer Service staffing, we have heard complaints about the unavailability
of Examination employees to finish audits they hegan months ago because they are assigned to
handle walk-in service, While delaying an audit may seem to some to be a relief, to those
taxpayers with audit deficiencies these delays add considerable additional interest charges, not to
mention additional professional fees

‘The budget reductions have also complicated the processing of other than Taxpayer Service
workloads. We have heard complaints fram practitioners who now have to travel to cities farther
away than before due to IRS office closings or personnel reassignments, The span af control of
some Group Managers has been increased substantially, in one case from 11 employees to over
30 located in two posts of duty. This manager spends hours a day shuttling between the posts.

Another area of major concern to us is the announcement made at liaison meetings with
practitioner organizations that the Service cannot afford to hold Continuing Professional
Education classes this year for employees. This has already caused problems and inconsistencies
in how Revenue Officers are applying the new National/l.ocal standards in Collection Division
cases.

As another example, we have worked for years to urge the Service to develop a system of
Appeals for Collection cases to enable taxpayers to get enforcement actions reviewed prior to
implementation. Finally, the Service agreed and the new system is to he implemented next week
We are very concerned with the ability of Appeals to shoulder new work reviewing Collection
decisions on liens, levies and seizures when their traditional workload is starting to rise due to
attrition caused by senior staff retirements and resignations.

Itis reported that the IRS will not be printing Publications 17 and 334 next year as a budget
saving measure. Package X may he dropped as well. These are eritical publications for many
taxpayers who do their own returns, for the many volunteer tax organizations that service their
communities, for adult education programs that offer tax and small business courses for
individuals who contemplate starting their own enterprises, and for many smaller tax preparation
firms which cannot afford extensive tax libraries, To eliminate these publications will prove to be
2 false economy for certain,

Also due to budget constraints, many district directors have stopped publishing their practitioner
newsletters. In California alone, we know of five istrict directors who have shelved their
newsletters, These publications are invaluable, particularly during filing season, to help
practitioners keep up with changes in practice and procedure within the IRS, Again, practitioner
groups are working with the National Office to fill the gaps, but these efforts do not replace
consistent outreach which the district directors have been successfully using in the past.



26

Finally, the third level of the measures hierarchy contains the measures for the Service's 18
budget activities. These 18 activities represent the Service's various functional components, each
activity contributes toward the achievement of the Service's mission and objectives. Details on these

are also shown in Aj ‘B--Performance Hierarchy.

IRS PERFORMANCE MEASURES--MISSION AND OBJECTIVES

Total Collection Percentage (TCP) 86.0% || 86.3% | 86.7%

Total Net Revenue Collected S1.271T | $1.358T | $1.450T|
Revenue Collected per Dollar of Burden $1097 [$11.38 _| $11.80

The time expended by taxpayers in fulfiling |53B |53B |53B
their tax responsibilities (Hours)

Fevorsbilty of TS (Roper Survey) 36.0%

Revenve Collected per Dota of TS Budget

Ihe Service is requesting $150 Million for a series of Tax Systems Modernization
T [resem ivesinens These invents wl Seance immediate and tangible

improvements in IRS’ service to taxpayers. The additional resources will be used for
the following projects:

A. Integrated Case Processing Systen/Integrated Collection System, With the resources
provided by ths initiative, IRS employees will be provided with greater access to information
and the abilty to resolve issues over the telephone by installing 3,500 Integrated Case
Processing workstations, 22% of the total workstations required, The Service will also



22

‘on our currant FY 1996 funding, we will not be able to perform some 290,000
examinations, with a potential loss in revenue collection of $324.8 million,
Examinations through our information reporting program will also be affected. For
‘example, reductions in our document matching program and our substitute for return
program, an effective means of addressing non-filing, could resutt in a potential loss of
$417 milion in collected revenue.

Madame Chairman, in your invitation letter you asked us to try to anticipate the
effect on IRS operations if the President and Congress approve an FY 1997
appropriation level which is no greater than the FY 1996 level. Flat funding really
means a $200 to $400 million reduction from our FY 1996 funding level because we
must absorb pay raises and increased costs. As a result, we would be faced with
difficult choices.

Like this year, we will make it a priority to sustain our basic operations —
processing more than 200 million tax returns and paying more than 90 million refunds.
To accomplish this, however, we will, ike we did this year, have to find altemate ways
to serve taxpayers, and, lke this year, we will have to decrease the amount of face to
face contact with taxpayers. The number of audits will decrease, with a corresponding
decrease in the audit coverage rate, and some of our collection operations may have to
be curtailed. While we will continue to process tax returns and pay refunds on time,
‘service to taxpayers may suffer and the amount of money collected next year could be
impacted. But what is more difficult to measure is the longer term impact of reductions
on overall taxpayer compliance levels.

Since becoming Commissioner almost three years ago, | have worked hard to
improve our service. | am pleased to report progress. Despite that progress, we
recognize that we still have much to do.


105

are electronic cash transactions happening where you could have
funds transferred in virtual banks, so the bank does not exist phys-
ically anyplace except in one location and the rest of it is online.

Mr. HANcock. Well, let me make this comment, Mr. Lane. For
everything man can invent, another man can figure out how to cir-
cumvent, because you are not going to come up with anything that
cannot be counteracted. The fact remains that when people get to
the point, as you mentioned earlier, that they feel they are over-
taxed, they are going to start trying to figure out some way to keep
from paying it.

Mr. Lane. That is right.

Mr. HANcock. And nobody really wants to take the chances on
going to jail and what have you. And, boy, you are opening the

joor.

Now, there is only one solution, and that is to get the tax struc-
ture back to where people feel like they are paying their fair share.

Mr. LANE. Well, I can’t disagree with you on that.

Mr. Hancock. OK. I think a good book to read would be Adams’
“The Good and Evil of Taxation,” which maybe you have already
read. This is the history of society as to what has happened when
the citizens start feeling that they have been overtaxed.

I would also like to ask you this question. You mentioned being
able to figure out your income tax on CD-ROM. Why should it even
be necessary for somebody to have a CD-ROM to fill out their in-
come tax return?

Mr. LANE. Well, I think the point was that with a CD-ROM disk,
you can put all the tax forms that are available on one disk, and
make those available in the library. If somebody needs a form, they
can stop by and pick them up. That is a very cost-effective way of
distributing forms.

Mr. HANCOCK. Well, it is cost effective, but why have a tax struc-
ture set up that way in the first place? And let me ask you this
question. I understand, and I think I know what the answer is, but
how many of these forms are merely statistical informational forms
that actually it costs the taxpayer and the government more money
to keep the records for statistical purposes than it does in realizing
revenue?

Mr. LANE. Well, I don’t know——

Mr. Hancock. Now, that is conjecture, you know. I mean, you
have got to guess at it. That is one part of the question. The other
part of the question is: I understand that about 70 percent of the
income tax returns are filed on the short form, so, therefore, you
are only concerned about the 30 percent that use the long forms.
My question is: How many of the people using those short forms
do it for two reasons. One, they don’t want to do the paperwork,
they don’t know how, or they don’t understand the law. Therefore,
they just go ahead and pay their taxes, and do not keep track of
their deductions and fill out the long form. Two, how many people
use the short form because they fear the IRS and they know that
they don’t have anything to fear as long as they just go on ahead
and send in their W-2 and forget about it? How many people do
that and actually pay more taxes than they really would owe if, in
fact, they did go on ahead and fill out the long forms?


34



WALLY HERGER $ COMMITTEE ON
nOrTeT Eb i WAYS AND MEANS
neastoene re coumnton

ie ¢ ‘He 6u0GET

-. Si

preston Congress of the United States
Bouse of Representatives

Washington, BC 20515-0502
March 21, 1996

Margaret Richardson

Commissioner Of The Internal Revenue Service
Room 3000

2111 Constitution Avenue, NW

Washington, District of Columbia 20224

Dear Madam Commissioner:

Sierra Pacific Industries, a significant employer in my
district, filed a request for a private letter ruling on January
30, 1996 concerning the application of Internal Revenue Code
section 1374 to the harvesting of timber. Upon receipt of a
favorable ruling, Sierra Pacific intends to make an election to
be taxed as an $ corporation. The ruling requested was entirely
consistent with a series of recent private letter rulings issued
by the Service. Nonetheless, Sierra Pacific was recently
informed that the request is being closed without the issuance of
a ruling. I understand that the Service has taken similar steps
with respect to several other taxpayers and has decided to
suspend consideration of private rulings in the area while it
analyzes the treatment of timber harvesting under section 1374.

I have two major concerns to bring to your attention with
regard to this matter. First, as you are well aware, the
President has proposed legislation that would make it
prohibitively expensive for companies such as Sierra Pacific to
elect $ corporation status. The administration recently
announced that the effective date of the proposed legislation is
being delayed to January 1, 1997. Therefore, it is imperative
that the Service conclude its review of this issue in a timely
fashion so that Sierra Pacific, as well as any other affected
taxpayer, will have the opportunity to apply for a favorable
ruling. Resolving the issue in a manner favorable to taxpayers
will do little good if they are then prevented from making an S
election because of the proposed section 1374 legislation.

The second major concern I have is that by closing down the
private ruling process in this area, the Service has shut down
the flow of factual information concerning timber operations. My
constituent informs me that timber operations vary widely from
region to region and state to state. It is possible that these
factual differences could be important in your consideration of
the overall treatment of the timber industry. Therefore, I urge
the service not to resolve these complex issues in a limited
factual setting, but to seek input from and be open to meeting
with affected taxpayers prior to reaching a final decision.

I am confident that you will take these concerns seriously,
and look forward to your response. In particular, I would like

your commitment to see that this issue is resolved in a timely
fashion.

Sincerely,

(alt Mager

Member of Congress


112

I have a client who is the director of the Stanford linear accelera-
tor unit out in Menlo Park, and we get laughing every year and
talking about stuff and tax law changes. And I said to him, “Just
imagine if you had to go to work January 1 every year and the
laws of physics were repealed and you had to learn a whole new
set na physics laws to go do your job.” That is what we are dealing
with.

You know, we have had 27 tax law changes in the last 29 years.

Mr. Hancock. Do you think we need to change the laws a little
bit to give you all some legal liability protection for making mis-
takes? You know, there are a bunch of CPAs getting sued now as
a result of improperly completing tax returns due to Internal Reve-
nue laws that nobody really understands.

Mr. Lane. Yes.

Mr. HANCOCK. So, really, you are assuming some liability when
you fill out somebody’s tax return.

Mr. LANE. That is a cost of doing business. You have got to com-
mit yourself to maintaining a professional library to let you stay
out of a lawsuit.

Mr. Hancock. Let’s work on it. Thank you.

Mr. Lane. Thank you.

Mr. HANCOCK. This hearing is adjourned. Thank you.

Mr. Lane. Thank you very much.

(Whereupon, at 2 p.m., the hearing was adjourned.]

12)


16

APPENDIX APPENDIX

FACTORS AFFECTING ACS STAFFING FOR FISCAL YEAR 1996

Factors surrounding IRS' organizational and business
restructuring led to ACS having a large number of seasonal, term
and other than full-time permanent staff at the end of fiscal

year 1995. As a result, ACS was targeted for a significant staff
reduction given IRS' cost-cutting approach for fiscal year 1996.

IRS' customer service vision calls for combining into 23 customer
service sites the work of at least 70 organizational units that
employ staff who do not have face-to-face interactions with
taxpayers. These centers are to employ staff who will work
primarily by telephone to assist taxpayers, collect delinquent
taxes, and adjust taxpayer accounts. As part of this
consolidation, IRS is to close 10 of its 20 ACS sites

After IRS announced which 10 sites would be closed, two things
happened. First, ACS employees who could find other positions
left ACS. Some of these employees were hired for revenue officer
positions that became available as part of the fiscal year 1995
compliance initiatives. Second, the 10 ACS sites that were
scheduled to close could hire only term and seasonal staf,
according to an IRS official. Therefore, at the end of fiscal
year 1995, ACS had 448 seasonal, term, and other than full-time
permanent staff--66 percent higher than the number at the end of
fiscal year 1994

(Code 268716}


28

D. Toll Free Circuitry. With the resources provided by this initiative, the Service will resolve
many more taxpayer inquiries through a combination of increased on-line assistance and self
service applications, using Voice Response Units, which permit callers to route themselves to
interactive systems or to specially trained IRS assistors,

he Revenue Protection Initiative (RPI) is a continuation of the Service's long term
strategy to improve voluntary compliance. Consistent with the Service’s business
vision, the emphasis is on resolving issues by telephone and avoiding more costly face to
face contacts with taxpayers. The return on investment is significant—4 to 1 in FY 1997 and 7 to 1 from
FY 1997 to FY 2002.

RPI involves four major programs. Collection
Revenues Par Bxoced Coste represents about two thirds of the total program
increase. Staffing for Automated Collection System
call site and Service Center Collection Branch
programs will generate more than $1.25 Billion in
revenue in FY 1997, Beyond these increases, the
Collection component includes 240 FTE for the
Individual Tax Identification Numbering System
(ITIN). ‘Scheduled for implementation in the
Philadelphia Service Center in July, 1996, ITIN will
during its first year in operation—generate valid TINs
for over one million taxpayers (mostly non-resident
aliens) who do not have social security numbers.

‘Tota Revenues: $16B, Toul Coss: $2.48,

‘The remaining one-third of the total

program is for three programs, First, FY 97 REVENUE INITIATIVE
Document Matching increases will finance a
enhancements to the Underreporter Zrogram__FTE_$(000)_Revenue_
Program, which compares data from Collection 2,490 $263 $1,265
information returns with filed returns, and

also to the Substitute For Return Program, Exam-SC 300 $35 $388

which creates returns for taxpayers who fail _
tofile a ayers CQRDT) 23000 S21

increases will fund more correspondence Doc Match 800 $40 $136
ingens wil ind more correspondence, Doe Much _s00__si__siss__
will increase the audit coverage rate from TOTAL 3: S359_ 1,489.

1.4% to 1.5% while expanding revenues.
FY 97 Benefit Cost Ratio is 4t0 1.


94

not—I was struck by the earlier testimony between the Chairman
and the GAO that IRS has some very good examples of achieve-
ments in individual developments, and that is so. What they
haven't done well in my opinion and the Committee’s is with a
very, very large system like this, they started developing all of
them at once. And they did so without setting the standards and
the architecture first.

But they do have a lot of capable people inside, and our sugges-
tion was that they pick an important project and put their best
people on it and use that as an internal learning and training
mechanism for the next project rather than trying to do all these
on such a broad front at the same time. In other words, they have
stretched all their people and I believe some of the outside contrac-
tors quite thin by doing it that way.

Mr. Portman. All right. That is very helpful. Again, without try-
ing to paraphrase what you are saying, but your recommendation
then would be to focus on specific projects to the extent those
projects are already being undertaken internally and have made
some progress, to continue along that path, develop the expertise
internally; projects that are not already inside projects, to consider
aggressive outsourcing or outside contractors for those; and all
along to stress the need for systems architecture and standards
first and then filling in the design logically which would follow.

Mr. CLAGETT. Yes.

Mr. Portman. And security is your other primary issue you feel
has not been handled well.

Mr. CLAGETT. We are very concerned about that, because if they
don’t set enough detailed standards, then as I said, since security
in information systems is not something that can be a stand-alone
package, it has got to be something that works at both ends, as I
am sure you know. And that means you have got to have standards
so that all of the designers of the new systems design their security
systems to the same standards so that they work.

Mr. PoRTMAN. Well, thank you. As the Chair said, there is an ap-
propriations issue here, and there are some interesting ways in
which your testimony I think could give direction to the Agency as
it looks at its appropriations challenge. Because if you can focus on
some doable projects and see some success, I think then you have
more likelihood of having—not those of us on this panel, but those
of us who control the purse strings being more likely to be under-
standing and to want to support it. So I thank you for testifying.

Mr. CLAGETT. I must just in passing say I have personally tried
for some time to convince the IRS to do that just because I said
in industry a chief executive officer with such a project certainly
wouldn’t sit still for 4 or 5 years without seeing some end result,
something completed and implemented. And wouldn't it be better
for you to do the same, both for internal and all of your oversight
people? That is not the way in which they approached it.

Mr. PorTMAN. Thank you.

Chairman JOHNSON. Thank you very much, Mr. Clagett. We will
get back to you and see if there isn’t some very specific assistance
we can provide in this period, because it is an important moment.

Mr. CLaGETT. OK. I need to remind you, though, that we had a
contract, as you know, with IRS, NRC did. That has expired. That


9

have asked for an increase of $647 million in our fiscal year 1997
budget. If instead our funding remains flat for 1997, we would ex-
perience a real reduction of between $200 and $400 million from
our fiscal year 1996 funding level because, once again, we would
be forced to absorb pay raises and increased costs, and we would
be faced with difficult choices.

Like this year, we will continue to make it a priority to sustain
our basic operations—processing more than 200 million tax returns
and paying more than 90 million refunds. To accomplish this, how-
ever, we will, like we did last year, have to find alternative ways
to serve taxpayers, and like this year, we will have to decrease the
amount of face-to-face contact with taxpayers. While we will con-
tinue to process tax returns and pay refunds on time, service to
taxpayers may suffer, and the amount of money collected next year
could certainly be impacted. What is more difficult to measure,
though, is the longer term impact of reductions on overall taxpayer
compliance levels.

Madam Chairman, since becoming Commissioner almost 3 years
ago, I have worked hard with our staff to try to improve our serv-
ice. As I said earlier, 1 am pleased to report we have made signifi-
cant progress. But despite that progress, we do recognize we still
have much to do.

This concludes my prepared remarks, and we would certainly be
happy to answer any questions you or your colleagues might have.

‘he prepared statement and attachments follow:]


17

Mr. LAUGHLIN. Thank you very much.

Dr. Stillman, are you testifying?

Ms. STILLMAN. I am available to answer any questions you may
have in the TSM area.

Mr. LAUGHLIN. Thank you.

Ms. Willis, how long do you think it will take the IRS to put the
TSM back on the right track? And how will we know if the new
track is any better than the current track?

Ms. WILLIS. Let me refer that question to Dr. Stillman.

Ms. STILLMAN. We made a series of recommendations in a July
1995 report, over a dozen recommendations, specific recommenda-
tions telling IRS what they needed to do to put themselves in a bet-
ter position to invest their large budget in it well, to build their
systems well, and to manage it well. We have dates on those rang-
ing from June 1995 to improve their investment strategy and
prioritize their investments through December 1995 to make tech-
nical improvements.

At that time IRS agreed with the recommendations, and in their
written comments took no exceptions to the dates. At this point
they have implemented none of those recommendations.

Mr. LAUGHLIN. That was my question.

Ms. STILLMAN. They have completely implemented none.

Mr. LAUGHLIN. Have you seen any implementation of any of the
12 that you recommended 9 months ago?

Ms. STILLMAN. We have seen activities aimed at making progress
on those recommendations. Those activities neither individually
nor in the aggregate completely addressed any of the over a dozen
recommendations.

Mr. LAUGHLIN. And when you made the recommendations, the
IRS agreed with them?

Ms. STILLMAN. They did so in writing at the back of that report.

Mr. LAUGHLIN. And you have seen no implementation?

Ms. STILLMAN. We see no effective implementation at this point.

Mr. LAUGHLIN. It is kind of like me saying I am going to marry
you and then not show up.

Ms. STILLMAN. Absolutely.

Mr. LAUGHLIN. How will the intervention of the Treasury Depart-
ment affect the timetable and acquisition costs for TSM?

Ms. STILLMAN. We did not evaluate that specifically, and I don’t
have that answer for you now. There are joint activities including
Treasury and IRS. I am unable to tell you what the time or quality
effect of that is.

Mr. LAUGHLIN. Dr. Stillman, this may be something you should
answer. In the prepared statement by Ms. Willis, you talk about
having seen no steps that satisfy your recommendations, and then
you say, “we do not believe the IRS can make effective use of TSM
system development funds at this time.”

What do you recommend?

Ms. STILLMAN. It is quite clear that IRS cannot control from an
investment perspective or from a technical perspective their very
large budget, in the neighborhood of $850 million or $700 million
or $1 billion annually.

What would seem to be more prudent would be for IRS to iden-
tify what it needs for basic day-to-day operations, what it needs to


83

Council. Mr. Clagett, we are happy to have you and appreciate the
input of the National Research Council throughout this process.

STATEMENT OF ROBERT P. CLAGETT, CHAIRMAN, COMMITTEE
ON CONTINUED REVIEW OF THE TAX SYSTEMS MODERNIZA-
TION OF THE INTERNAL REVENUE SERVICE, NATIONAL
RESEARCH COUNCIL

Mr. CLaGETT. I am glad to be here. Indeed, I am the chairman
of the committee. I am also a lecturer at the University of Rhode
Island now and am a member of the National Academy of Engi-
neering.

As I think you know, the National Research Council is the oper-
ating arm of the National Academy of Sciences, the National Acad-
emy of Engineering, and the Institute of Medicine, chartered way
back in 1863, the original NAS. Its charter is to advise the govern-
ment, and through them, that is what this committee has been

loing.

The project I chaired involved an original Committee followed by
an extension, and there were some membership changes during
that time. We have produced six reports, and my remarks are
going to refer to the latest report, which was distributed in Feb-
ruary 1996. That publication is the “Continuing Review of the Tax
Systems Modernization of the Internal Revenue Service,” and it
was released to the IRS in December 1995.

I want to point out that the IRS was the sponsor of this project,
but consistent with the NRC policy, it did not preview any of the
recommendations. The Committee, the original and the extension,
that I chaired was rich in both private sector experience with large
systems and large systems developments and with technical exper-
tise.

My Committee and I strongly believe that modernization of the
information systems at the IRS is very important. Indeed, that is
not the question at all. The Service has a lot of old computer equip-
ment, and it certainly is difficult for them to maintain it. Only a
part of the returns processing now is computerized, with taxpayer
paper files the main mode of operation still. Modernization would
enable better customer service and better agency and government
performance.

In the course of our work, we focused on the ability of the IRS
to modernize while monitoring its progress. We made several rec-
ommendations relating to the IRS structure and management, and
they have been implemented. Among them, for example, they have
established focused units to address the needs in architecture and
privacy and elevated positions in human resources and, most im-
portantly, as you have heard, for the management of the tax sys-
tems modernization, the modernization executive position, which is
now an Associate Commissioner level.

Through such actions, the IRS has improved its organization in-
volved with TSM. A central concern of our committee was manage-
ment, and it runs the spectrum from vision through planning and
implementation. Quoting from our 1996 report, “The committee be-
lieves that ‘success’ starts with a concise business vision, a well-or-
ganized modernization process, a clear systems architecture, a com-
plete development plan, and a strong set of metrics to determine


5

IRS. The tax collector may never be loved, but it is a sobering mes-
sage when the average person supports the elimination of the IRS.

My goal is to work with you to modernize the system and assure
that the IRS delivers a uniformly high standard of professional
service. Because of its tough assignment to help taxpayers who
genuinely need guidance and to assure that every citizen pays his
or her fair share, whether they want to or not, the quality of cus-
tomer service, the attitude of every IRS employee as they deal with
the public as both guide and enforcer is crucial to restoring respect,
civility, and efficiency to government.

While citizens need to know and understand the many important
services government delivers day in and day out that do make our
lives individually and collectively better, government needs to be
far more customer oriented and user friendly, and I hope to work
with you toward those goals. Today’s hearing to review your 1997
budget request and the current filing season are the beginning of
what I hope will be a fruitful collaboration.

Before we begin, let me thank you, Commissioner, for implement-
ing by administrative action many of the provisions of the Tax-
payer Bill of Rights when it looked like we would not get it onto
the floor of the House and to the President’s desk. I am pleased to
report that we expect to have the new bill, which your people have
also been involved in shaping, on the floor hopefully this week and
very soon to the President’s desk.

Commissioner Richardson, it is a pleasure to have you back with
us. Please proceed.

STATEMENT OF HON. MARGARET MILNER RICHARDSON,
COMMISSIONER, INTERNAL REVENUE SERVICE;
ACCOMPANIED BY MIKE DOLAN, DEPUTY COMMISSIONER;
JUDY VAN ALFEN, ASSOCIATE COMMISSIONER FOR
MODERNIZATION; JIM DONELSON, CHIEF OF TAXPAYER
SERVICE AND ACTING CHIEF COMPLIANCE OFFICER; AND
TONY MUSICK, CHIEF FINANCIAL OFFICER

Ms. RICHARDSON. Thank you. Madam Chairman and other dis-
tinguished Members of the Subcommittee, I have with me today
Mike Dolan, who is on my immediate left, the Deputy Commis-
sioner; Judy Van Alfen, who is the Associate Commissioner for
Modernization; and on my right I have Jim Donelson, who is the
Chief of Taxpayer Service and our Acting Chief Compliance Officer;
and Tony Musick, who is our new Chief Financial Officer. We all

preciate the opportunity to be here this morning to discuss the

filing season, our efforts to modernize the tax administration sys-
tem, as well as our fiscal year 1997 budget request.

The IRS is in the financial services business—like a bank, a cred-
it card company, or an insurance company—and we understand the
importance of providing good customer service. Of course, we un-
derstand there are some significant differences between our busi-
ness and other financial services firms. But despite these dif-
ferences, like many other financial services firms, what we are
seeking may be easier to describe than to achieve. We want to pro-
vide our customers with better service at lower cost, we want to
use less paper, and we want to be able to take ads antage of new
technologies.


lll

Mr. Lane. I think one of the other things that could be driving
this is the reorganization of IRS, which has eliminated 30 districts
by consolidating districts, has taken the managerial oversight
structure out of a lot of areas. What you have now is an agent who
is responsible to a group manager who might be 500 miles away,
who has a branch chief that, in the case of Hawaii, is 3,000 miles
away in Seattle.

Mr. PorTMAN. Do you think the reorganization is a bad idea?
How do you come down on it?

Mr. LANE. You know, that is a tough one. I can understand the
Service’s situation. They had basically an unchanged, 40-year-old
organizational structure that was appropriate in a day when it took
12 hours to get to California in a prop jet and you didn’t have fax
machines and you didn’t have teleconferencing. But on the other
level_—

Mr. PorTMAN. As I understand it, a lot of the RIFs would have
occurred—not even RIFs, necessarily, but transfers at the middle
management level, that it was part of the IRS catching up with the
rest of the private sector to become a leaner operation.

Mr. LANE. What has happened, it has stripped out the manage-
ment level in a lot of these small districts. So, for example, in Mon-
tana and Idaho and those places, you have the agents that are on
the street and their supervisors, and that is it. There is nothing
else above them. You have to go to another State to get a branch
chief or a division chief involved. One of the frustrations to the
practitioner community and to taxpayers in those locales is what
is the chance of a branch chief getting over to Missoula every week
where there used to be a branch chief sitting there?

So you had an appeal process that went up above, and that to
a certain degree kept people in check. Now the concern, I know, in
Senator Stevens’ Committee the other day, there was quite an ex-
tensive discussion about what happened to the State of Alaska
when they did away with the district director and sent him to Se-
attle. But we are reflecting that from our membership as well in
those States that have been affected. People feel that they are not
being supervised anymore, so they can go do what they want to do.

Mr. PoRTMAN. Well, maybe that is something after a year or two
we will have a better sense of, too, as that system begins to adjust
to the new levels of leadership and management.

I thank you very much for coming again today, and I will now,
Mr. Chairman, leave it up to you to finish this hearing.

Mr. LANE. Thank you.

Mr. Hancock. One final question. Have you ever heard anybody
say I would be willing to pay more taxes if I didn’t have to keep
all these records and fill out these forms?

Mr. LANE. I have heard people say that they wished they had a
simpler system. I have heard people say they would be willing to
pay more if they knew everybody was paying their share. And I
don’t argue with you. You know, as a tax professional, I know some
people on your Committee might think that we are dealing from
self-interest. There is no one more in favor of tax simplification
than the people that have to fill out these forms every year. Believe
me.


81

Ms. WILLIS. We are currently in the process of doing an evalua-
tion of SCRIPS and identifying what the problems have been, how
it is, indeed, performing against expectations over time, and wheth-
er the improvements that are being made are bringing it up to the
performance levels expected. We expect to be able to report out on
that later this year.

Mr. PorTMAN. Is it your thought, with regard to the 1040EZ and
perhaps some of the other forms that are easier to scan, that this
is a solution to some of the existing problems in the system, mak-
ing it more efficient, expediting returns and so on?

Ms. WILLIS. The ability to optically scan returns would definitely
make certain parts of the system more efficient. It would reduce
the amount of manual data entry that is required and allow IRS
to process the returns more quickly.

Mr. PorTMAN. Reducing mistakes?

Ms. WILLIS. Reducing mistakes.

Mr. PorTMAN. That would seem to me to be an obvious benefit.

Ms. WILLIS. Right.

Mr. PorTMAN. It is not officially part of TSM; is that correct? Is
it a separate undertaking?

Ms. WILLIS. My understanding is it is included under the TSM
umbrella.

Mr. PorTMAN. OK. I know in Covington it has already begun.

Ms. WILLIS. Right.

Mr. PorTMAN. Perhaps I should be directing these questions to
our friends from Treasury or IRS, but it is something that is up
and going, I know, in our area through the Covington Service Cen-
tel

r.

Ms. WILLIS. Right, it is up and running in five sites across the
United States.

Mr. PorTMAN. OK. And is your report coming out in the short
term after the filing season? Or when would you expect to have it
ready?

Ms. WILLIs. It will be later this summer.

Mr. PorTMAN. Later this summer?

Ms. WILLIS. Right after we have a chance to get the data and
analyze this year’s filing season.

Mr. PorTMAN. And obviously you are taking into account the in-
ternal audit that has been done. The report done by the Service
with regard to SCRIPS?

Ms. WILLIs. Yes.

Mr. PorTMAN. I for one and I think this Subcommittee would be
very interested to hear more about what you all are coming up
with and to see whether this is an area where we can make some
progress. Again, if we can’t do it with SCRIPS that would seem
more fundamental than some of the other TSM undertakings we
were discussing, it seems to me we have a real problem. So we
need to focus on that, and if it doesn’t work, then move on to other
ways to gain efficiency.

Thank you, Madam Chair.

Chairman JOHNSON. We do have a vote that has been called. Let
me very briefly ask a question, because I share the gentleman’s in-
terest in SCRIPS, and I appreciate his pursuing that questioning.
In your estimation, was there a problem in the development of


107

disclosing, or they just don’t want any hassles with IRS. They be-
lieve that by filing a short form you don’t get audited. There is a
lot of mythology about that.

I can’t tell you what percentage of clients that come to me every
year to get their tax return done because they have never been au-
dited as long as I have been doing their tax return. Well, you know,
they don’t realize that only 1 percent of the taxpayers get audited.
That is like saying as long as this mike has been here, I haven’t
been audited, so this mike is my good luck piece.

Mr. Hancock. Well, let me ask you a hypothetical, probably face-
tious question. What would happen if a group got together, includ-
ing some Members of Congress and IRS, and sat back and said how
could we design the tax law to where we can get the revenues of
government that we need where people wouldn’t have to use com-
puters, and analyze it from that standpoint? I wonder how we
would change it. I wonder if we could forget about the govern-
ment’s problem of Internal Revenue agents being trained and then
having the private sector hire them.

Mr. LANE. I can answer it this way. I have been teaching tax pro-
fessionals for about 10 years now, and I facetiously have said on
many occasions that it ought to be a felony for Members of Con-
gress to get professional assistance with doing their own tax re-
turns, and it ought to be a felony for them to use a computer to
do so. OK?

Now, I have said that kiddingly, but I could tell you this: If com-
puters were taken out of the equation, I wouldn’t stay in this busi-
ess any longer. It is too frustrating to try and do these things by

Mr. HANCOCK. The law would have to be changed; correct?

Mr. LANE. You would have to change it.

Mr. Hancock. You know, I would even contribute to an organiza-
tion and send them some money if somebody would sit back and
just visualize a tax system without computers. How could we de-
sign a tax law that the average Ph.D. without a computer could fill
out? You know, we might come up with something even better. You
know, that is not a bad idea at all, the more I think about it. We
might come up with something that would beat Bill Archer’s sales
tax and Dick Armey’s flat tax. Gosh knows we wouldn't have to
worry about industry, hiring all the Internal Revenue agents after
they are trained, because this thing would be so simple you
wouldn’t have to have that much training.

I think we ought to talk about that, Rob.

Mr. LANE. Well, one of the encouraging things about this tax de-
bate we are having now, hopefully—I mean, in a perfect environ-
ment—it will lead to a situation where there will be an honest de-
bate about what kind of tax system we ought to have in this coun-
try.
Mr. Hancock. But the fact remains that with all these forms
and everything, you have got all kinds of inaccurate statistical in-
formation because by the time you get it in the computer it is 5
years old, anyway. By the time you come up with the figures from
the tax return, they don’t have any meaning. They won't know for
5 years what the 1995 results are, actually.

Mr. LANE. Well, with respect to TCMP, you are right.


92

the prime the ability to hire the level of people they need, if they
didn’t have them, and get the job done.

There might be one other thing. I know there is some talk now
about helping CIOs, that there may be—and I don’t have any fa-
miliarity with the structure. There may be a way to have a cadre
of people with that kind of experience available to loan to an agen-
cy when they start into such a project. But as was mentioned ear-
lier, IRS is not the first to have a problem creating such a large
system.

Chairman JOHNSON. I would appreciate your thoughts about
what problems have to be dealt with to get qualified, trained, and
experienced managers underneath the CIO or how to address that
level of operation, whether that is more appropriately addressed
through contract at this point or not. I think we have no shot of
getting any support from the Appropriations Committee, nor
should we, unless the Agency can be far more specific and unless
there are some plans that really everybody agrees will bring to
them the expertise they need in the time they need it to do the
work that has to be accomplished.

Mr. CLaGeTT. I would have to say that by now our committee,
at any rate, is rather pessimistic also.

Chairman JOHNSON. I do see that. On the other hand, the public
need is to accomplish this, and we are either going to accomplish
it badly or well. I mean, it is going to go forward because the com-
puter capability of this agency is simply intolerable and much too
outdated. If we don’t do anything, it will simply break down, and
there we will be. So we are going to have to go forward. And to
avoid continued loss both of time and money, we really do have to
help the Agency get the resources it needs and somehow press for-
ward on the proper use of those resources.

Mr. CiaceTt. I quite agree with that. As a matter of fact, even
though I think, you know, long term—as I said, maybe it is not ap-
propriate for an agency to do it—there is a substantial investment
in TSM now, and our recommendation is, and certainly mine, I will
refer to the committee’s recommendation or at least comment on it,
and that is, as is said in the report, to pick one project and to put
their best people on it, and that means not do the other projects
but to focus on one, complete it, test it, put it in the field, learn
from it, use it as a training vehicle for their own people. That
would take longer to do but at a slower pace. While they are doing
that, I would add, they could be finishing the standards, both the
interface standards and the security standards, to make sure that
a system would be able to communicate. And I think at this point
that is probably the best way to go to allow you to move forward
and use as much as you can of the current expenditures and effort
to come up with a system.

Chairman JOHNSON. Thank you. Let me recognize Mr. Portman.

Mr. PorTMAN. I thank the Chair, and I have just a few follow-
up questions of a genera} nature.

I am hearing in your testimony a little different emphasis than
I see in the summary of the report.

Mr. CLAGETT. Oh, OK.

Mr. PORTMAN. It seems to me the report, indeed, does believe
there are a number of deficiencies, and one, the CIO having been


60

Sierra Pacific Industries

P.O. Box 498028 * Redding, California 98049-6028 + (916) 378-8000
‘March 27, 1996

Thereby authorize the Internal Revenue Service to disclose return information regarding a
ruling request filed by Sierra Pacific Industries on January 30, 1996 and closed without a ruling on
February 29, 1996, as that term is defined in section 6103(b) of the Internal Revenue Code, to
‘Members and staff of the Subcommittee on Oversight of the House Committee on Ways and
‘Means.

1 am aware that without this authorization, this information is confidemtial and protected
by law under the Internal Revenue Code,

Taxpayer's Name: Sierra Pacific Industries
Taxpayer ID Number
Address; 19794 Riverside Avenue

Anderson, CA 96007

Yours very truly,
SIERRA PACIFIC INDUSTRIES

—~{sS>—

Secretary and Director of Taxes


56

part of this Oversight Subcommittee not to have a full and com-
plete report on that and to look at it closely.

Chairman JOHNSON. It is instructive that the Congress came to
the conclusion that the only way you could keep a system that
large technologically current was to get it out from under the bu-
reaucracy. So what are the barriers within the structure of the bu-
reaucracy and the way the bureaucracy proceeds that are interfer-
ing with the accomplishment of this architectural issue and some
of the contractual problems? We will look forward to that report,
and I would be happy to get those on the Committee who are most
interested together for an informal discussion if that would be more
appropriate.

There are a couple of other issues that I did want to pursue if
my colleague is finished.

Mr. LAUGHLIN. Absolutely. I yield back the balance of my time.

Chairman JOHNSON. The National Research Council did criticize
the security features of TSM. That is extremely important. If we
can’t guarantee people information security, we are going to have
very big problems on our hands. And as we move into TeleFile and
CyberFile, if there are doubts about the security of the TSM sys-
tem, it will simply fail.

So how can the IRS expand the filing options to the Internet and
assure information security? What are you doing to assure that?

Ms. RICHARDSON. Well, we don’t want to develop and are not
planning to develop any of our systems without proper regard to
security. There is a security concept of operations and security ar-
chitecture that is under development, and I think we elaborated
more on that in the written testimony. I would be happy to give
a fuller briefing to the Committee about what we are doing. Specifi-
cally, as to any kind of direct filing or Internet-related filing, we
would never go forward with any program until it could be assured
that such a program could be made absolutely secure.

Chairman JOHNSON. How do you respond to the criticisms that
the National Research Council made about your security features?
Are you familiar with them?

Ms. RICHARDSON. I will let Mike Dolan answer the question.

Mr. DOLaN. A couple, Madam Chairman. We actually had a fair-
ly robust closeout conversation with them around this point, and
I think the thing that we took most from their observation and the
follow-on conversation was that the architecture that we are cur-
rently operating under, which is a very distributed—it is a process
by which an awful lot of our data gets distributed widely in the or-
ganization. The NRC said to us two things:

One is that we have got to be very conscious that to overlay on
that kind of an architecture the security we want and need is a
costly undertaking. And so they encouraged us to be sure that we
made the right kind of choices surrounding business needs of dis-
tributed data versus cost of securing it the way you need to. They
encouraged us to make the right kinds of tradeoffs and that we do
that up front, recognizing the kinds of cost consequences of our de-
cision.

The other thing they asked us to be sure we weren’t doing was
looking only at internal security. They acknowledged that we had
placed an inordinate amount—not inordinate, an extraordinary


18

In FY 1995, we received the first year of funding for a five-year plan to improve
‘compliance with the dollars raised going directly to deficit reduction. Our FY 1995
compliance accomplishments were impressive. We closed an additional 676,000
‘examinations and audit coverage increased from 1.08 percent to 1.63 percent
1995. We issued an additional 86,000 determination letters for exempt organizations
and employee plans. And, we collected an additional $803 milion directly attributed to
the compliance initiative, far exceeding the $331 millon we promised. Overall, with a
five year investment of $2 billion, we had conservatively committed to raise $9.2 billion
in additional revenue. While the loss of the Compliance initiative impacts federal
revenues, an important point that may be overlooked is the corresponding loss in state
revenues, because adjustments made during our compliance efforts are used by the
states to make corresponding state adjustments without the need for a state audit.

‘Modernizing our current tax administration system requires an ongoing effort to
update technology, to improve business processes, and to develop a flexible
organization. These three items are the essence of modemization, and the IRS is
modernizing on all these fronts.

Updating Technology

The IRS has undertaken a series of technology modernization projects —
collectively referred to as the Tax Systems Modernization (TSM) Program ~ to
modernize its information systems. Originally designed in 1988 as a technology
replacement program, the TSM Program has been redesigned in order to assist the IRS
in realizing its Business Vision in the year 2001, although many of the projects are
scheduled for completion before then and some projects have already been completed.

The TSM Program will enable the IRS to move from paper and more labor
intensive processes to an electronic environment, enabling it to more effectively
accomplish its mission, which is to collect the proper amount of revenue at the least
cost and in a way that imposes the least burden on taxpayers. The TSM Program
projects are designed to provide more accurate and timely taxpayer account information
to enhance the IRS's customer service and compliance efforts while reducing the
number of contacts between taxpayers and the IRS.

‘Tax administration is dependent on the receipt, analysis and utilization of
information submitted by taxpayers and other sources, e.g.. employers and other
payors. The TSM Program projects fall into three broad categories: those that will
facilitate capture of data more effectively and efficiently, those that will improve our
ability to store and analyze data, and those that will distribute and use the data to
improve compliance and customer service.

All of these TSM Program systems will be supported by a common infrastructure
and related support services. Infrastructure components include various
telecommunication components, systems administration and operational support
systems, security, operating and data base management systems, and an integrated
environment for systems testing, configuration control and software distribution. All of
the TSM Program systems will be built o assure that confidential taxpayer information
wil be protected from unauthorized access and use.

Although we recognize that a great deal of work remains to be done in updating
‘our technology, progress has already been made. As | discussed earlier, as a result of
technology, taxpayers have more options for fling their returns and paying their taxes
than ever before through such programs as Telefile and Tax LinWEFTPS. Taxpayers
are also able to get information from the IRS in many different ways through services
like our Internet Home Page and the "fax on demand” service. We also are using
technology to answer more of taxpayers’ questions the first time they call by providing
our employees with access to more account information. Also as | discussed earlier,
technology is changing the way our compliance operations work, through such
programs as the Integrated Collection System that has improved our collection
productivity and the Electronic Fraud Detection System (EFDS), an automated fraud
detection system that provides on-line research capabilities which are used to validate


47

Now, these are very strong statements, very recent statements,
followed by Deputy Secretary of the Treasury Larry Summers’ tes-
timony before the Treasury and Postal Appropriations Committee
that TSM has gone badly off track and it needs to be rethought
from bottom to top.

Now, you are familiar with all those statements, but the depth
of their criticism is very concerning to me, and when they talked
specifically about the Integrated Case Processing Project, a $64
million project in 1997, their conclusion was that frontline employ-
ees had not had enough input in its development to assure its use-
fulness to end users.

Now, you are making some changes. They are at the top. The
problem doesn’t entirely seem to be at the top. There seems to be
a systemic issue here that if it is not addressed, it almost doesn’t
matter how much money you put into technology if it isn’t going
to be integrated and if the frontline people haven’t been part of
generating the solutions.

Now, I say this as one who represents a manufacturing district,
machine tools, bearings, those kinds of industries that suffered ex-
traordinary challenge at the hands of targeted and grossly unfair
foreign competition. But as they tried to survive, they rethought
from the bottom. And when they first tried, they rethought from
the top and they failed. And not until they rethought from the bot-
tom did they succeed.

The level of criticism that is coming from the National Research
Council recently and from the GAO I hear in the light of my experi-
ence as the consequence of the old bureaucratic tendency to solve
from the top. And that isn’t just a public sector problem. That is
a private sector problem. Authority tends to believe it can find so-
lutions, and what I want to know is: What is the problem? When
you look back at what you have been through—because you got a
lot of good people, and you have really worked hard on this. And
you have in certain pockets. I mean, J have known this, but I saw
it with you in my own office recently. You have made some very
significant improvements in your equipment, in your capability,
and are able to serve taxpayers at certain levels and in certain in-
stances very much better. On the other hand, you still can’t adjust
a change in address or if a taxpayer gets married.

The cases that tend to come to the Members’ offices are those
kinds of cases: For 3 years now we have been dunned because they
can’t get through their system that we are now married and we
have one name and not two.

So the profound level of criticism that you are receiving is of
great concern to me, and having been involved in it in good faith
and having accomplished some measurable achievements, to what
do you attribute this criticism? And what are you going to do to ad-
dress it, aside from putting new people in the boxes? Because we
had new people actually in the boxes a few years ago.

Ms. RICHARDSON. Well, in fairness, the boxes have changed. We
did have a Chief Information Officer, but we did not have an Asso-
ciate Commissioner for Modernization. And one of the early criti-
cisms I think of both the General Accounting Office and certainly
the National Research Council was that we needed a single point
of accountability for all of modernization and that accountability


51

is based on observations that at this point have to be, conserv-
atively stated, 18 months old. We are in a pilot which is the way
we chose to make sure that the front-end involvements around this
get done correctly before we roll it to the entire organization.

A series of iterations have done exactly what you have suggested
is the right thing to do, which is to get the iterations of the people
using the systems to come back and make a version 1.0 grow to a
version 1.5, grow to a version 2.0, all before that gets then visited
en the organization as an operational system to roll out across the

joard.

So the criticism on the front end of if you don’t do it this way
it will be a failure, is accurate criticism, but the dipstick was taken
18 months ago and I think today we could lay out a series of things
we have done which are, indeed are, the positive kind of reactions
from that observation.

Chairman JOHNSON. Well, I do believe that you as an agency
have achieved some real improvements in recent years, and out
there on the frontline you are doing a better job in many regards,
and I think the EITC fraud effort that you made last year was a
very successful one. And while it involved some delay—and this is
sort of off the subject of tax systems modernization, but there are
many areas in which you actually have pressed hard and have
some significant success to show for it. I thought your collection fig-
ures were very impressive.

As I listen to what you are saying and put together the informa-
tion that you have given me and that we have talked about over
the last year, I am pleased to see the aggressive actions that you
are taking to deal with the top-level issues and the architectural
issues in a sense, the biggest and most difficult issues that every-
thing else has to fit into. And I think probably the best thing for
us to think in terms of is an oversight hearing in about 6 months
on how far have you gotten, what did this mean. Because we don’t
have the same timeframe anymore that we had when this project
started 5 or 6 years ago. So there does have to be some real payoff
to hiring some of these people. You are more knowledgeable below
that person and to work with that person, and so at that time we
certainly want to get a better view of how the architectural issues
are moving and also of frontline involvement amongst employees.

Thank you for your comments on those issues.

Mr. Laughlin.

Mr. LAUGHLIN. Thank you, Madam Chairman.

Commissioner Richardson, I have a couple more questions on
your testimony today and I want to ask the question of you in con-
junction with some statements that Chairman Jim Lightfoot of
Towa said about the Modernization Program being a $4 billion fi-
asco. In your testimony you talk about, “As of today, $1.7 billion
in new equipment and software has been installed across the coun-
try.” Somewhere in here, my information is it is about $3.5 billion,
and Chairman Lightfoot has a $4 billion price tag.

Ms. RicHARDSON, He rounded it up, he told me.

Mr. LAUGHLIN. OK. Let’s just use the $3.5 billion. But when we
use your figure of $1.7 billion for equipment, it seems a staggering
amount of money left over for overhead and salaries and consultant


80

was incorrect, the information regarding the refund was correct,
and the taxpayer did, indeed, warrant it.

I am not sure that I understand your question about Mexico.

Mr. LAUGHLIN. Forget that part. I will rephrase the question,
though. Is there a satisfactory system for pursuing invalid Social
Security numbers? And let me direct your attention to credit card
abuse to focus where I am trying to go.

I had a credit card stolen, a gasoline company credit card, and
I didn’t know it. But the company called me after several days be-
cause there were charges being made outside the geographic area
where I normally charged. I thought it was wonderful. I had no
clue it was missing.

Is there anything in the IRS system that will trigger them, trip
them that there is an invalid Social Security—how do they address
that?

Ms. WILLIS. If you were attempting to file a return electronically
and the Social Security number is either missing or invalid, IRS fil-
ters will kick that back and not allow you to file it. So they do have
a system within the Electronic Filing Program to identify missing
or invalid SSNs which prohibits the filing of the return.

In terms of paper returns, they have a process where the return
is actually filed, and then they go back through and look for miss-
ing and invalid SSNs. They do not have a system that would allow
them to say that your SSN was used on somebody else’s return and
notify you to that effect.

Mr. LAUGHLIN. Now, let me go to Mexico, but we can go to any
other country where Americans will retire and move, and a sub-
stantial amount of people do that. People will retire, move to an-
other country, and receive their refunds or their Social Security
using numbers that often get transferred around, and then you
have fraud. What is in the system to prevent that from happening?

Ms. WILLIS. Sir, we really haven’t done any work to look at that
question.

Mr. LauGHLIN. Madam Chairman, that completes my question-
ing, and I not only yield the time back to you, but your Chairman’s
chair, also.

Chairman JOHNSON. Thank you, Congressman Laughlin, for tak-
ing over in that interim. I will recognize Mr. Portman.

Mr. PorTMAN. Thank you, Madam Chair. And, Mr. Chair, you
did a superb job as always.

I was a little disappointed in your brief response with regard to
the SCRIPS Program. I come from Cincinnati and have toured the
Covington Service Center where SCRIPS is up and going, and
about a year ago I had a very upbeat assessment from the local
IRS office as to how it was working. I actually witnessed it work-
ing. And it is my view that if this can work, in fact, we will see
instant modernization in the sense that there will be less need for
manual input. And if we can’t do SCRIPS right, it seems to me it
doesn’t bode well for TSM.

So my thought is, we need a little more information as to what
is wrong with SCRIPS, why isn’t it working, why do we have the
downtime—do you have any other information? Have you all spent
much time on SCRIPS? I know there has been an internal audit,
I guess, but has GAO spent much time looking at that?


13

The IRS has underway two studies: one that is of particular interest to you,
‘Madame Chairman, is on the unique problems faced by divorced and separated
taxpayers under the current tax system; the other is on interest netting. To help us
with these studies, we issued two Notices fast week asking for public comment on
issues that may arise in each of these situations.

‘The IRS has also issued guidance to Revenue Agents and Revenue Officers on
new procedures to notify one spouse of actions taken against the other spouse to
collect their joint taxes. On April 1, 1996, the IRS will put into place procedures to give
taxpayers the right to appeal liens, levies and seizures proposed by the IRS. The IRS
has already trained its personnel in this new Appeals procedure. And, we formalized
our practice of requiring Regional Counsel to review designated summonses and
limiting designated summonses to large (Coordinated Examination Program) cases,
except in unique circumstances.

We also helped taxpayers by adopting a number of alternative dispute resolution
initiatives, such as an Appeals mediation procedure, simultaneous Appeals/competent
authority procedures and advance valuation of artworks for tax purposes. And we
have reduced the paperwork burden on taxpayers by issuing a proposed Revenue
Procedure on digital computer imaging for storing paper tax documents.

‘Madame Chairman, we look forward to continuing our work with you and the
Members of this Subcommittee on one of my continuing priorities for me -- responsible
tax administration while ensuring taxpayers’ rights. .

Along with responsibility for serving taxpayers and providing easier filing
methods: we must also enforce the tax !aws — both civil and criminal. In addition to the
improvements we have made in serving taxpayers, we are also improving our
compliance operations.

Collection

For the three years prior to FY 1994, yield from our Collection operations had
declined between 4 and 6 percent, partly because of a decline in productivity. in FY
1994, despite a 9.5 percent decrease in collection staffing, our Collection yield
increased 3 percent. in FY 1995, the Collection yield rose by more than 7 percent -- a
10 percent increase since FY 1993.

‘One way we accomplished this increase was by recognizing that the earlier a
debtor receives a request for payment, the greater the likelihood a debt will be paid
We are now requesting payments at the earliest possible time — by the Taxpayer
Service function after account questions are resolved over the telephone, or at the
close of an audit. In FY 1995, Examination secured payment of 64.2 percent of agreed
tax assessments.

We have also expanded the use of an important too! -- the instaliment
agreement — to keep taxpayers in the system who cannot immediately pay all they owe.
By increasing the installment agreement authority, we raised collections secured this
way from $2.28 billion in FY 1992 to $5.4 billion in FY 1995.

‘As part of the effort to increase Collection yield, we are improving our knowledge
of the composition of our accounts receivable inventory. When taxpayers either do not
file returns or file inaccurate returns, we make assessments based on the tax laws:
irrespective of collection potential. We record these unpaid assessments as accounts
receivable and keep them on our books for as long as they are leaally collectible. While
we attempt to collect these debts, some accounts are obviously uncollectible for various.
reasons, for example: the taxpayer has died or is insolvent. In other words, we know at
the outset that some of these assessments will not be collected. But our gross
accounts receivable does not include just unpaid taxes; it also includes the ever-
increasing interest and penalties related to those unpaid taxes. In addition, the law
prescribes how long we must keep accounts receivable on the books -- 10 years. Thus,
unlike private sector businesses, the IRS’ accounts receivable cannot be written off
even when we know that an account is not collectible.


55

modify the contract that we have with either our systems integra-
tor, or any other, and turn them into a prime contractor. In order
to do something like that, there are a number of legal requirements
that would have to be met, and we are not in a position to do that
without some significant changes, I think either approval of Con-
gress or rebidding of the contracts. But it is not something that can
be done unilaterally or even bilaterally with the one contractor.

Mr. LAUGHLIN. Sure. I would just ask you to review that area,
and it doesn’t have to be made a part of the record, but I certainly
would ask you to make some type of response or report to Chair-
woman Johnson——

Ms. RICHARDSON. One of our four reports to Congress that will
be coming out in the next 30 days will discuss the role of the inte-
grator and what we are doing to try to get ourselves out of being
the integrator.

Mr. LAUGHLIN. And I would like in that report for you to address
to the Chairwoman the role of the contractor and being able to im-
plement innovations free of the constraints imposed by the IRS, or
the shackles or whatever word we want to use, because I think
when you look at private industry, they have gone through a tre-
mendous amount of change in the last few years that we in govern-
ment have been either unable or unwilling to do. And if you will
just address that to Chairwoman Johnson.

Ms. RICHARDSON. Absolutely.

Mr. LAUGHLIN. It is not necessary to respond at this time.

Chairman JOHNSON. I would also like when you do that to be as
specific as possible because that phrase caught my eye, too.

What kinds of things are in the existing contracts that are im-
pediments to innovation? And what would be the cost of rebidding?
How can we get out from under that? There may be ways that we
can help you do that. I can understand how contracts developed a
number of years ago might not serve you well now, but I would like
a better understanding of what the existing contract impediments
are and how you plan to overcome them, and that leads me to an-
other question I wanted to bring up, which is: Why are you serving
as your own prime contractor? And what are the pros and cons of
that? The FAA did that in trying to develop their new air traffic
control computer network.

Mr. LAUGHLIN. I was going to make reference to that.

Chairman JOHNSON. I used to be on the Public Works Commit-
tee, too.

Mr. LAUGHLIN. You all were doing it that long ago?

Chairman JOHNSON. That is right, and sat through the first
years of that planning and were really appalled how every time we
had a report, the report sounded great, but in the end the system
didn’t work.

Mr. LAUGHLIN. I would just like to add, Commissioner, that what.
Chairwoman Johnson has asked is so important because I went
through those aviation hearings on implementing a new computer
system for the FAA and our airliners, and I may be wrong, but it
was in the billions of dollars that had been spent, and we still don’t
have a modern system after years, because they sold the company
to get rid of the contract. I think it would be irresponsible on the


ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT
FOR IMMEDIATE RELEASE. CONTACT: (202) 225-7601
March 19, 1996
No. OV-11

Johnson Announces Hearing on
Internal Revenue Service Budget for Fiscal Year 1997
and the 1996 Tax Return Filing Season

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Oversight of
the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing
‘on the Internal Revenue Service's budget proposal for fiscal year 1997 and the 1996 tax return
filing season. The hearing will take place on Thursday, March 28, 1996, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m.

In view of the limited time available to hear witnesses, oral testimony at this hearing will
bbe heard from invited witnesses only. However, any individual or organization not scheduled for
an oral appearance may submit a written statement for consideration by the Subcommittee and
for inclusion in the printed record of the hearing.

BACKGROUND:

‘The Administration's fiscal year 1997 budget request for the Intemal Revenue Service
RS) totals almost $8 billion and will support the IRS's operations in collecting nearly
$1.5 trillion in revenue and in administering the Federal tax laws. By way of comparison, the
fiscal year 1996 appropriation for the IRS totaled $7.3 billion, approximately $900 million less
than the Administration had requested and $200 million less than the IRS received for fiscal
year 1995.

The $8 billion fiscal year 1997 budget request includes $1.8 billion to process the tax
returns which taxpayers will file in 1997; $4.5 billion to examine tax returns; and $1.7 billion for
information systems. Almost $850 million of the information systems request is earmarked for
the Tax System Modernization (TSM) program. TSM is a long-term program which is estimated
to cost over $8 billion upon completion, and which is supposed to upgrade the IRS's computer
capability and bring it closer to state-of-the-art performance levels. However, numerous experts
who have reviewed TSM have criticized the IRS's ability to successfully implement TSM in its
current form.

‘The 1996 tax retum filing season is the period of time between January and April 1Sth
when American taxpayers are expected to file 118 million tax retums. Approximately 83 million
taxpayers are expected to receive an average refund of over $1,300 in 1996, During the 1995 tax
retum filing season, the IRS applied rigorous compliance checks in order to identify fraudulent
refund claims.

EOCUS OF THE HEARING:

As a result of the reduced level of the fiscal year 1996 appropriation, the IRS must absorb
a $200 million funding reduction during the current fiscal year, The Subcommittee is interested
in reviewing how the Service is adjusting its operations to comply with the reduced funding, and
how the IRS is retargeting its resources to meet the demands of the 1996 filing season and its

+ other responsibilities in administering the nation’s tax laws,



72

being delayed in 1996 is the decrease in the number of “where is
my refund" calis to IRS. Taxpayers wanting to know the status of
their refunds can call TeleTax and get information through the
use of an interactive telephone menu. This filing season, as of
March 16, 1996, IRS reported receiving 26.5 million such calls--a
decrease of about 15 percent from the 31.0 million it reported
receiving as of the same time last year.

Telephone Accessibility

For the past several years, taxpayers have had difficulty
reaching IRS by telephone.’ As we reported to the Subcommittee in
December 1995, IRS data showed that (1) an estimated 46.9 million
callers made 236 million call attempts to IRS for tax assistance
between January 1 and April 15, 1995 and (2) IRS was able to
respond to only 19.2 million of those attempts--an accessibility
rate of 8 percent.’

Accessibility has improved this year, although it is still low.
IRS data for January 1 through March'9, 1996, showed 63.3 million
call attempts, of which 12.7 million were answered--an
accessibility rate of about 20 percent. As of the same time last
year, IRS reported receiving about 107 million call attempts, of
which 11.7 million were answered--an accessibility rate of about
ll percent. As the data indicate, a major reason for the
improved accessibility is the significant drop in call attempts.
IRS attributed that drop to (1) fewer refund delay notices being
issued, as discussed earlier; (2) a slippage in the number of
returns filed; and (3) IRS efforts to publicize other information
sources, such as Internet

SCRIES

In our report to the Subcommittee on the 1995 filing season, we
noted that IRS’ new document imaging system--SCRIPS--did not
perform as expected, leading to increased returns processing
costs and lower-than-expected productivity. For example,
SCRIPS had such significant downtime that two of the five service
centers that were using SCRIPS stopped using it to process Forms
1040EZ. As a result, IRS had to redirect more of the Form 1040EZ
processing workload to its manual data entry system. After the
1995 filing season, IRS identified hardware and software upgrades
that would be needed to correct the SCRIPS performance problems
IRS made some of those changes for the 1996 filing season.

Our discussions with IRS officials and our review of processing
xate data indicate that SCRIPS‘ performance has improved in 1996.
Specifically, SCRIPS is processing at faster rates in three of
the five centers and operating with less system downtime in all
five centers. However, the two centers that stopped using SCRIPS
to process Forms 104082 last year are experiencing slower
processing rates than those of last year. Despite the improved
performance, SCRIPS is far from the level of performance IRS had
originally expected. For example, IRS originally planned to be
processing all Forms 10402 on SCRIPS by 1996; it now expects to
process about 50 percent of the Forms 104082 received in 1996 on
SCRIPS. The remaining forms are being processed through IRS'
manual data entry system

Although IRS made changes to SCRIPS and performance has improved,
we are concerned that IRS did not establish more specific
performance expectations for SCRIPS this filing season. IRS
specified volume expectations by form type, but it did not

‘The 1995 Tax Filing Season: IRS Performance Indicators Provide
Incomplete Information About Some Problems (GAO/GGD-96-48, Dec.
29, 1995).

*°GRO/GGD-95-48


27

automate many of the activities of field revenue officers, by implementing the Integrated
Collection System in 20 of 33 districts,

‘TSM INVESTMENT BY PROJECT vein erally, IRS will moderni
nally,

approximately 15% of the total
universal wiring requirements.

‘Chart breaks out $150 M TSM Proposed Increase.

Contractor Support. With th
provided by this initiative, we | TOTALFYS? TSM BY OBJECT CLASS

wil provide funding for ConmctrSsvos i Sho of Tota Pls
support in developing and integrating Ean
modemized operational systems, in {x)

response to guidance received from
Congress, the National Research
Council and GAO. The Service will use
its major integrator to perform the
necessary architecture, systems
engineering and design tasks so that
specification of hardware, software, and
telecommunications products will lead
to a filly fimctioning system. The
integrator also will play a major role in Chart eaks out taal $850 M'TSM Request
the design and development of the

‘Workload Management System, which

will provide the IRS with a corporate system to track and prioritize workload.

Integrated Input Processing System, With the resources provided by this initiative, the
universe of taxpayers that can file electronically by telephone will be expanded through funding
toll free circuitry costs associated with expanding Telefile.


10

Alternative Wavs of Filing

As of March 15, 1996, the number of individual income tax returns
filed in ways other than the traditional paper format has
increased substantially compared to the same time last year.

That is true even though the overall number of returns filed as
of March 15 was down slightly from last year, As shown in table
1, most of the growth in alternative filings is due to 1040PC and
TeleFile.’

Table 1: Individual Income Tax Returns Received, 1994-1996

‘Type of March 15, | March 17, March 18,
filing 1996 1995 1994
‘Traditional

paper 36,258,000 | 40,787,000 _| 38,333, 000
Electronic | 9,811,000 | 9,259,000 __| 11,647,000
TeleFile 2,379,000 592,000 459,000
1o4orc 2,767,000 673,000__|_ 1,723, 000
TOTAL 51,215,000 | 51,312,000 _] 52,262,000

Source: IRS’ Management Information system for Top Level
Executives.

Growth in the use of 1040PC is due, in part, to the largest user
rejoining the program after dropping out in 1995.* The growth in
TeleFile is due primarily to its expanded availability. rt is
now available nationwide; it was only available to taxpayers in
10 states in 1995. IRS* budget request for fiscal year 1997
includes $7 million to allow expansion of TeleFile to other forms
and taxpayers. Although IRS has made substantial progress in
expanding the use of TeleFile and further expansion seems
logical, it is important to note that only about 12 percent of
the more than 20 million 104082 taxpayers who IRS estimated would
be eligible to use the system in 1996 had actually used it as of
March 15. In past reports, we have discussed the benefits of
TelePile to taxpayers (e.g., reduced filing time, fewer errors,
and quicker refunds) and the presumed benefit to’ IRS in reduced
processing costs. In addition to expanding TelePile, it seems
that IRS could increase participation in the program by (1)
determining why many currently eligible users are

participating and (2) taking steps to address any identified
barriers to their fuller participation.

Sunder TeleFile, certain taxpayers who are eligible to file a
Form 104082 are allowed to file using a toll-free number on
touch-tone telephones. Under the 1040PC method, a taxpayer or
tax return preparer uses computer software that produces tax
returns in an answer-sheet format. The 1040PC shows the tax
return line number and the data (dollar amount, name, etc.) on
that line. Only lines on which the taxpayer or preparer has made
an entry are included on the 1040PC. Under the third alternative
filing method, electronic filing, returns are transmitted over
communication lines to an IRS service center, where they are
automatically edited and processed.

‘Por the 1995 filing season, IRS required that preparers provide
(Eaxpayers with some type of descriptive printout or legend that
‘explained each line on the taxpayer's 1040PC return. According
to an official of a private tax preparation firm that had been
the largest user of 1040PCs, the firm chose to stop participating
in 1995 rather than incur the extra cost associated with
providing the legend.


63

In 1996 IRS closed 93 walk-in assistance sites and reduced the
operating hours for some of the remaining 442. IRS data show that
walk-in sites have served about 16 percent fewer taxpayers
through March 9 than in the same time last year. However, I
should note that taxpayers are able to obtain assistance and serv-
ice from other sources, although maybe not as easily.

IRS’ primary program for detecting questionable refund claims
also absorbed staffing cuts in 1996, a decrease of 31 percent. IRS
told us that because of the Staff Reduction Program, procedures
were changed to better target staff efforts. In an attempt to recoup
most of these staff reductions, IRS’ budget request for 1997 in-
cludes $21 million and 230 FTEs for the Questionable Refund Pro-
gram. This is part of the revenue initiative I will discuss later.

Moving now to TSM, which began in 1986, is key to IRS’ future
business vision. IRS’ 1997 budget request for TSM is $850 million,
$155 million more than 1996. We have raised significant concerns
about TSM and continue to believe that additional investments are
at risk and we are concerned about how effectively IRS can use the
requested funds until it corrects fundamental technical and mana-
gerial weaknesses.

While IRS has initiated a number of activities and made some
progress in addressing our recommendations to improve the man-
agement of TSM, none of our recommendations have been fully sat-
isfied. As a result, we do not believe that IRS can make effective
use of TSM systems development funds at this time. Our concern
is heightened by the fact that IRS would not give us specific infor-
mation on its plans for spending the $850 million requested for
TSM in 1997. Information that is available on the $155 million in-
crease raises additional concerns in that it contains an additional
$29 million for CyberFile. We believe CyberFile is poorly developed
and does not adequately address the security requirements needed
to protect taxpayer data.

Finally, IRS’ 1997 budget request contains $359 million for reve-
nue protection or compliance initiatives. To help Congress delib-
erate on that portion of their request, you asked that we summa-
rize our past work on compliance initiatives. That work has raised
the following issues:

First, prior to fiscal year 1995, IRS consistently used at least
some compliance initiative funds to cover budget shortfalls in base
operations. To ensure IRS spent 1995 fiscal year compliance initia-
tive funds as intended, its ability to use those funds for other pur-
poses was restricted by Congress.

Second, until recently, IRS was unable to track actual revenues
generated by the compliance initiatives. For the last several years,
IRS has been implementing an enforcement revenue information
system that is intended to report the actual revenue from compli-
ance programs. However, in the past, concerns have been expressed
about the reliability of that data, and IRS has been working to re-
solve those concerns. We will test the reliability of the data as a
part of our audit of IRS’ 1996 financial statements.

Third, for several years, we have encouraged IRS to shift its col-
lection focus from revenue officers, who generally collect delinquent
taxes through face-to-face contact with taxpayers, to more produc-
tive processes like ACS that emphasize early telephone contact. Al-


20

establishing achievable and manageable priorities for the next five years. We also
have a new Chief Information Officer (CIO), Mr. Arthur Gross, who will work with the
Associate Commissioner for Modernization. He plans to begin work on April 15th. Mr.
Gross was previously the Deputy Tax Commissioner responsible for systems and
processing for New York. in that position, he led a broad tax modernization effort for
the state during the past several years.

‘We recognize that our software development capabilities as well as those of our
contractors must be improved, and we have taken positive steps in that direction. Our
contractors are required to perform at a level that produces high quality software. We
are also improving our own systems development capabilities to ensure that the TSM
Program is developed consistent with modem processes and standards. Specifically,
‘we are enhancing our system architecture and test plans to provide the critical road
maps for developing and implementing fully integrated systems.

A vital aspect of updating our technology is enhancing our capabilities for
safeguarding taxpayer information. IRS concurs with NRC's advice regarding the
security of tax processing systems and the privacy of tax information. information
systems security and integrity has been and will continue to be one of the highest
priorities for the Internal Revenue Service. | have issued two policy statements - the
Declaration of Privacy Principles in 1994 and the IRS Information Security Policy in
1995. Based on a similar recommendation from GAO, we recently completed a
‘Security Concepts of Operation which provides an IRS users’ view of the security
capabilities in the TSM Program systems which will protect taxpayer data from
unauthorized access or disclosure. Security will also be an integral part of the
information systems architecture.

We are also relying heavily on private sector expertise to assist in our technology
modernization projects. To meet the significant challenges of such a large-scale effort,
we have the ability to access private sector skills and experience through contracts with
the IRS' Federally Funded Research and Development Center (FFRDC), the Integration
‘Support Contract (ISC) and the Treasury Information Processing Support Services
(TIPSS) procurement.

We have developed a plan with the help of outside experts from other
governmental agencies and the private sector to aggressively expand the work of the
current Integration Support Contractor. Under this new approach, the Integration
‘Support Contractor will assume as much of the systems integration role as the existing
contract permits. This will include the architecture, systems engineering, integration
and test activities that are essential to successfully integrate the systems. IRS will
continue to make the decision on final design and development. Production software
development work is and will be contracted out.

{n addition, the newly-instituted Presidential Technology Team will bring
‘experienced technical professionals from across government to work on technology
modernization. The IRS, in fact, worked with OMB to create this concept and will be the
first beneficiary of its effort

We are working to increase electronic filing options -- like TeleFile ~ and
payment options ~ like TaxLinWEFTPS. To accomplish this, we are developing a
comprehensive strategy for electronic filing. We are also taking a hard look at how we
currently receive returns from taxpayers, and studying ways to reengineer the entire
process.

Improving Business Processes

Along with updating our technology, we are also improving our business
processes to make them more efficient and effective. For instance, in 1994, the IRS
volunteered to serve as a pilot agency for the Government Performance and Results
Act (GPRA). GPRA requires agencies to set goals, establish measures, and report on
their accomplishments, as well as integrate performance measures into the budget and
strategic planning process. Our participation as a GPRA pilot agency has helped us
improve our budget, strategic planning and evaluation processes. This year as part of
our GPRA responsibilities, we are integrating our planning, budgeting and assessment
processes and will complete the first draft of an Integrated Strategic Plan and Budget
next month.



37

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57

amount of inside security in all of our plans and architectures, and
they said they wanted evidence that the way we were building the
security levels was also mindful of all the sort of outside penetra-
tion attempts that we have seen elsewhere in government.

I think we will be able to satisfy hopefully both you and them
from our security architecture that we have done exactly that.

Chairman JOHNSON. Thank you. We will be interested in discuss-
ing that information with you when you have completed it.

I want to just conclude by raising the issue of the Service Center
Recognition Image Processing System, SCRIPS. SCRIPS was devel-
oped to electronically scan instead of manually keypunch into the
IRS computer system certain tax forms. In February of this year,
last month, an internal audit report prepared by the IRS Inspec-
tion Service was critical of the SCHIPS. performance and ques-
tioned whether it was ready for wide-scale use.

Has SCRIPS met all the performance goals originally set for it?
Has SCRIPS captured all information on the forms it scans or only
part of the data? What have been the results from the SCRIPS
Pilot Program?

Ms. VAN ALFEN. Madam Chairman, SCRIPS has not met all of
the performance goals that we had in place and that we had origi-
nally set and desired that the system would deliver on. However,
this year it is functioning much better. We have made some up-
grades and some workflow improvements and it is showing much
improved performance this year.

We encountered some major integration issues with it early on,
but we feel comfortable that we are working through those, and it
is performing much better.

Chairman JOHNSON. So what percentage of the workload that
you originally scheduled for SCRIPS has the IRS had to shift to the
traditional processing pipelines perhaps last year and this year?

Ms. VAN ALFEN. Last year we did have to shift some of our work-
load back to the pipeline processing because we were not able to
process it all the way through.

Chairman JOHNSON. Fifty percent?

Ms. VAN ALFEN. On one particular form type, yes, that is correct.

Chairman JOHNSON. And how about this year?

Ms. VAN ALFEN. This year we are still processing 50 percent of
one form type. However, in the other forms that we have identified,
we are processing those through the system.

Chairman JOHNSON. OK. Thank you very much. That concludes
my questions, and I thank the panel for being with us this morn-
ing.

Str. Herger has been detained and has been unable to join us be-
fore we have completed our discussion, and we will have some
follow-on questions for you which he will submit and we will enter
in the record.

(The following was subsequently received:]


23

FY 1997 BUDGET IN BRIEF
Internal Revenue Service
Internal
Revenue
Service

or FY 1997, the Internal Revenue Service has proposed a series of investments
that will substantially reduce the burden on the American taxpayer, enhance
compliance, and maximize revenue collections. The Service is submitting budget
proposals for FY 1997 that total $7,995 Billion and 109,050 FTE. The total budget request
represents an increase of $647 Million and 2,699 FTE over the FY 1996 operating level. Our
FY 1997 budget consists of three equally significant and critical investment components:

‘The Tax Systems Modernization (TSM) Program. IRS is in the financial services business,
The Service performs the same basic functions--collecting money, processing data, maintaining
customer accounts, and responding to customer questions. Its 200 million customers expect it
to do these activities accurately and efficiently, while maintaining the highest level of integrity
and safeguarding their privacy. The TSM Program projects are designed to provide customers
with bette, faster service as well as enhance compliance. IRS has requested $150 Million in
additional TSM Program funding in FY 1997 for four tax systems modernization investments
These investments will finance immediate and tangible improvements in our service to taxpayers,
with emphasis on electronic receipt of tax returns and payments, extensive data capture,
streamlined storage and retrieval of data, and early identification of issues with as many as
possible resolved with a single telephone call. In response to guidance received from Congress,
the National Research Council and GAO, the Service will extensively use contractor support in
developing and integrating modernized operational systems.

Revenue Protection Initiative. The Service is requesting $359 Million and 3,820 FTE for a
Revenue Protection Initiative (RPI) that is estimated to generate $1.5 Billion in FY 1997— a
return on investment of better than 4 to 1. During the outyears—FY 1999 and beyond, the
increase to enforcement revenues from this investment will exceed $3 Billion annually. All
staffing increases will be placed in call sites and service center based enforcement programs
Not only do these telephone and correspondence activities represent highly cost effective
investments that emphasize up-front treatments and early contacts with taxpayers, they are also
less intrusive and burdensome than traditional face-to-face enforcement actions that rely on
revenue agent and revenue officer involvement. In reviewing the proposed FY 1997 initiative,
‘Congress should consider the proven record of delivering the revenue promised in connection



90

Mr. CLaGETt. How do I explain that? Well, I would like to back
up because I have thought a lot about this after spending all these
years looking at it. And knowing what most—I certainly won't say
all, but what many private industry people would do, it goes some-
thing like this: You decide that you need a new system, a very
large one, and so the first thing you do is decide what is it you
want to have this new system accomplish when it is completed.
Those are the metrics I am talking about. What kinds of perform-
ance do I want? And, of course, at the same time, or maybe even
prior to that, they are asking themselves, when we get this capabil-
ity or as we get it, how do we want to do business in a new way.
And so those two things are done up front. Then most chief execu-
tive officers will look around and say we don’t have the capability
in-house to take on such a large system, so they will make a con-
certed effort to hire the best possible people they can get; some in-
dividual to lead the project who has large system experience and
technical experience, and then expect that person to also bring in
a cadre of outside people.

I don’t think there is any reason, as I said in my testimony, for
the IRS or any other agency to be embarrassed that they don’t
have the capability in-house when they start. What they don’t tend
to do is try to find outsiders who can lead with that kind of experi-
ence. Therefore, now I get back to why they do it the way they do
it. In my view, they start doing the development, and in the case
of TSM, as you have heard, TSM was preceded by some individual
areas of development. And from that, they decided what we really
want to do is a major one, the basis of which was to get all of the
forms digitized as they come in so that they could then put them
in the central database. Once you have got a central database, then
you can pull out a taxpayer’s complete file. Today, as you know, the
front and back of the first page of the 1040 is all that is digitized.
So all those other pages are not, and if you as a taxpayer ask them
a question, they have to pull out those paper files, and that takes
a lot of time.

The goal of TSM is to be able to pull up online most of that. In
fact, one of the most meaningful metrics that was established some
years ago in the business vision was to be able to respond to tax-
payers’ questions something like 80 percent of the time on the first
call. It is a great goal, and it would make a wonderful thing. It re-
quires all of this to be put together, starting with the database. It
certainly means that all the systems they develop under TSM have
got to communicate with each other, and that is why we are so
worried about the architecture and the standards.

So when IRS, absent that concept, started, I believe what they
did was start with the development and then say, maybe under
some of our prodding and GAO’s, we need to have an architecture
and we need to have standards of interface. And that is backward,
because the designers are way along in developing some systems,
both inside the IRS and outside, without those standards. And that
is why the committee has eventually become rather pessimistic
that under the current mode you are really going to end up with
a TSM. You are going to end up with a bunch of individual sys-
tems, but the chances of them both communicating with each other
well and having a secure system are not great.


44

Mr. LAUGHLIN. In the past there have been serious questions
with respect to your ability to leverage the resources provided by
outside contractors. Can you tell us how you plan to improve the
use of the outside resources?

Ms. RICHARDSON. Particularly in respect to the Tax Systems
Modernization Project?

Mr. LAUGHLIN. Yes.

Ms. RICHARDSON. As I mentioned in my opening statement, we
have a systems integrator, and we are moving to utilize them to
the fullest extent possible under the contract. Most of the software
development on the big projects that we have underway or will un-
dertake will be done by outside contractors. We are working with
our systems integrator to make sure that all of the projects inte-
grate as they come together in the final analysis.

Mr. LAUGHLIN. In that area, our staff has given us some informa-
tion, and I have got to tell you, I share their concern that there
appears to be high tech, high cost, but low performance. This
brings to mind the debacle at the Denver airport in their baggage-
handling system. And in my earlier life in Congress, I was on the
Aviation Subcommittee, and we heard too much about what was
going wrong there.

Can you tell us what is happening from your management view-
point that will alleviate the concern that we have that we are going
to have a Denver airport baggage problem here?

Ms. RICHARDSON. Well, as I mentioned in my opening state-
ment—and I think we went into more detail in the written state-
ment—we have taken to heart the criticisms. We have put in place
a different management structure than we had in the past. All of
the authority for modernization—the budget, the resources, and re-
engineering efforts, not just the technology piece but the re-
engineering of our business processes—is currently the responsibil-
ity of the Associate Commissioner for Modernization. We have a
new Chief Information Officer who will be joining us in 2 weeks
who has had extensive experience in technology modernization in
a major tax administration system.

Mr. Dolan mentioned we moved to reprioritize. We had a project
last fall where we reprioritized our investments. We have set up
an investment review board so that each and every project has to
be rigorously scrubbed for its business investment potential to aid
us in our business. A very strict business case, using some of the
GAO best practices that we worked with them on, has to be made
in order for a project to be funded.

We also recognize that many of the projects that people would
like to have had or would like to have done are no longer afford-
able. The unlimited budgets that looked like people were going to
have in the late eighties and maybe early nineties are not going to
be there, so we are trying to focus our attention on the projects
that we think are most important for us to provide good customer
service and also to enhance compliance. Other projects will not be
funded unless they meet these rigorous criteria.

Mr. LAUGHLIN. In your review, have you identified programs that
are no longer needed because of changes in technology, because of
new programs? And are you in the process of identifying any that


85

qualified Chief Information Officer to fill the vacant position. And,
of course, I am pleased to note that they have now done so. It
might be interesting to talk some time about the effort they had
and the frustration in trying to find somebody within the con-
straints both of salary and the position, of the caliber they wanted.

Chairman JOHNSON. If I may interrupt you, I am glad you men-
tioned that, because that is something we should come back to and
that we will be very interested in, particularly in your perspective
on it, since you do see this in many areas where the government
is seeking scientific or other expertise. I know when we worked on
the air traffic controllers issues, we simply had to change the pay
structure in order to get people into the more difficult areas like
O’Hare and Kennedy.

Mr. CLAGETT. Well, perhaps after I finish we can talk, because
I have, indeed, thought about the way in which an agency can go
about it, and maybe we can talk some more about that.

Chairman JOHNSON. Thank you.

Mr. CLaGETT. So I am pleased they have got such a person. I
hope he has the background and experience that will really help
TSM become effective.

The second recommendation was to effectively integrate the oper-
ational and technical goals by developing a proper set of metrics to
measure performance. That is, at the very outset, know what it is
you want to accomplish; in other words, know when TSM has suc-
ceeded, and then start to develop the systems, instead of develop-
ing the systems and then trying to figure out what those goals
should be. Those metrics are still not in place.

Recommendation 3, Develop an adequate architectural definition
and design led by the Systems Architects Office—they do have one
now—and enforced by a strong set of interface specifications for
key applications of systems—and that includes security—and a
process for maintaining them properly. I would be glad to talk
some more about that as well.

Significantly increase the scope, level of effort, management at-
tention, and tools devoted to security development. Next, the SEI
level 2 issue that was mentioned by GAO is very important. I
would add not only for internal, but if, indeed, their contractors are
at level 2 and beyond, I doubt that there is a significant amount
of communication between the two if inside the IRS they are at
level 1. That would be tough.

Recommendation 5, Implement an overall process improvement
plan. I have just gone into that. That is the SEI level 2 challenge.

Recommendation 6, Focus efforts on the Integrated Case Process-
ing System. That is the target system we picked. The main mes-
sage here is pick one, do it well, develop it, test it, put it in the
field, prove it out, and use your best people to do that, and then
move on to the next one. We think integrated case processing is
central to the whole TSM effort, and that is why we recommend
that project.

Absent sufficient followthrough, new approaches to TSM may be
necessary. We have thought about what alternatives there are. One
would be to assess, justify, and fund each component project indi-
vidually. Another possibility is to outsource the whole system as a
project. The committee believes, however, that correcting the defi-


62

much more smoothly than the 1995 season. However, there are still
several outstanding concerns. Available data indicate that IRS has
been successful in not adversely affecting its ability to do what it
sees as its most critical functions: Processing returns and issuing
refunds. As of March 15, IRS Service Centers had processed 71 per-
cent of the paper individual income tax returns they had received
and had done so within about the same 8- to 13-day cycle time as
last year. IRS officials told us that refunds may be going out a cou-
ple of days slower than last year, but still within the 40 days that
IRS promises taxpayers.

The performance of IRS’ new document imaging system, or
SCRIPS, that we just talked about has improved in 1996, but re-
mains far from the level of performance IRS had originally ex-
pected. Although IRS made changes to SCRIPS after the 1995 fil-
ing season to enhance its performance, we are concerned that more
specific performance expectations for SCRIPS this filing season
were not established. Without those expectations, it is difficult to
determine which enhancements were cost beneficial.

As of March 15, the number of individual income tax returns
filed electronically had increased substantially compared to the
same time last year. This is true even though the overall number
of returns filed as of this date was down slightly. Most of the
growth was in TeleFile, which went nationwide this year. Although
the number of electronic returns is higher than last year, as of
March 15 it was still about 16 percent fewer than the number filed
at the same point in time 2 years ago.

Last year IRS also took several steps to better ensure that tax-
payers were entitled to their refunds, dependents, and earned in-
come credits they claimed. The most visible of these involve the
delay of millions of refunds to allow IRS time to verify Social Secu-
rity numbers and to do compliance checks. Although those efforts
appear to have significant deterrent effect, they were not without
problems. Specifically, IRS identified many more missing, invalid,
and duplicate Social Security numbers than it was able to pursue
and ended up releasing the refunds without resolving the problems
and delayed millions of refunds for taxpayers that had valid Social
Security numbers to check for duplicates, but also ended up releas-
ing those refunds without doing the checks.

IRS took steps this year to address some of the problems it en-
countered in 1995. It has said it is being more selective in deciding
which cases to investigate and which refunds to delay. Statistics in-
dicate that IRS is, indeed, delaying fewer refunds this year. The
impact of delaying fewer refunds is also reflected in higher tele-
phone accessibility rates for the 1996 filing season, according to
IRS, although the rate is still very low. Accessibility is at 20 per-
cent as of March 9, up from 8 percent for the 1995 filing season.
IRS attributes the improved accessibility primarily to the lower
number of calls received this year. The number of calls received is
down approximately 40 percent.

Although IRS has apparently been able to process returns and
issue refunds this year without significant problems, staffing cuts
in other areas could be affecting its ability to serve taxpayers and
identify questionable refunds.


86

ciencies that have been identified and strengthening management
is the best course of action for both the IRS and the country. That
is the tone, as you know, of our report. We have expressed concern
with the problems we have raised here and that we have raised
previously, I might add. In fact, this last report specifically talks
about how many times we have raised over the 5 years most of
these same problems.

So we suggest that some ongoing mechanism be established that
can both advise the Commissioner and foster constructive inter-
action between the IRS and its oversight organizations to assure
the best possible focus, decisionmaking, and communication.

With that, I thank you and I will be glad to try to answer any
questions you have.

[The prepared statement follows:]


31

Protection Initiative (RPI), discussed above,
RPI consists of programs based in the service
centers and call sites that deal with taxpayers
by telephone and through

Without RPI, the FY 1997 program
‘reduction to traditional “back-end”
enforcement functions performed by
Revenue Agents and Revenue Officers is not
offset with increases to new “front-end”
enforcement functions.

Administrative Reduction Pursuant to
Executive Order. This reduction reflects

—————
JOB CATEGORY FTE REDUCTIONS
Revenue Agents 462

Revenue Officers 230
Special Agents 88
Tax Auditors 91
‘Tech/ProffClerical 470
TOTAL 1,341
ing to Executive ————

the FY 1997 adjustment
‘Order 12837, which requires agencies to

reduce administrative costs by not less than 14 percent from FY 1994 and FY 1997. This is to
be achieved by annual reductions of three percent (five percent in 1997) o the baseline FY

1994 amount, adjusted for inflation.

ter Suppo ay for oninng cae tae fermen epee

These ‘have exhausted the
Almost All Support is M Servis ay co ma ewer
Omer 8u a
eon sates support budget of $2 Billion, over

three fourths of itis either information
systems related, and used to purchase
‘ADP equipment or telecommunica-
tions, or is mandatory, and pays for
categories such as rent, postage, and

has been reduced severely, what is left
is used for case related travel,
‘enforcement expenses, including lien

fees, training, and services and supplies, such as computer discs,

Budget Overview
Performance Measures Hierarchy


7

What could be easier than filing by telephone? This filing season,
over 20 million taxpayers are eligible to file their tax returns with
a phone call that takes less than 10 minutes. As of March 22, over
2.5 million taxpayers have already used this option. Three years
ago, our TeleFile Program was a pilot, and just last year it was
available in only 10 States and we had only 680,000 returns filed
that way.

Making it easier for taxpayers to both file their returns and com-
municate with us is only part of our effort to improve our relation-
ships with taxpayers. As you mentioned, Madam Chairman, we
worked with you and Members of the Subcommittee on the Tax-
payer Bill of Rights 2, and I am pleased to say that we were able
to work with you on the bill that we hope will be reported out next
week and passed. But when we weren't successful in getting the
legislation earlier, we did go ahead and administratively adopt
many of the proposals that didn’t require congressional action.

We look forward to continuing to work with you and Members of
your Subcommittee on our continuing priority, which is responsible
tax administration while ensuring taxpayers’ rights.

Last year when I appeared before this Subcommittee, I said that
our biggest challenge was to put in place better methods to protect
the tax revenue from those who improperly attempted to claim re-
funds. We accomplished this by using both technology and a dif-
ferent approach to compliance to stop improper refund claims. We
used numerous systemic verifications, including checks of Social
Security numbers. We established new criteria for electronic return
originators, including fingerprint and credit checks, and we in-
creased our monitoring of the EROs. We delayed about 8 percent
of the refunds, and we did increase compliance resources devoted
to checking those refunds for accuracy.

I am pleased to report our efforts were most successful. One-and-
a-half million fewer dependents were claimed, and there were ap-
proximately 100,000 fewer earned income tax credit claims than in
the prior year. In our direct compliance efforts, including prerefund
audits, we prevented $503 million in improper refunds from being
issued.

This filing season we are continuing to devote substantial re-
sources to detecting and stopping improper and fraudulent claims
for refund. We have refined our efforts to address improper refund
claims based on what we learned last year.

I would also like to spend a few minutes talking about moderniz-
ing our current tax administration system. Modernization requires
an ongoing effort to update technology, to improve our business
processes, and to develop a flexible organization. Today I would
like to touch on our efforts to update the technology.

As you pointed out, we have undertaken a series of technology
modernization projects, collectively referred to as the Tax Systems
Modernization Program, to modernize our information systems. It
was originally designed in 1988 as a program to replace our tech-
nology. It has been redesigned since then to assist us in achieving
our business vision by the year 2000, although many of the projects
are scheduled for completion before then, and some, like our
TeleFile Project, have already been completed.


46

We are 8,000 FTE below where we were 1 year ago. Most of that
money and most of those people are directly involved in either
frontline collection activities, frontline compliance activities, or in
processing tax returns and making sure that money is timely de-
posited in the Federal Treasury and making sure that people are
paying their proper share of taxes, as Chairman Johnson men-
tioned in her opening statement. Many taxpayers are concerned
that while they are paying their proper share, others are not. They
want to be assured that others are paying their share of taxes.

At the same time, we don’t feel we should be exempt from scru-
tiny about how we spend our money and whether we use it wisely.
And I have said on every occasion meeting with employees, that
we, too, need to enhance our productivity and find new solutions
to old problems. But I think that the increases that are being pro-
posed for next year are largely in the compliance area and will
largely go to raise money that will go for deficit reduction.

Mr. LAUGHLIN. Madam Chairman, I will yield back. Thank you.

Chairman JOHNSON. Thank you. To that last general point, I
think some of the projects the IRS has taken on are impressive and.
have been very successful. The telefiling seems to be going very
well. It is clearly improving the quality of taxpayer service and will
relieve your staff, and the broader that initiative becomes—now it
is very limited to a small group of taxpayers—the more important
a resource it will be for taxpayers and the IRS and the more it will
enable us to reduce the number of employees in an intelligent and
responsive fashion.

There are others of the Tax Systems Modernization Projects that
have been very fruitful for us, so for that reason, because I know
some of the projects have been very successful, I do want to put
on the record and ask you to talk a little bit about the truly shock-
ing depth of criticism of the Tax Modernization Project.

The GAO said there is little tangible evidence that actions being
taken will correct the pervasive management and technical weak-
nesses that continue to plague TSM. GAO described the IRS’ soft-
ware development capability as unlikely to build TSM in a timely
and economic manner, and the systems are unlikely to perform as
intended. The IRS has placed its software development capability
at the lowest level, described as ad hoc and sometimes chaotic, and
indicating significant weaknesses.

Now, even for GAO, that is pretty strong criticism, and GAO has
worked with you over all the years that you have implemented this
system. So words of that nature are very concerning to this Over-
sight Committee.

In addition, the National Research Council just last month re-
ported that the IRS has had serious technical capability problems
that cast doubt on the overall success of TSM if they are not
solved. If the IRS does not begin to improve its development proc-
esses—and you have spoken here to some of those efforts that you
have made to improve your development processes. But they say if
you don’t take strong corrective action, TSM will degenerate into
a collection of individual projects that are poorly integrated, with
inadequate privacy and security safeguards that may or may not
be able to cope with the increased workload.


6

We are in the midst of a major transition, as I know you are
aware, Madam Chairman, but it is one that began several years
ago, and it will continue for several more years. Today I would like
to focus on what we are trying to do to make things easier for tax-
payers, how we are doing our job more efficiently and effectively.

This filing season—and every filing season—begins with tax-
payers filling out their tax returns and sending them in either
through the mail or electronically. Since coming to the IRS almost
3 years ago, I have made it a top priority to try to improve service
to taxpayers. For most taxpayers, this means making communicat-
ing with us easier and filing tax returns as simple as possible.
While we are certainly not yet at a stage we could call perfection,
I do believe in the past 3 years we have made progress in improv-
ing our service to taxpayers.

We understand that taxpayers get frustrated when they call us
and repeatedly get a busy signal, and in the past 3 years we have
answered more calls than ever before. But we still have taxpayers
whose calls are not answered. We also have a growing number of
taxpayers who visit or write us. In 1993, we heard from taxpayers
by phone, visits, or letters 73 million times. Last year that grew
to 118 million. But we were able to serve more taxpayers by in-
creasing our productivity, expanding our hours of service, and in-
stalling call-routing equipment that does allow us to better manage
our telephone workload. It allows us, among other things, to route
calls to available assistors who may be in the next county, the next
State, or even across the country. We are doing our best to try to
answer more taxpayer questions more quickly and efficiently.

When I became Commissioner in 1993, not only were we unable
to move calls around the country, but our assistors only had access
to taxpayer account information that was stored at the particular
service center their office had to rely on. Technology has allowed
us to remove this artificial barrier and to enhance our ability to
route calls automatically to personnel who have both the data and
the expertise needed to handle taxpayers’ specific questions. And
we can now resolve issues with a single call 75 percent of the time,
and we are bringing more tax account information online.

But despite these improvements, not every taxpayer call is being
answered, and not all taxpayers who need to be served are getting
served. So we are looking for other ways to meet taxpayers’ infor-
mation needs.

Technology is certainly helping by creating entirely new ways for
taxpayers to get forms and information from us while reducing our
postage and printing costs. Taxpayers who have access to a com-
puter and modem can get forms and information anytime anywhere
in the world from our FedWorld or our Web site on the Internet.
So far this year, millions of taxpayers have visited our Internet
home page, and an average of 25,000 forms a day are being
downloaded. Forms are also available on CD-ROM and, for the
first time this year, through our automated “fax on demand” serv-
ice.

One of my goals has been to make it easier for taxpayers to file
their returns. Today nearly 40 percent of individual filers use our
easiest forms, and over 70 percent take a standard deduction.


40

Chairman JOHNSON. Are you making any changes in your
screens or enforcement or forms or routine business in order to re-
duce the possibility of fraud in this area?

Ms. RICHARDSON. I might have Jim Donelson comment.

Mr. DONELSON. Madam Chair, if I may, on the compliance side,
the criminal investigation organization has open cases in the
health care industry. We know that there is approximately $100
billion annually that experts estimate is lost through fraud in the
health care industry, and we are concerned about that money flow-
ing through that industry and the potential of money laundering
and other aspects of, as you describe it, fraud in that industry. So
we do have cases throughout the country that have been initiated
by our criminal investigators.

Chairman JOHNSON. The $100 billion is the industry activity.
That is not——

Mr. DONELSON. Exactly. It is not the tax implication.

Chairman JOHNSON. In terms of the reduction in your budget
last year, and particularly looking to the future, some of the things
you are doing like encouraging filing by telephone, making your
forms available, some of the projects you have done to make it easi-
er to pay your taxes and easier to get the information you need to
do so have also reduced some of the burden on your staff.

Ms. RICHARDSON, That is correct.

Chairman JOHNSON. In looking at absorbing reductions, has
there been any reduction in taxpayer services?

Ms. RICHARDSON. Well, we have certainly had to reduce the face-
to-face contact, as I mentioned in my oral statement. But we have
tried to provide alternatives for taxpayers to get information
through our automated telephone system, our TeleTax system. We
have had, I think, about 28 million calls this year that we have al-
ready answered through our TeleTax system. It is a system where
you can get refund information, the status of your refund, and
there are automated answers to 148 of the most frequently asked
questions.

As I mentioned, we have our forms and publications on the
Internet. We have a fax-on-demand system for forms as well. And
we have almost 20,000 volunteer tax counseling for the elderly
sites this year. So we have done what we could to try to serve more
customers, but not necessarily do it in a face-to-face way.

Chairman JOHNSON. From the comments that I get from my con-
stituents, my conclusion is that you have successfully improved
your ability to service taxpayers in a number of automated ways
and that you actually do have the personnel to satisfy the walk-
in business and the face-to-face contact that is necessary. Would
that be your conclusion?

Ms. RICHARDSON. Well, obviously we would always like to be able
to serve more people and answer more phone calls.

Chairman JOHNSON. I understand.

Ms. RICHARDSON. I think anybody in business, and particularly
in the customer service business, would like to answer every call
n the first ring. But we understand that resources are somewhat
imited.


19

claims and identify mult-return schemes. EFDS was used last fling season and
continues to be used to stop improper claims for refund.

We are also putting a new infrastructure in place. A number of initiatives are
currently underway with substantial long-term benefits. One of the keys to building a
world class information management system is to make appropriate investments in the
technical infrastructure ~- hardware, software applications and telecommunications.
During the past four years, we have awarded contracts that upgrade computer center
hardware, modernize operations and allow us to utiize commercial expertise for
software and hardware support, information engineering, telecommunications, and
security. As of today, $1.7 billion in new equipment and software has been installed
across the country,

‘Over the past several years, our technology modernization efforts have
benefitted from oversight from the General Accounting Office (GAO), the National
Research Council (NRC), and the Congress. On balance, we agree with the
assessments in the GAO and NRC reports. We take them very seriously, but more
importantly, we are doing something about them. The criticisms of our technology
modernization efforts can be categorized as follows:

1.) Accountability and Management - the need to centralize management of

technology modernization in one office;

2.) Managing Information Technology Investments - the need to better
prioritize technology investments;

3.) Software Development - the need to develop procedures that ensure the
development of high quality software;

4) Technical Infrastructure - the need to develop a comprehensive blue print
of the infrastructure;

5.) Electronic Filing - the need to develop a comprehensive strategy for
electronic fing

During the past year, management of the TSM Program has changed
significantly. Modernization management has been centralized under the Associate
‘Commissioner for Modernization, who has been given the responsibility and authority to
manage and contol consistently all systems development and reengineering efforts
within the IRS, in September 1995, the Associate Commissioner for Modernization
became responsible for the formulation, allocation, and management of all information
systems resources, This was an important step in the process of ensuring that all
information systems resources are used in accordance with the IRS's strategic
objectives.

The Modernization Management Partnership (MMP), a management structure
which includes me and the Assistant Secretary for Management/Chief Financial Officer
‘as well as other senior IRS and Treasury Department officials, was established last
year to identify and address important technology modernization issues at the
Departmental level, The Deputy Secretary has taken action to strengthen the MMP so
that it will function more like a board of directors, with day-to-day responsibility for the
TSM Program remaining with the IRS.

In response to crticisms about the lack of a clear plan for implementing the TSM
program and an adequate analytical process for establishing investment priorities, we
put in place an investment review discipline to select, control, and evaluate investment
decisions based on GAO best practices. An integral part of this discipline is the
Investment Review Board, established in October 1995, chaired by the Associate
‘Commissioner for Modernization, which is responsible for assessing and prioritizing
information systems investments, monitoring progress of spending against plans and
evaluating the results of those investments. In addition, we recently reexamined our
entire modernization program to ensure that information technology investments
produce the maximum business value. Based on the results of this review, we are


14

Having a reliable estimate of delinquent taxes that are truly collectible is
essential in enabling us to better manage our collection efforts.’ At the end of FY 1995,
IRS gross accounts receivable inventory equaled $200 billion of which 28.5% or $56.9
billion reflected accrued interest and penalties. This is a $29 billion increase over the
FY 1994 balance. A significant portion of this growth was due to additional accruals of
interest and penalties, the extension of time we are required to keep the receivables on
the books from 6 to 10 years’, and to our non-filer program. The non-filer initiative was
started in 1992 to encourage taxpayers who were not filing retums to get back into the
system. While we realized the non-fler program would increase our accounts
receivable since many were not filing because of an inability to pay their tax obligations
in full, we believed it was more important to get taxpayers filing again and then assist
them with ways to meet their obligations by expanding our installment agreement and
offer in compromise programs.

‘The gross accounts receivable inventory for compliance purposes is divided into
‘wo components Currently Not Collectible and Active Accounts Receivable.

‘Currently Not Collectible (CNC) are accounts that a collection employee has

determined a taxpayer cannot currently pay. Accounts in this category are

periodically monitored, and if a taxpayer is able to pay within the statutory 10-

year period, the account will be collected. At the end of FY 1995, $87.4 billion? —

or nearly half the gross receivable total -- is classified CNC. Of this amount.

+ 37.6% ($32.8 billion) is accrued penatties and interest.

+ Over 85% ($75 billion) is not collectible because it is owed by defunct
corporations; taxpayers adjudicated bankrupt; hardships; or the inability to
locate the taxpayer.

Active Accounts Receivable — are accounts that are potentially collectible and
that continue to be pursued through activities ranging from notices and
telephone contacts, to installment agreements and offers-in-compromise, and,
ultimately, liens, levies and seizures. At the end of FY 1995, $88.8 billion‘ is
classified in the Active Accounts Receivable category. Of this amount:

+ 41% ($36.6 billion) the largest portion of the active account, has been
assigned for enforcement action;

+ 22% ($19.1 billion) of the inventory is either awaiting adjudication by a
court or acceptance of an offer-in-compromise;

2 The GAO has reported and we agree that financial receivables are those
that the taxpayer has agreed to or the courts have set, and that from this amount we
should estimate a net realizable value of accounts that are potentially collectible. To
accomplish this, we have been working with GAO on a better way to represent these
amounts on our financial statements. Starting with the FY 1995 statements, we will
classify amounts as financial receivables (the amounts that taxpayers have agreed to
pay or courts have set), financial write-offs (financial receivables that have
subsequently been determined to have no further collection potential), and compliance
assessments (those amounts that taxpayers have not agreed to or on which the courts
have not acted). These amounts will be audited by GAO.

2 FY 1995 was the last year in which the accounts receivable inventory
‘would automatically increase because of the extension of time we must keep accounts
on the books from 6 to 10 years.

2 Not included in this balance are Trust Fund Recovery Penalty
assessments of $6.3 bilion that are potentially duplicative.

+ Not included in this balance are Trust Fund Recovery Penalty
assessments of $8.7 billion that are potentially duplicative and Resolution Trust
Corporation assessments of $9.0 billion that have not yet moved to Currently Not
Collectible.


In reviewing the fiscal year 1997 budget request, the Subcommittee will review all
aspects of IRS operations, and particularly the TSM program. The Subcommittee will explore
the status of specific systems upgrades, such as the Integrated Case Processing system, which
will allow IRS taxpayer service representatives to access IRS databases on-line in order to
respond to telephone inquiries from taxpayers. The Subcommittee will also review the
appropriate level of TSM funding in the future in light of the current restricted funding
environment, the critical evaluation of TSM by outside experts, and the Administrati
testimony that the program is off track and needs to be rethought

's recent

Chairman Johnson is also concerned that the IRS hasn't been able to adequately account
for the $4 billion already invested in TSM. "While I understand that over-hauling the Service's
antiquated computer systems is a major endeavor which will require mid-course adjustments, the
IRS's learning curve in implementing TSM appears to be very costly. I want to make sure that
the $4 billion spent so far has not been wasted,” Johnson explained.

‘The Subcommittee will also inquire into the progress of the 1996 tax filing season, the
availability of taxpayer services, the effectiveness of anti-fraud efforts in the 1995 filing season,
and what the IRS is doing in the 1996 filing season to deter improper refund claims.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed record
of the hearing should submit atleast six (6) copies of their statement, with their address and date
of hearing noted, by the close of business, Thursday, April 11, 1996, 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.

or exh or the printed
ents mus conform othe guidlines lated blow. Any
rub not in printed, bat willbe a he Comme le fr review

find we bythe Commitee.

‘All statements na way accompanying exhbis for printing mast be typed in igh pace on lepalane paper und may not
accu 1 gags acang each

2. Copies whole documents submited as exhib materia wil nt be acexptd for printing, oatend xb
shoul be eferented ued quoted or paraphrased All exhibit meteria bo! metog tes apeifcaion il De
‘Comte les for review od we bythe Comaes.

ee sheet mat each tag the nue fl aren 8 -aumber where the
‘nites or the dsigaate representative maybe reached a: topleal eve or rumteary af the comments oad recommendations
{he ll statement. Thi supplemental Yee Wl nt be faced tn the printed record,

Tae shove appl oly to material bing for printing,
ssgpementty mater ebmted sty fr tibuen tee Mente row aod he pee erg teen as pale Nea
‘ney be submited i he forms,

Note: All Committee advisories and news releases are now available over the Internet at
GOPHER.HOUSE. GOV, under ‘HOUSE COMMITTEE INFORMATION’.


110

tended to work odd hours, so they had Tuesday afternoons off when
everybody else was at work. But also part of it was this kind of us-
them thing.

That is very true in the IRS. IRS people tend to socialize with
other IRS people. I think you will see in any situation that an atti-
tude, if it is a positive attitude, is reinforced by management com-
ing down and saying, yes, you know, this is good behavior and it
has got to be rewarded, and this is bad behavior. Everybody as-
sumes when you go to work for IRS you are not going to be the
belle of every cocktail party. That is just a given. It kills more con-
versations at cocktail parties when you are at someone’s house and
they say, Where do you work? And you say IRS. It is amazing how
many people have to refresh their drink at that time. I think Mr.
Hancock might have had a point about needing that bourbon. They
just disappear.

So there is a situation in terms of morale within the organiza-
tion, and right now because of the political season and because of
all of this discussion we have had about the tax system, there are
ad hominem attacks daily on IRS employees, on the tax system,
and on the government in general. I think the problem with that
is that if that leads to a constructive discussion about what kind
of a tax system we ought to have in this country, that is fine. That
is the purpose of democracy. If the only result is that you have a
whole bunch of demoralized enforcement people running around
with badges now and the only way they can take it out is on the
people, that’s bad.

Mr. PoRTMAN. You have got the same bad system or a system
that is comparably bad.

Mr. Lane. Yes.

Mr. PorRTMAN. Well, I would agree with you. The irony of it is
that the reason we have such a problem—and I think Mel and I
would agree on this—is because of the laws that these people are
asked to enforce. If it wasn’t so darn complicated, if there weren’t
all these judgment calls to be made, 50 different results from 50
expert tax preparers, as Money Magazine told us last week, you
wouldn’t have the degree of frustration and the degree of morale
problems.

Mr. Lane. That is right.

Mr. PorrMAN. But also, I think given our current system and
given where we are, there are probably ways to improve it. And
from what you have said, it sounds like part of that can come from
leadership, from both elected officials and within the Agency, to try
to improve that situation. You talked about the incentives you
could put in. You talked about just providing leadership in the
sense of saying, hey, it is not the agent’s fault; this is a system that
is bad; let’s work as best we can within it. I think we probably all
have some responsibility there.

But I would hope that, in fact, the discussion over the next year
will include the fact that we are the people who are going to be re-
sponsible for cleaning up the system so that those agents can do
their job better. I would also hope we will have fewer agents, frank-
ly, because I think that is part of the consequence of a system that
needs fewer judgment calls and less complexity.


69

Taxpayer service

In the taxpayer service area, IRS closed 93 walk-in assistance
sites, reduced the operating hours of some of the 442 sites that
remained open, and eliminated free electronic filing at 195 of
the sites. According to IRS, the closed sites were selected on
the basis of their historical volume of work and their proximity
to other walk-in sites. As an indication of the effect of these
closures and cutbacks, IRS data show that walk-in sites served
about 1.7 million taxpayers from January 1 through March 9, 1996-
-about 16 percent fewer taxpayers than were served at the same
time last year

Walk-in sites provide various free services, including copies of
the more commonly used forms and publications, help in preparing
returns, and answers to tax law questions. There are other ways
taxpayers can obtain those services free, although maybe not as
easily

Taxpayers needing forms and publications, for example, might find
them at their local library or can get them by calling IRS' toll-
free forms-ordering number. Our reviews of past filing seasons
showed that taxpayers were generally able to get through to IRS
when they called the forms-ordering number, and the forms
distribution centers did a good job accurately filling orders.
However, according to IRS, it will generally take from 7 to 15
workdays to receive what you order, if it is in stock. Taxpayers
with access to a computer can download forms from Internet or the
FedWorld computer builetin board. Forms are also available on
CD-ROM and through IRS’ “fax on demand" service.

Taxpayers who need help preparing their returns and do not want
to pay for that help might be able to take advantage of the tax
preparation services offered at sites around the country that are
part of the Volunteer Income Tax Assistance and Tax Counseling
for the Elderly programs.

Taxpayers who need answers to tax law questions could call IRS’
toll-free tax assistance number (which we discuss later) or IRS’
Teletax system, which has prerecorded information on about 150
topics. As of March 16, 1996, the number of tax law calls to
TeleTax had increased by about 10 percent over last year (4.5
million this year compared with 4.1 million last year).

Still another option for free assistance is IRS’ World Wide Web
site on the Internet. Among other things, IRS' site includes
copies of forms, information similar to that on TeleTax, and some
interactive scenarios that taxpayers can use to help them answer
some commonly asked questions. IRS reported on March 18, 1996,
that its World Wide Web site had been accessed more than 25
million times since January 8, 1996.

Questionable refund proaram

IRS! primary program for detecting questionable refund claims
also absorbed staffing cuts in 1996. According to IRS data, the
10 service centers have been allocated a total of about 379 full-
time equivalents for that progran in fiscal year 1996 compared
with 551 full-time equivalents in 1995--a decrease of 31 percent
IRS officials told us that, because of the staff reduction,
program procedures were changed in an attempt to better target
the staffs' efforts. We do not know the initial impact of these
changes because we have not yet seen any statistics on the number
of questionable refund claims detected in 1996. In an attempt to
recoup most of those staff reductions, IRS' budget request for
fiscal year 1997 includes $21 million’ and 230 full-time
equivalent positions for the questionable refund detection
program. That request is part of the revenue protection
initiative discussed later


24

with the FY 1995 Compliance Initiative. In FY 1995, the IRS received the first year of funding
for what had been a five year plan to improve compliance with the dollars collected going
directly to deficit reduction. The FY 1995 accomplishments were impressive. Over $800
Million was collected, far exceeding the $331 Million promised. While the Joss of the
‘Compliance Initiative impacts federal revenues, an important point that may be overlooked is the.
Joss in state revenues, because adjustments made during IRS compliance efforts are used by the
states to make corresponding state adjustments without the need for a state audit.

C. Maintaining Current Levels of Service. The Service needs $276 Million just to maintain its
FY 1996 program levels in FY 1997. These additional resources, which are offset by

‘Without these resources, the Service willbe forced to reduce programs, or to shortchange funds
intended for training, supplies, enforcement travel and essential enforcement expenses.

Total Decreases: $139 Million Total Increases: $786 Million

‘Note: A detailed breakout of increases and decreases is contained in Appendix A~Budget Overview.


10

STATEMENT OF
MARGARET MILNER RICHARDSON
COMMISSIONER OF INTERNAL REVENUE

BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
HOUSE COMMITTEE ON WAYS AND MEANS
MARCH 28, 1996

Madame Chairman and Distinguished Members of the Subcommittee’

With me today are Mike Dolan, Deputy Commissioner, Judy Van Alfen,
Associate Commissioner for Modemization, Jim Donelson, Chief Taxpayer Service and
Acting Chief Compiiance Officer, and Tony Musick, Chief Financial Officer. We
appreciate the opportunity to be here this morning to discuss the IRS's 1996 filing
season, the results of the 1995 filing season, our efforts to modernize the tax
administration system, and our FY 1997 budget request.

The IRS is in the financial services business — like a bank, a credit card
company of an insurance company. We have the same basic processes -- collecting
money, processing data, maintaining customer accounts, and responding to account
questions. Customers expect us to do this accurately and efficiently while maintaining
the highest level of integrity and safeguarding their privacy.

Of course, there are some significant differences between our business and
other financial services firms. We are also in the law enforcement business — we are
charged with administering and enforcing the tax iaws of this country and combating
financial crimes. Another significant difference is sheer volume. Compared to other
financial services businesses, we have many more customers — more than 200 million -
- and we handle much more money —- over a tition dollars annually. We also operate
under different constraints. We cannot modify our product line, and we do not choose
‘our customers. And, of course, we cannot change the laws that govern our operations;
they are written by others.

Despite these significant differences, like many financial services firms, what we
seek is easier to describe than achieve. We want to provide customers with better
service at lower cost. We want to use less paper and take full advantage of new
technologies.

‘Some say that all businesses must learn how to "do more with less." Having
thought a lot about how we can do our jab better, | believe instead that we must devise
innovative solutions to problems. That requires a combination of updated technology,
improved business processes and a flexible organization -- the essence of
modemization. We are modernizing the IRS on all three fronts,

We are in the midst of a major transition -- one that began several years ago and
that will continue for many more years. AS | discuss the filing Season, our
modernization efforts and the FY 1997 Budget Request, | would like to focus on what
we are doing to make things easier for taxpayers and how we are doing our job more
efficiently and effectively.

The filing season begins with taxpayers filing out their tax returns and sending
them, either through the mail or electronical, to the IRS. Since coming to the IRS
almost three years ago, ! have made it a top priority to improve our service to
taxpayers. For most taxpayers, this means making communicating with us and filing
returns as simple as possible. While we have yet to teach perfection, | believe in the
last three years we have made progress in improving our service to taxpayers.

Making It Easier For Taxpayers

Taxpayers get frustrated when they call us and repeatedly get a busy signal. In
the past three years we have answered more calls than ever before, but we still have
taxpayers whose calls are not answered. We also have a growing number of taxpayers
who visit or write us. For example, in 1993, we heard from taxpayers by phone, visits,
or ietters 73 million times. Last year, this number grew to 118 million. We expanded


29

FY 07 Bullds FTE for Collection/Dec Matching
©

Third, the Criminal Investigation increase will
bbe used for Questionable Refund Detection
Teams (QRDT), aimed at protecting revenues
by prosecuting individuals involved in large
scale fraud schemes

additional resources and reduce the Federal
deficit. The total resources for Examination,

Includes Base and Increases, Exar excludes Appeals

which absorbed a big share of

the program reduction KEY PERFORMANCE MEASURES
discussed below, would
‘continue to decrease. The Measure: Fy%6 | FY97
etka CollectionYield $2498 | $2598
performance measures is UR Assessments $1,368M | $1,619M
shown at the right
SER Assessments $1,292M | $1,140M
Audit Recommended $ | $23.88 _| $23.48
Audit Coverage 154% [1.51%

UR=Underreporter SFR=Substitute For Retum

YL Maintaining G Levels of Servi

‘o maintain current operations and protect the integrity ofthe fling season, the Service
[must have the resources to pay for both the inflationary costs associated with statutory
pay and other mandatory increases in support costs, and the expected increases in the
number of returs fled

A. Mandatory and inflationary Costs Related to IRS Staff:

1 ‘Pay Raise and Benefit Increases. The statutory pay increase for FY 1997 is expected to
be 3.1%, Total cost is $155 Million. Without this increase the Service would be forced
to reduce FTE and disrupt program delivery


98

lents this year, the average employee will be asked to take any-
where from 8 to 11 days furlough time this year without pay. There
are rumors in almost every office that there is going to be a RIF,
a reduction in force.

When you talk to people in the offices that are not in major
cities, there is discussion about the task force that is looking at the
whole question of IRS rents, justifying any area office that is under
10,000 square feet. If implemented, that closes a lot of small offices
serving rural communities. Our members are also concerned that
we are being asked to go to Sacramento or Chicago to deal with an
appeal that might have been closed locally 2 years ago, but that of-
fice is gone now.

There are also some real concerns about the reorganization that
IRS is going through. The number of districts by October 1 this
year will go from 63 to 33. They have eliminated 30 districts. Many
of you are serving from congressional districts that now have been
combined with other States, and that is of concern to our members
and to taxpayers in those areas.

We are also very concerned about employee morale, so much so
that we would urge the Committee to have GAO conduct a review
of IRS employee morale. In any tax administration system, tax col-
lectors and tax enforcers like revenue officers, revenue agents, and
tax auditors, are not exactly the most popular people on the block.
Everybody understands that. That is the nature of the business
they are in. But you need to keep them happy to a certain degree
with their working environment, because the last thing you need
is 30,000 or 40,000 disgruntled tax enforcement people roaming
around the country. What happens is that their frustrations get
taken out on the taxpayers they get assigned to them. That is a
major concern of ours and obviously of the Committee as I under-
stand that this Committee is considering the possibility of holding
some hearings later this year on the whole IRS collection and en-
forcement area.

We are hearing more and more horror stories coming out of the
field about specific cases where we have problems with employees
not following procedures, and that to me is indicative of a morale
problem. IRS had a serious number of resignations and retirements
this year, partly as a result of the rumors with respect to the
changes in the Service and partly as a result of reorganizations,
and that has not contributed to making the IRS a happy place to
work within. That is being reflected now in the cases we are seeing
come forward to our National Government Relations Committee for
action. So we would urge you to take a look at that whole area.
Maybe it is appropriate for GAO to conduct a review of that.

One last thing, in the TSM area, I am very concerned both as
a tax practitioner and a taxpayer about this question of the IRS
technical capability. As you know, I am from Menlo Park, Califor-
nia. That is the heart of Silicon Valley. I have a fair number of Sili-
con Valley entrepreneurs who are clients of mine. There is a lot of
discussion about the impact that we are going to have in terms of
our voluntary compliance system when we see more and more elec-
tronic commerce happening on the Internet. We have electronic
cash. We have virtual banks, and we have encryption technology
that is getting better and better. The concern that I have as a tax-


91

Chairman JOHNSON. Is hiring one skilled leader enough?

Mr. CLaGeETT. No.

Chairman JOHNSON. What are going to be the barriers, from your
experience of watching this process, to hiring the complement of
people? I mean, is it money?

Mr. CLAGETT. Yes. We were pretty naive, I must say, as a group
of people coming in here to look at what IRS was doing, and we
really did think that what you needed to do was enhance what they
are doing, get some people from the outside. The CIO search is a
good example.

I am reasonably sure that the Commissioner is very frustrated
that, one, they had a nationwide search and hired a search firm—
and they should speak to this, not me. But she, I know, was frus-
trated because she talked to me about getting input from our com-
mittee to help her, to get really top-drawer people. It turns out not
many people even applied because the pay levels and so forth are
well known. And it would have taken, I am sure, to get the kind
of CIO that you would find in a comparable private firm taking on
a project of the same size, it would take double or triple, at least,
the salary they were able to offer.

So that has been a frustration for them. I don’t know how—the
only way I can conceive of it is not to make that person part of the
civil service system, but to do what most private people do now.
When they hire somebody at that level, it is usually on a contract.
It is usually a contract for several years in which part of that large
remuneration depends on performance of the individual.

Chairman JOHNSON. Why didn’t they choose that course of ac-
tion?

Mr. CLaGETT. I don’t know, and I am not even sure that it is
available to them. I did hear that if they did such a thing under
a contract, that contract has to come under, if they want to do it
quickly, one of their existing contracts. So that individual would
have to work with one of those contractors for some time. I don’t
really know much about that. I know that it is a problem for them.

But to your other question, would one person or a few help? One
of the reasons we have been talking about it for so long was—well,
I will say it bluntly. We were having a hard time really commu-
nicating with the IRS about what we meant about a systems archi-
tecture, about what we meant about changing the level of capabil-
ity. And it is not surprising when you look at the background of
the IRS folks. Most of them are excellent administrators, came up
through IRS, as I said earlier. Their background is certainly lim-
ited on large projects.

So then we thought, well, the thing to do is to get some outside
experts in. I now have a different opinion. I now—as Mr. Portman
mentioned earlier, I really don’t think it is effective for a Federal
agency to either have onhand or try to get the level of experience
in seldom approached, very large, complex computer systems. And
so I think a much better method would be to have a prime contrac-
tor do the development, have enough internal expertise to develop
the contract, and then have that prime contractor have cost, per-
formance, time kinds of requirements, and even have incentives, or
disincentives if they don’t meet those deadlines. That would give


i

access to our TeleTax recorded information line, which offers taped information on 148
topics all day every day, and refund information 16 hours a day, Monday through
Friday. Last year, we answered 61 million TeleTax calls, over twice the 30 million
answered in FY 1394. In FY 1995, our assistors also answered 39 million calls, an
increase of more than 3 million over the prior year. We were able to serve more
taxpayers by increasing productivity, expanding our hours of service, and installing call
routing equipment that allows us to better manage our telephone workload. This
technology allows us, among other things, to route calls to available assistors, who may
bbe in the next county, next state or across the country. Taxpayers cannot tell the
difference, but | hope they are aware of the improved service that results.

We are trying to answer taxpayer questions more quickly and more efficiently. in
1993, when I became Commissioner, not only were we unable to move calls around the
country, but our assistors had access only to the taxpayer account information that was
stored at the particular Service Center their office relied on. Technology has allowed us
to remove this artificial geographic barrier and to enhance our ability to route calls
‘automatically to personnel who have both the data and expertise needes to handle
taxpayers’ specific questions. Last year, we began providing nationwide access to
certain taxpayer account information. As a result, we could resolve issues with a single
call 75 percent of the time; and we are bringing more tax account information on-line.

Despite these improvements, not every taxpayer call is being answered and not
all taxpayers who want to be served are being served. So we are !ooking for other
ways to meet taxpayers’ information needs. At the outset, that means making the
information we do provide so clear that taxpayers will not need to contact us.

‘We are also reducing the number of notices we send. We recently decided to
‘eliminate notices that are now sent out about 46 million times a year. This is good for
both the IRS (we save $20 million in printing and postage and eliminate subsequent
questions) and taxpayers who are relieved of the stress that can surface when an
official looking letter from the IRS arrives in the mail. The notices we will continue to
send are being rewritten in clearer language so that fewer recipients will require further
explanation

Technology is creating entirely new ways for taxpayers to get forms and
information from us while reducing our postage and printing costs. Three years ago,
taxpayers requesting a publication or form either had to call us to have the material
‘mailed or they had to drop by one of our offices, their local post office or library. Not
today ~ at least for many taxpayers. Taxpayers with access to a computer and modem
can get forms and information anytime, anywhere in the world from FedWorld or our
Web Site on the Internet. So far this year, millions of taxpayers have visited our
Internet home page and an average of 25,000 forms a day are being downloaded.
Forms are also available on CD-ROM, and, for the first time this year, through our
automated “fax on demand” service,

We also sponsor VITA, the Volunteer income Tax Assistance program, and TCE,
Tax Counseling for the Elderly. With these two programs we also assist taxpayers by
giving them the opportunity to have direct contact at more than 20,000 sites with
volunteers trained by IRS personnel. Last year, more than 80,000 volunteers served
almost 3.5 million taxpayers through both of these programs.

Easier Filing Methods

One of my goals has been to make it easier for taxpayers to file their tax returns.
Current data suggests we're making progress on this front. USA Today recently
reported on a poll that showed 52 percent of American taxpayers describe preparing
their personal income taxes as easy. The Associated Press also recently reported on a
poll that found that 50 percent of taxpayers insist the system is not too complicated for
them personally. Neatly 40 percent of individual filers now use the easiest tax forms
and more than 70 percent take the standard deduction

What could be easier than filing by telephone? This filing season, 23 milion
‘taxpayers can file their tax retums with a phone call that takes less than ten minutes.

As of March 22, 1996, 2.5 million taxpayers have already used this option. Three years
ago, TeleFile was a pilot, and, just last year, when it was only available in 10 states,
680,000 returns were filed by telephone



97

would urge you on the 1997 budget to take a look at the allocations
within that budget, what is happening in the taxpayer service area
in terms of making it easier for taxpayers to access the service and
increase the quality.

With respect to the current filing season, I have to tell you that
there is a vast improvement this year over the prior year. We have
many fewer complaints from our Members and from taxpayers in
general about the quality of the processing within the Service. I
think the revenue initiative adjustments they made this year are
clearly working. They are not delaying unnecessarily tax returns
and refunds that were due to people that had legitimate filings.
And I have to report that the problem resolution officers that we
have talked to around the country in preparation for this testimony
have all reported a much, much lower level of taxpayer complaints
flowing into their offices.

So, in general, given the situation that the Service found itself
in this year with the budget restrictions, the bad weather in the
East, and the possibility of a tax law change right up to the last
minute, I think they deserve a round of applause for the job they
are doing in this current filing season. I think the information we
got from GAO indicates that it is running fairly smoothly.

In closing, I would like to add one important thing that we have
noticed, and that is, some of the cutbacks that the Service has had
to do because of the budget situation have affected things like con-
tinuing professional education for their employees. Now, this cre-
ates a problem for taxpayers because we are in a period of change
right now, both in the examination function and the collection func-
tion.

As you will recall from the hearings last year, we had exam tak-
ing a whole new direction with respect to the financial status or
economic reality auditing. We have a new set of collection stand-
ards that were implemented last September 1 with respect to na-
tional and local standards. And we have a lot of discrepancies being
reported by our members in the way that these new standards are
being applied across the Nation by revenue officers. One of our con-
cerns is if there is a cutback in continuing professional education
training, we are going to have this inconsistency cropping up more
and more.

Another part of the problem that we are concerned about with
the budget reductions is the district directors have had to curtail
their communications with the practitioner community. Many of
them eliminated their local newsletter. That newsletter served as
a vehicle to communicate procedural changes within the Service
that helped tax practitioners advise their clients.

Those types of cuts, while they are understandable given the
budget situation, are very shortsighted, because eventually it
catches up with the system by having people doing stuff that is out
of date, not being aware of new procedures, not being aware of
changes that the Service has implemented.

The overall impression we have of the budget problems within
the Service is there is a tremendous morale problem at the lower
levels of the Service. This is driven by several factors. There are
rumors throughout the organization that because they are under-
budgeted something in the neighborhood of 8,000 full-time equiva-


102

‘One of the consequences of the FY 1996 Budget reductions that causes us a great deal of concern
is the impact on IRS morale. We understand, perhaps more than most taxpayers because we deal
‘with them everyday in representing our clients, how difficult a job the Service employees have to
perform. There has been a decidedly negative impact on employee morale in the past year. The
prospect of unpaid leave days being mandated has had a discouraging effect on employees.
Rumors of @ Reduction in Force or RIF are rampant in every office.

(Our members have reported that certain enforcement employees have started to exhibit an
attitude of callousness to the plight of taxpayers far in excess of their usual indifference. No one
who works for IRS ever expects to be courted at cocktail parties but they do have the right to
‘expect that those they work for appreciate the difficulty of their positions and respect them for
the tough job they perform. In the current political climate, it is very effective to launch ad
hominem attacks against the IRS, government employees, and the tax system. We would hope
that constructive criticism would spur an honest debate about the kind of tax system we should
have in this country. We are concerned, however, that these gratuitous attacks will only cause
further dectine in the morale of employees.

‘As you know, there have been a great many retirements from the Service this past year. In fact,
during Calendar Year 1995, 45 senior executives retired, We have been told by some retirees
that they left because they no longer felt the organization had the Congressional support it
needed to fulfill ts mission. This attitude concerns us because our current tax administration
system depends on having competent, well-intentioned people on both sides of the table. The
ability of the Service to continue to attract capable, dedicated employees is of primary
importance for a continued well-balanced tax administration system. The system as currently
constituted cannot support a dramatic increase in cases that have to be referred to Problem
Resolution or forwarded on to Appeals simply because disgruntled employees start taking their
frustrations out on taxpayers. It is difficult enough for some taxpayers to deal with the Service
under normal conditions. It is impossible to predict what Kafkaesque nightmare could result if
the Service were not able to attract and retain the usually high calibre employees they have had in
the past. With the staffing cutbacks, downsizing and reorganizations of fate, we are fearful that
they may be on the verge of such a situation.

We suggest it may be an appropriate time for the Congress to instruct the GAO to conduct an
in-depth employee attitude survey within the Service. Once the attitudes of those expected to do
the difficult job of collecting society's bills is assessed, Congress may be in a better position to
deliberate changes that affect those employees. We recognize that this topic is not one the
committee is addressing in today's hearings but we urge the committee to consider this
suggestion and offer our cooperation in any effort undertaken,

‘The 1995 Tax Return Filing Season

We believe the Service is to be commended for the efforts made this year to expand the vehicles
available for taxpayers to secure assistance with their tax filing requirements without a
concomitant increase in cost to the Service. The expansion of electronic filing capacity to
individuals with their own tax software and computers who elect to file via modem is a welcome
development, The new IRS home page on the World Wide Web is orders of magnitude better
than the old FedWorld site, The availability of tax forms for downloading has proved very
beneficial to taxpayers with computer access. The forms themselves are much more user friendly
including the 1040, with color yet! The newly revised Publication 334, Tax Guide for Small
Business, and new Publication 583, Starting a Small Business, have won the acclaim of
practitioners and small business taxpayers alike. The expansion of the TeleTax program has
yielded very positive support from taxpayers in all walks of life. The study group the Service has
‘convened to eliminate unnecessary notices will cut down on needless taxpayer calls to Service
telephone sites and free up scarce resources for deployment on more important tasks. Our
discussions with the upper management of the Service lead us to conclude that the effort to
reassess the traditional ways of interacting with taxpayers will continue to receive significant
‘emphasis and we anticipate more improvements in the future

‘Our members report they have encountered far fewer problems this year compared to last year in
the area of refund processing and electronic filing. It would appear that the changes the Service


65

‘STATEMENT OF LYNDA D. WILLIS
DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES
GENERAL GOVERNMENT DIVISION
U.S. 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 Internal Revenue Service's (IRS)
financial condition for 1996, the status of the 1996 filing
season, and the administration's fiscal year 1997 budget request
for IRS.

Our statement is based on work we have been doing for the .
Subcommittee and our past reviews of filing season activities,
Tax Systems Modernization (TSM), and compliance initiatives

In our statement, we address the following four issues:

-- According to IRS officials, IRS‘ actions to reduce staffing
through a hiring freeze and an early-out program were not
sufficient to cover the labor-cost shortfall that resulted
from an approximately $860-million reduction in IRS' budget
request for fiscal year 1996. To further cover the
shortfall, IRS reduced support costs, cut the number of
hours for’ seasonal employees, and reduced the number of
nonpermanent staff. In making these reductions, IRS wanted
to ensure that it had enoigh staff to process tax returns
and issue refunds in a timely manner. As a result, programs
directed at identifying noncompliance and, to a lesser
extent, assisting taxpayers, absorbed most of the cuts.

-- Notwithstanding the budget cuts that affected some of IRS*
taxpayer assistance programs, this year's filing season
seems to be progressing more smoothly than did last year's
in some key respects. Most importantly, IRS is delaying
fewer refunds this year while it validates Social security
Numbers (SSN) and Earned Income Credit claims. IRS revised
its procedures for 1996 in an attempt to better target its
efforts and impose less of a burden on honest taxpayers
Also, telephone accessibility has improved, and more
taxpayers are using alternative return-filing methods.
Although this filing season appears to be going more
smoothly in these respects, there are still several
concerns. For example, (1) although telephone accessibility
has improved, it is still very low; (2) IRS closed many
walk-in sites this year that had provided assistance to
taxpayers in the past; and (3) the document imaging system
being used to process some individual income tax forms is
still not meeting its original expectations

-- The adminiscration is requesting almost $8 billion for IRS
for fiscal year 1997, an increase of $647 million from
fiscal year 1996. Of that request, $850 million is for TSM,
$155 million more than in 1996. TSM is plagued by numerous
managerial and technical weaknesses that we identified in a
July 1995 report.‘ Although IRS has initiated actions in
response to these weaknesses, those efforts provide little
assurance that the weaknesses will be corrected in the near
term. As a result, we believe that additional investments
in TSM are at risk

-- The largest program increase in IRS' fiscal year 1997 budget
request is $359 million for certain compliance programs
Our past work on compliance initiatives identified several
problem areas, including (1) IRS' inability to fully
implement past initiatives, (2) the inaccuracy of IRS‘
tracking of the revenue from such initiatives, and (3) the
focus of past collection initiatives on hiring revenue
officers instead of more productive collection staff

0: ¢-(GAO/AIMD-95~
156, July 26, 1995).


m1

Last year was the first year since electronic filing started in
1986 that the number of returns received electronically decreased
from the number received the prior year. Although the number of
electronic returns is on the rise this year compared with last,
the number filed as of March 18 was still about 16 percent fewer
than the number filed at the same time 2 years ago. As
Fecomended in October 1995, if IRS is to’ reach its goal of 80
million electronic returns in 2001, it needs to (1) identify
those groups of taxpayers who offer the greatest opportunity to
reduce IRS' paper processing workload and operating costs if they
were to file electronically and (2) develop strategies that focus
resources on eliminating or alleviating impediments, such as the
Program's cost, that inhibit those groups from participating.”

Refund Delavs

Last year, IRS took several steps in an attempt to better ensure
that persons were entitled to the refunds, dependents, and Earned
Income Credits they were claiming. The most visible of those
efforts involved the delay of millions of refunds to allow IRS
time to verify SSNs and do compliance checks. Although those
efforts appeared to have had a significant deterrent effect
(e.g., preliminary information indicates that 1.9 million fewer
dependents were claimed in 1995 than were in 1994), they were not
without problems

IRS (1) identified many more missing, invalid, and duplicate SSNs
than it was able to pursue and ended’ up releasing the refunds
without resolving the problems and (2) delayed millions of
refunds for taxpayers whose returns had valid SSNs to check for
duplicate SSNs but ended up releasing those refunds after several
weeks without doing the checks. Many taxpayers and practitioners
were surprised that IRS delayed some refunds even if all of the
SSNs on the return were good. They were also upset that IRS
split some refunds--issuing part of the refund and delaying the
rest--but only honored a taxpayer's direct deposit request for
the first part of the refund.

As we noted in our report to the Subcommittee on the 1995 filing
season, IRS identified fewer fraudulent returns during the first
9 months of 1995 than it did during the same period in 1994, and
the percentage of fraudulent refunds it stopped before issuance
declined." Neither we nor IRS know whether those decreases were
due to a decline in the incidence of fraud or a decline in the
effectiveness of IRS‘ detection efforts. The Director of IRS'
Office of Refund Fraud expressed the belief that there were fewer
fraudulent returns to be identified in 1995. He opined that the
additional controls IRS implemented in 1995 and knowledge of
those actions had deterred persons from filing fraudulent
returns

IRS took steps this year to address some of the problems it
encountered in implementing its new procedures in 1995. For
example, IRS has said that it is being more selective in deciding
which cases to investigate and which refunds to delay this year~
trying to focus its resources on the most egregious cases and
minimize the burden on honest taxpayers.

Statistics on the number of notices sent to taxpayers in 1996
concerning SSN problems and refund delays indicate that IRS is
indeed delaying fewer refunds. As of March 9, 1996, IRS had

mailed about 56-percent fewer refund-delay notices than at the
same time last year. Another indicator that fewer refunds are

Expectations (GAO/GGD-96-12, Oct. 31, 1995).

Swe limited our comparison to the first 9 months because IRS had
not compiled data for the last quarter of 1995.


16

materials, offering an optional settlement program, and providing early referral of
employment tax issues to Appeals.

As | stated earlier, we are finding ways to reduce the amount of paper small
business owners have to store, by developing rules that permit taxpayers to use
computer imaging systems to replace the paper records now required. We also raised
the threshold for meals and entertainment expense documentation from $25 to $75,
reducing the number of receipts that businesses have to retain for tax purposes.

Working with private industry, we are responding to the increased sophistication
of transactions in the financial world and specialization in the business community. We
have cooperatively developed Market Segment Specialization Program guidelines,
focusing on the practical problems of examining a market segment and identifying
Particular issues of interest to the IRS. In turn, taxpayers are better informed about the
non-compliance in that market and about the IRS's position on that issue. Through
January 1996, we had issued 27 Market Segment guidelines covering 23 markets.

Criminal Investigation

In addition to our compliance activities in examination and collection, our
Criminal Investigation Division (Cl) investigates complex financial transactions of
taxpayers, looking for criminal tax violations and money laundering. Cl is also actively
identifying and investigating new and emerging areas of tax fraud that impact an the
economy and prey on honest citizens. These areas include bankruptcy, health care,
insurance, motor fuels excise taxes and telemarketing. | would like to share with you
the results of our efforts in two of these areas.

Health care fraud is found in a wide range of schemes including home health
care, false claims/billings, rolling labs, transportation services, and kickbacks/bribes.
While most of this fraud is investigated by the FBI and U.S. Postal Service using the
‘mail fraud statutes, Cl investigates them as tax vioiations if the income is not reported
or underreported, the expenses ate overstated, or the tax return is otherwise false. Cl's
ability to bring tax charges coupled with its expertise in money laundering investigations
is often essential to the successful prosecution of health care fraud cases. In the last
three fiscal years, C1 initiated 344 investigations; recommended 168 prosecutions, and
obtained 111 convictions in this area

Health Care Convictions: The CEO of Integrated Systems Incorporated, John P.
Milne, was sentenced on October 7, 1995 to 2 years in prison, 5 years’ probation and
ordered to make restitution of $1.4 million and pay IRS $339,780 in back taxes and
penalties. Milne plead guilty to charges of tax fraud, making false claims against the
ULS., making false statements to banks and mail fraud. His health care scheme
involved negotiating reduced medical rates with hospitals, not disclosing the amount of
the discounts to his clients and filing for full payment, then keeping the difference for
himself. In this multi-agency investigation, C's financial investigative expertise not only
uncovered income tax evasion but also documented a health care scheme which had
defrauded numerous health care providers. This evidence provided the proof which
enabled the court to demand the $1.4 million in restitution,

In another Health Care Fraud investigation, Jeanette G. Garrison, owner of
Healthmaster Home Health Care in Macon, Georgia, was sentenced on October 30,
1995, to 33 months imprisonment, three years of supervised release and 200 hours of
‘community service on federal charges based on criminal events that transpired while
she controlled Healthmaster. She was also ordered to pay $2.5 million in fines and
$16.5 milion in restitution. Garrison plead guilty to one count of conspiracy to defraud
the United States and nine counts of faise statements. She conspired to defraud the
Medicare Program of millions of dollars by the submission of fraudulent cost reports for
reimbursement to the Medicare fiscal intermediary between 1989 and 1993. CI special
agents, working with the Georgia Bureau of Investigation and the FBI, combed through
hundreds of billing records, financial records and invoices to meticulously document
and prove this conspiracy against the government.

Tel Another growing area of criminal activity is
telemarketing fraud. Fraudsters use telephonic and wite communications to
fraudulently promote, solicit, or market products and/or services. Monies obtained
through telemarketing solicitations are then used to enrich the promoters of these


99

payer is we have a potential disaster brewing out there for our vol-
untary compliance system if we have an environment where trans-
actions cannot be traced. And we are getting very close to the day
when that is going to be a reality.

The Service needs to have as much technological assistance as it
can get at this time, perhaps through contracting, as the gentleman
that just appeared before me suggested. They need to buy the ex-
pertise. Quite frankly, the CIO position that they are offering
something at SES level 3 or $108,000 or $112,000 a year, would in
private industry, be a $400,000 or $500,000 job with pretty attrac-
tive stock options. In addition, if that person guided a successful
program they would be in line for a couple of million dollars in
compensation. It is way beyond the reach of the government.

We are concerned about asking the government to race in an In-
dianapolis 500 in a 1936 Plymouth against Formula One cars. We
have the potential for a real problem for the voluntary compliance
system. I think this fuels a lot of taxpayer discomfort with the cur-
rent tax system. It fuels the whole discussion about why we need
a flat tax or should we throw the whole system out the window.
Average taxpayers don’t mind paying their taxes if they feel that
they are paying their fair share and no more, and everyone else is
paying their fair share as well. If there is a widespread perception
that there are significant unreported income transactions happen-
ing on the Internet, which I think is a good possibility, and that
they are virtually untraceable because of this encryption tech-
nology, you are going to see a major tax revolt in this country. We
are very concerned about that as tax practitioners and as tax-
payers.

{The prepared statement follows:]


21

We have also reengineered many of our administrative processes to be less
labor intensive and to take advantage of available technology. Through an innovation
we call "Employee Express,” our employees can now manage their own employment
accounts, directly changing their tax withholding, savings bond allotments, Thrift
Savings Plan contributions and other personnel actions through the use of a touch tone
telephone or centrally located kiosks. In the past, these employees filled out forms and
sent them to their personnel offices where other employees made the changes to the
Payroll system

We have also fully automated our travel accounting system, and this system was
showcased as an example of a government agency implementing the best practices of
the private sector at a March 8 hearing on Government-Wide Travel Management
before the Senate Committee on Governmental Affairs, Subcommittee on Oversight of
Government Management and the District of Columbia. In reengineering this process,
we were able to eliminate all but two steps: a certification of the claim by the traveler
‘and the approval by the supervisor. Employees are reimbursed in about five to seven
days. In FY 1995, we processed 83 percent of our travel vouchers or about 325,000
vouchers electronically.

‘We have also changed our business processes so that we can serve taxpayers
better. For example, as | stated earlier, we have eliminated certain notices we send to
taxpayers, and we are in the process of reviewing the remaining notices to make them
more understandable. We are providing information to taxpayers in new ways, for
instance through our Internet Home Page. Also, as | discussed earlier, in our
compliance efforts, we are rethinking the way we accomplish our mission and putting
more emphasis on working with taxpayers on difficult issues with such tools as alternate
dispute resolution and Market Segment guidance. We will continue reviewing our
processes and make changes that will make us more efficient and make it easier for
taxpayers to deal with us.

Business Structure

The remaining part of our modernization efforts involves realigning our
organizational structure to make it more efficient and effective. We are concentrating
on the work currently performed by Service Centers, Computing Centers, Automated
Collection and Taxpayer Service telephone sites, and district offices. During FY 1994
and 1995, we consolidated our 70 phone and correspondence operations into 34 and
will consolidate ultimately in 23 Customer Service Centers. We will soon be operating
with three Computing Centers responsible for centralized mainframe computing instead
of the twelve operating today.

‘On October 1, 1995, the number of regions was reduced from seven to four, the
staff in the remaining four tegions was reduced, and we began to consolidate from 63
district headquarters to 33 offices. The district consolidations are ahead of schedule
and will be completed by October 1. In the summer of 1993, we decreased the number
of locations providing administrative support services from more than 80 to 24: three
more will be eliminated this year. Despite this 38 percent decrease in support services
managers and an overall decrease of 20 percent of support services employees, the
job is getting done,

E

I would like to discuss briefly the IRS's FY 1996 Budget and our FY 1997 Budget
request. | have included as an Appendix a summary of the FY 1997 request. As you
know, the IRS submitted a budget request for FY 1996 of $8.2 billion, and received an
appropriation of $7.348 billion, less than the IRS's $7.483 billion FY 1995 appropriation.
This decrease posed a particular challenge to us since we require about $200 milion
more each year for cost increases beyond our control, such as pay raises and rent
increases, just to maintain our current level of operations. Our FY 1996 budget allows
tus to run our basic operations and will not affect the processing of returns or the
payment of refunds within our customer service standards of 40 days for paper filing
and 21 days for electronic filing during the 1996 filing season.

‘What we will not be able to accomplish again are the impressive results we
achieved in deficit reduction last year through our Compliance Initiative funding. Based


50

cation to me that the needs of our employees will be met by this
system.

Ms. RICHARDSON. I think that they also had a very formal role
in designing the workstations, designing the functionality, as the
word seems to be, and to make it suitable for our frontline
assistors.

Mr. Dotan. Madam Chairman, if you would permit, you ticked
off a string of criticisms that both thread themselves through the
GAO and the NRC and the last part of it we have been talking
about is the ICP. One of the difficult things in a hearing like this
is to sort of say two things. One is that the essence of the criticism
is an essence that we agree with, and at the same time get a
chance to talk about how, when all those words and all those criti-
cisms and all those things aggregate in reports that build on each
other, sometimes reporting essentially the same thing and other re-
ports that look like there are now five reports that say the same
thing, and also dealing with language like “little evidence that ac-
tions will”—well, part of our frustration is we are in the midst of
reacting about as aggressively as we know how to a body of work
that we actually asked get done and that culminated in a briefing
last April, a formal report last July, as a template for how, if we
were to do all that we could do, how we could really ratchet our-
selves from this series of places where we didn’t have our act as
well together as it might be, into this admittedly world class under-
taking. And I think what I would like to hope is that as we deliver
against this middle of April date to the appropriators, what will be
resident in the four sets of reports that basically our appropriators
asked us to come back with is not anything that would allow any-
body to say “little evidence,” but hopefully something that would
say a heck of a lot of evidence.

Now, some of that evidence will be evidence of work in progress,
because one of the other things you talked about was our software
maturity level. If you read that report on its face, someone might
infer that we should take an organization that is today, by metrics
that the Carnegie-Mellon folks use, a level 1 organization, and be-
cause we are resolved to improve it, should in 3 or 4 or 6 months
make that a level 2 organization. It doesn’t happen that way. Ex-
perts inside and outside will tell us that it doesn’t happen that
way. They will tell us that as an organization trying to do what we
are doing, we had better have level 2 or better skills available to
us, and so we have made a very conscious decision that some part
of our inside cadre must get to level 2, but we have also made a
conscious decision an awful lot of that software is going to be writ-
ten on the outside, and it is going to be written by people who are
already level 2 or above. Our integration support contractor is a
level 3 organization.

So what on the face of it is criticism that we say is right on, you
can’t do this world class endeavor if you are operating at level 1,
but when we get a chance to work behind some of those rec-
ommendations and talk about, first, what we are doing, and, sec-
ond, what we will do more of, I would like to believe we could sat-
isfy you that we are not standing still but, quite the contrary, ag-
gressively moving to deal with the essence of those. And your ICP
example is another one. That report upon which that data is drawn


95

report that you have is our last one. The committee is all volun-
teers, and so I would say—I will speak personally. The only reward
you get after spending all those years learning about it and giving
advice is if somebody listens to the advice.

Chairman JOHNSON. Right.

Mr. CLaGETT. That is really the satisfaction. So I am certainly
willing to do so.

Chairman JOHNSON. Well, thank you. I appreciate that. Why is
the contract expired?

Mr. CLAGETT. Why? Well, remember, this was the IRS’ contract.
They had a specified period of time. It was originally 2 years to
look over TSM and make recommendations as to whether or not
they were doing it right. They extended that for 2 years because
the process and the project was continuing to go.

I will have to tell you that after 5 years, the committee, and that
includes the chairman, was pretty well tapped out in coming down
here making recommendations and not seeing a lot happen. And so
most of us were not willing to go ahead.

But I think the contractual arrangement with the National Re-
search Council was one that had to be a specified time and a speci-
fied number of reports.

Chairman JOHNSON. Thank you.

Mr. CLAGETT. Yes.

Chairman JOHNSON. Thank you very much.

Let me call forward Joseph Lane on behalf of the National Asso-
ciation of Enrolled Agents. Sorry you had to wait so long, Mr. Lane.

You may proceed, Mr. Lane. Thank you for joining us this after-
noon, We appreciate your perspective on these issues.

STATEMENT OF JOSEPH F. LANE, ENROLLED AGENT,
NATIONAL ASSOCIATION OF ENROLLED AGENTS

Mr. LANE. Thank you. We appreciate the opportunity to come
back before the Committee and share some of the insights that our
members have about the budget situation with IRS and also the
current filing season.

We have prepared some written testimony, and I would request
that the Committee accept that. I would be happy to just highlight
some of the written testimony and then be willing to take questions
from Members, if that meets with your approval.

We attempted to get a lot of input for this session today by going
out with an e-mail poll of our members. We received scores of com-
ments from members all around the country, so we are pretty con-
fident in the positions we are taking as an organization with re-
spect to the overall impressions that our members have of the IRS
current filing season.

We also tried to take into consideration the average taxpayer
that is going to be dealing with IRS, particularly in addressing this
budget situation. As we heard this morning from the Commis-
sioner, and we reviewed her written testimony, the budget cut-
backs that were necessitated by the financial situation the Service
finds itself in resulted in a lot of taxpayer service reductions. We
have had an unprecedented report of the increase in the number
of taxpayers who are coming to our members asking them for forms
because they can’t get them elsewhere.


33

BUDGET OVERVIEW

FY98 FTE By Appropriation

FY97 FTE By Appropriation
gti

 Precenang Aanatanes ant Management
‘Tex ta Exeroment
internation Sytem

Three Year Comparison Three Year Comparison
‘Total Batoe Dore Dota by Appreptn

00
ono
3900.
2000.
1900.

»

Pres re wn



lq

frauds. Because telemarketing fraud often crosses state borders, federal and state law
‘enforcement agencies must work together to successfully prosecute the cases. From
FY 1993 through FY 1995, 133 telemarketing investigations were initiated; 102
prosecutions recommended; and 86 convictions were obtained.

In September 1994, the Western New York Telemarketing Task Force, including
agents from Cl, uncovered one of the largest telemarketing cases in the Western New
York area. Four corporations and 13 individuals were indicted and charged with
operating a telemarketing scam that bilked hundreds of victims, mostly senior citizens
throughout the United States and Canada; out of millions of dollars. Three of the
individuals indicted were charged with Title 26 Section 7211, having to do with making
false statements to purchasers relating to tax, a seldom used statute that can effectively
be used in telemarketing fraud investigations. This statute makes it a crime for anyone
to solicit payment for the sale or lease of an “article” and faisely state, orally or in
writing, that any part of the payment, both sale or lease, is to pay federal tax. The
Assistant United States Attorney working with the task force has utilized this statute to
faciltate plea agreements for individuals cooperating with the government

The 1995 Filing Season

Last year, | told you, Madame Chairman, and the Members of this Subcommittee
that our biggest challenge was to put in place better methods to protect the tax revenue
from those who improperly attempted to claim refunds. We accomplished this by using
both technology and a different approach to compliance to stop improper refund claims.
‘We used numerous systemic verifications including increased checks of social security
numbers. We established new criteria for Electronic Return Originators (EROs),
including fingerprint and credit checks, and increased monitoring of EROs. We delayed
7.4 million refunds -- or about 8 percent -- and increased compliance resources devoted
to checking these refunds for accuracy.

Tam pleased to report that our efforts were successful. One and a haf million
fewer dependents were claimed, and there were approximately 100,000 fewer earned
income tax credit (EITC) claims than in the previous year. Cl identified more than 4,100
refund schemes involving almost 60,000 returns, and prevented the issuance of $78
million in refunds. Last year, we initiated 491 criminal investigations involving refund
‘schemes and return preparers. Prosecution recommendations were forwarded on 404
cases, and we obtained indictments of 329 individuals and convictions in 300 cases.”
Eighty-two percent of the convictions resulted in prison sentences averaging over 18
months.

‘Through pre-refund examinations, we prevented the issuance of an additional
$425 million in refunds. We visited over 6,600 EROs, issued 707 warnings for
violations and suspended 287 EROs. Thus, last year, direct compliance efforts
prevented $503 million in improper refunds from being issued. In fact, in its August,
1995 Economic and Budget Outlook update, the Congressional Budget Office
decreased anticipated EITC outlays by $2-S3 billion a year over seven years, stating,
"EITC spending has been lower than expected this year, possibly as a result of a recent
crackdown by the IRS... .."

‘The 1996 Filing Season

This filing season we are continuing to devote substantial resources to detecting
‘and stopping improper and fraudulent claims for refund. We have refined our efforts to
‘address improper refund claims based on what we learned last year. We are still
requiring EROs to meet suitability standards, and we are continuing our ERO
monitoring efforts. We also continue to ook carefully for suspicious returns and check
social security numbers. However, we anticipate far fewer delayed refunds this year as
taxpayers now understand the importance of filing returns with correct social security
numbers. In fact, so far this year, the number of social security number problems on
electronically fled returns have decreased by more than 33 percent from last year.

‘THE 1995 COMPLIANCE INITIATIVE

5 These totals inciude cases initiated in the prior fiscal year.


61

Chairman JOHNSON. Thank you, Commissioner Richardson.

Ms. RICHARDSON. Thank you very much.

Chairman JOHNSON. And my thanks to your staff.

The next panel is Lynda Willis, the Director of Tax Policy and
Administration Issues at the U.S. GAO.

I would ask my colleague to take over for a few minutes, and I
will return very shortly. But I would like you, Ms. Willis, to pro-
ceed.

STATEMENT OF LYNDA D. WILLIS, DIRECTOR, TAX POLICY
AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT
DIVISION, US. GENERAL ACCOUNTING OFFICE;
ACCOMPANIED BY RONA B. STILLMAN, PH.D., CHIEF
SCIENTIST, COMPUTERS AND TELECOMMUNICATIONS,
ACCOUNTING AND INFORMATION MANAGEMENT DIVISION

Ms. WILLIS. Thank you, Madam Chairman. We are pleased to be
here today to participate in the Subcommittee’s inquiry into the In-
ternal Revenue Service’s financial condition for 1996, the status of
the 1996 filing season, and the administration’s fiscal year 1997
budget request.

With me today is Dr. Rona Stillman, who is the GAO executive
responsible for our work evaluating tax systems modernization.

My statement today makes the following four points:

First, programs directed at identifying noncompliance and, to a
lesser extent, assisting taxpayers absorbed a substantial portion of
the 1996 budget cuts.

Second, the 1996 filing season seems to be going more smoothly
than last year’s in some key respects.

Third, TSM continues to be plagued by numerous management
and technical weaknesses that put additional investments at risk.

And, fourth——

Mr. LAUGHLIN [presiding]. Could I interrupt you. Did the Com-
missioner leave somebody from her staff here?

{A show of hands.]

OK. Very good. Please proceed.

Ms. WILuIs. And, fourth, although IRS has taken some actions to
address our previous concerns with compliance initiatives, some is-
sues remain.

Turning first to IRS’ 1996 financial condition, in fiscal year 1996
IRS had an appropriation of $7.3 billion, $160 million less than its
1995 appropriation and $860 million less than the President re-
quested. To accommodate its reduced budget, IRS took a number
of actions. These included a hiring freeze, offering early outs with-
out incentives, reducing awards, travel, and overtime costs, reduc-
ing the work hours of seasonal employees, and cutting back on the
use of nonpermanent staff.

In making its staffing reductions, IRS wanted to ensure that it
had enough staff to process tax returns and issue refunds in a
timely manner. As a result, programs directed at identifying non-
compliance, such as document matching, automated collection, or
ACS, and questionable refund detection, absorbs most of the cuts.
Affected to a lesser extent were taxpayer assistance programs.

Turning to the filing season, preliminary information indicates
that in certain key aspects the 1996 filing season is progressing


4

Chairman JOHNSON. The hearing will come to order.

Some of our Members are en route, but in view of the heavy floor
schedule, we would like to get started.

Good morning and welcome. The fiscal year 1997 budget proposal
for the IRS would give it almost $8 billion and almost 109,000 em-
ployees in order to collect $1.5 trillion in revenue. This represents
an increase of 10 percent over the 1996 level. I respect the preroga-
tive of the administration to present a budget designed to carry out
its priorities; however, I believe that the Congress will have some
tough, legitimate questions about this proposal.

This morning we want to learn how the IRS intends to use its
resources in fiscal year 1997. Most IRS programs show only small
changes, but a few programs deserve special attention. The budget
proposes $850 million tor the Tax Systems Modernization Program.
The TSM is supposed to upgrade the IRS’ computer capability and
move it closer to modern performance levels. It is essential to im-
prove the IRS’ computer capability if it is to cope with the crushing
burden of processing over 1 billion documents every year, but there
are many unanswered questions about the TSM Program at the
present time.

No one questions the goal of TSM, but significant doubts have
been raised as to whether the IRS is on the right road to achieve
its goal. Two weeks ago, Deputy Secretary of the Treasury Law-
rence Summers testified before a House Appropriations Sub-
committee that TSM had gone “badly off track,” and that it “needed
to be rethought from top to bottom.”

I certainly understand that a complex computer project might
need a midcourse correction, but it sounds as if the IRS is going
back to square one on TSM. The question raised by this decision
is: What have we gotten for the $4 billion we have invested so far?
How much of the past TSM funding will the IRS now have to just
chalk up to experience? How much of that money spent so far has
been wasted? And how much of it has gone for something useful
and productive? And how long will it take to get TSM back on
track?

We don’t want TSM to become the IRS equivalent of the baggage
handling system in the new Denver airport: High tech, high cost,
low performance.

Today we will examine how the IRS is absorbing the reduced
funding in the current fiscal year. We want to learn what the Com-
missioner’s priorities are in operating with fewer resources. Are all
the activities being trimmed a similar amount, or are a few activi-
ties bearing the brunt of the reduction?

The 1996 tax filing season appears to be normal and uneventful.
This is a welcome contrast to the disruptions which occurred last
year because of the IRS’ crackdown on fraudulent refund claims. I
commend the Commissioner’s strong action to identify and deter
improper refund claims. But a regrettable side effect was a good
deal of confusion and some late refunds.

Commissioner, the IRS is the one Federal agency that touches
the lives of every American. How Americans view their government
often is determined by how they view the IRS. A large part of the
enthusiasm for pursuing a flat tax or a consumption tax is rooted
in a negative attitude toward taxes and, derivatively, toward the


93

hired I guess is something that has been addressed, although from
your conversation earlier I am not convinced that you think that
the background and expertise is there, without getting into the in-
dividual person. But I sense from the report that you all believe
that there is a need for what you call an ongoing mechanism to
interact between the Secretary and this project generally and with
the technical community, and you believe that there can be some
improvements in management and so on. What I am hearing from
you, though, is that perhaps it would have been best at the outset
to have contracted this project out in total, much as we do in other
areas of the government—environmental cleanup would be one that
comes to mind, where there is technical expertise required and the
government simply can’t afford to keep that kind of expertise in the
civil service; therefore, it is outsourced.

Is that a fair summary?

Mr. CLaGET?. That is a correct reading, Mr. Portman, and I
should probably emphasize that last bit about contracting out was
my opinion. It was not something that the committee addressed. It
is my conclusion thinking about this thing after going through all
that.

We have been recommending a strong person. In fact, we had
recommended from the beginning that either the Deputy Commis-
sioner, current Deputy Commissioner, be the person responsible be-
cause that person has enough clout to get the job done, or to have
someone at that level do the job, beyond the CIO.

It took several years for that to begin. In the meantime, of
course, during all that time, the CIO had the development respon-
sibility. So when the former CIO retired, we had been saying you
need to have more expertise.

That was our solution during all of this time, and it certainly is
still necessary to make sure that you get the maximum benefit
from the funds that have been expended. However, as I said, I have
now myself come to the conclusion that starting a new one, that
is not the way to go.

Mr. PorTMAN. Taking off your National Research Council hat,
though, for a moment and just speaking in your individual capac-
ity, given where we are in the process, would you now recommend
that the Service, indeed, look at the possibility of contracting out
some of these specific projects? I think in your testimony you men-
tioned the ICP as an example that could be, in a sense, showcased.
as one that could be successful if it was focused on. Or would you
recommend that the Service continue to focus on internal expertise
and capability to do that?

Mr. CLAGETT. I think it is pretty late to start changing, and ICP
is largely done in-house. DPS, for example, is done essentially out-
side. That is the document reading, digitizing system.

So what we were suggesting was one that was independent of
which system they pick, but that they pick one and focus on it. And
we were also recommending one that is being done in-house in
order to enhance, build on their own internal expertise at this time.
And I still think that is probably the best way.

If there are units that are not now already well underway either
inside or outside, I believe they would be better off done outside
with a contractor. But one of the problems you see is that it was


38

Chairman JOHNSON. Thank you, Commissioner. I appreciate your
testimony. And for the Members’ knowledge, included in your testi-
mony is quite a long section on debt collection, and you may get
a chance to address that in the course of the questions.

Before we get into that, however, let me turn to some other mat-
ters, just to return to the part of your testimony where you dis-
cussed the impact of your screens last year and your efforts to re-
duce fraud, particularly in the EITC Program. The outcome was
very impressive. Are those screens working this year? Do you have
reason to believe that you are going to be able to maintain the
progress you made last year? Do you think there will be any in-
creased benefit from the work that you have done to reduce fraud
in that area?

Ms. RICHARDSON. Very much so, Madam Chairman. We installed
our electronic fraud detection system and a number of filters this
year based on things we learned last year. We feel that we cer-
tainly weren’t going to lessen our efforts, but we were able to refine
what we were doing, which I think accounts for the fact that, as
you pointed out earlier, we are having a much smoother filing sea-
son. But we have certainly not lessened our commitment to pre-
venting refund fraud.

Chairman JOHNSON. There are some other areas where you have
a lot of concern about fraud, one of which is health care fraud.

Ms. RICHARDSON. Right.

Chairman JOHNSON. Could you discuss your efforts in that area?
And are there any new things in this filing season that you are
doing to try to identify fraud? As a Member of the Health Sub-
committee of this Committee, we are keenly aware of the problems
in some of the provider service areas.

Ms, RICHARDSON. Well, as you and I have discussed, health care
fraud is an area that is of grave concern to us and to other Federal
law enforcement agencies, as well as State law enforcement agen-
cies. And it is an area of growing concern. It is not particularly
geared to a filing season, so we don’t have anything that we do that
is unique to the filing season. However, our Criminal Investigation
Division is working closely with other law enforcement agencies in
a number of major health care fraud investigations. We reported on
a couple of convictions in our written testimony. I would be happy
to provide you and the Committee more information about it.

{The following was subsequently received:)


100

STATEMENT OF JOSEPH F. LANE, EA
‘ON BEHALF OF
‘THE NATIONAL ASSOCIATION OF ENROLLED AGENTS

‘Madam Chair, Members of the Subcommittee, my name is Joseph F. Lane, 1 am an Enrolled
‘Agent in private practice in Menlo Park, California. I thank you for your invitation to testify on
behalf of the National Association of Enrolled Agents regarding the proposed FY 1997 IRS
Budget and the status of the current tax filing season

1am testifying today on behalf of the more than 9,000 members of the National Association of
Enrolled Agents (NAEA). As the members of the Subcommittee well know, Enrolled Agents are
the only tax professionals possessing a Federal license to represent taxpayers before the Internal
Revenue Service. Our members represent more than four million (4,000,000) individual and
small business taxpayers annually. NAEA is especially appreciative of the interest this
Subcommittee has taken in the matter of Internal Revenue Service practices and procedures and
their impact on taxpayers. We pledge our support to assist the Subcommittee in the future on
issues which affect the general taxpaying public.

The Proposed FY 1997 Budget

As small business owners, the members of NAEA fully support the concept that the Federal
‘government should be as careful and diligent in spending the revenues it receives in taxes as
taxpayers are in earning those revenues. It is important to all taxpayers to be confident in the
ability of the government to adequately account for the expenditures it makes on behalf of
taxpayers. It is also important for taxpayers to recognize that certain functions of government
need to be adequately funded in order to be effective. We believe that with respect to this last
point, the FY 1997 IRS budget needs to he considered in ight of the impact of the FY 1996
budget cuts on IRS operations,

During the course of our preparation of today's testimony, we conducted an e-mail poll of our
members to solicit their feedback on the issues being examined by the Committee. We received
scores of messages from members all over the country and have incorporated many of their
comments throughout our prepared statement.

In addressing our comments tocay, we have tried to take into account the realities of tax
‘compliance for all taxpayers, not only those who are the clients of our members. We point this
‘out because we think the Congress needs to be aware of the effect reductions in Taxpayer Service
staffing and availability have had on the general taxpaying public. When the Service has to
‘curtail the availability of telephone and walk-in assistance to taxpayers, the taxpayers that are
directly affected are those with the fewest alternative resources to turn to for information. Our
‘members’ clients will get their questions answered and their tax retums prepared because they
have sought out competent professional advice and have the resources to pay for that advice.
About 50% of the taxpayers filing returns in 1996 will seek professional assistance.

Who will service the rest of the taxpayers who need questions resolved in their effort to comply
with the law? There are many volunteer organizations, such as senior citizen community centers,
college accounting organizations, and other entities which provide free or low-cost taxpayer
assistance to certain constituencies. The IRS’ own Volunteers In Tax Administration (VITA)
program provides a structure and support system for several of these volunteer efforts. Many of
‘our own members volunteer their time as well in these community efforts. However, all of these
efforts put together cannot replace the IRS! Taxpayer Service function

We believe a well-funded and well-staffed Taxpayer Service organization is vital to insure the
Viability of our voluntary compliance system. We have one of the most complex tax systems in
the industrial world, At the same time, we enjoy one of the highest levels of voluntary
compliance in the world. The cost of securing this compliance is providing taxpayers with
answers to their legitimate questions and assistance in meeting their filing responsibilities.

To fail to provide this support is to tisk further decline in compliance levels. Everyone involved
in tax administration tnderstands that the most expensive way to secure compliance is one-on-
one enforcement, The most efficient and cost-effective way to secure high compliance levels is to
provide readily accessible information in the most inexpensive way to the widest number of
taxpayers, enabling them to comply with their tax filing and paying obligations.



Al

Chairman JOHNSON. What is the primary focus of your profes-
sional education and training efforts? And to what extent are they
going to be affected by tight budgets?

Ms. RICHARDSON. I might ask Jim Donelson to address that. He
is both Chief, Taxpayer Service and Acting Chief Compliance Offi-
cer and knows a lot about the professional education issues.

Chairman JOHNSON. And as you are talking about that, would
you talk about if there are impacts on your training programs,
which ones. And are you doing it equally across the board, or are
there programs that you are committed to retaining at the same
level or stronger? I want to get a better idea of the training compo-
nent, how it affects staff capability, and how reductions in funding
are being handled.

Ms. RICHARDSON. Excuse me. I might just say in a general way,
though, what we have tried to do in the last several years and will
continue to do is analyze our training money so that we can pro-
vide the highest quality training with the least amount of cost. We
are doing much more with distance learning, using videos,
videoconferencing, and teleconferencing. A good bit of our training
money in the past had gone to pay for travel and lodging as people
came for offsite training. We are trying to shift that balance so that
we can provide high-quality training to a greater number of people.

Mr. DonELSON. Madam Chairman, if I may, we have had to take
some reduction and cuts in our continuing professional education
and training, as well as our outservice training where we send our
employees out to receive training outside the Agency. We are con-
tinuing to give the basic training to our employees and making the
cuts as judiciously as possible where we think we can afford to take
them. I am sure that there are employees that wish they could
have certain training courses that we just can’t afford to send them
to as we may have in the past, and we have done a lot, as the Com-
missioner has said, by using technology to train people across the
country.

Our Office of Chief Counsel has a very excellent process that
they use for satellite training around the country, and we are en-
gaging in that to help train our examination people, for example.
And we continue to run our CID, our criminal investigation people,
through the Glynnco Program, as well as all of the other Treasury
enforcement agencies. So we have taken cuts. We have tried to ab-
sorb them as judiciously as possible.

Chairman JOHNSON. Thank you very much. I am going to recog-
nize my colleague, Congressman Laughlin, for some questions, and
then we will come back to the TSM issue. Thank you.

Mr. LAUGHLIN. Thank you, Madam Chairman.

Commissioner Richardson, one of the most serious criticisms that
has been leveled at the Tax Systems Modernization Program is
that there is a lack of focus and an inability to establish priorities.
Both the General Accounting Office and the National Research
Council have raised this repeatedly in their reports.

Have you prioritized your systems development efforts? And can
you provide us with a list of programs where you will focus your
resources?

Ms. RICHARDSON, Yes, Mr. Laughlin, and as I mentioned in my
oral statement, we have taken those criticisms very seriously, and