JOINT REVIEW OF THE STRATEGIC 

PLANS AND BUDGET OF THE 

INTERNAL REVENUE SERVICE, 2003 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

AND THE

COMMITTEE ON FINANCE 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

One Hundred Eighth Congress 

First Session 

May 20, 2003 

JCS–4–05 


E:\SEALS\CONGRESS.#13
JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL REVENUE SERVICE, 2003 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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21–115 2005

JOINT REVIEW OF THE STRATEGIC 

PLANS AND BUDGET OF THE 

INTERNAL REVENUE SERVICE, 2003 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

AND THE

COMMITTEE ON FINANCE 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

One Hundred Eighth Congress 

First Session 

May 20, 2003 

JCS–4–05 


E:\SEALS\CONGRESS.#13
(II) 

COMMITTEE ON WAYS AND MEANS 

William M. Thomas, California, Chairman Charles B. Rangel, New York 

COMMITTEE ON APPROPRIATIONS 

C. W. Bill Young, Florida, Chairman David R. Obey, Wisconsin 

COMMITTEE ON GOVERNMENT REFORM 

Tom Davis, Virginia, Chairman Henry A. Waxman, California 

COMMITTEE ON FINANCE 

Charles E. Grassley, Iowa, Chairman Max Baucus, Montana 

COMMITTEE ON APPROPRIATIONS 

Ted Stevens, Alaska, Chairman Robert C. Byrd, West Virginia 

COMMITTEE ON GOVERNMENTAL AFFAIRS 

Susan M. Collins, Maine, Chairman Joseph I. Lieberman, Connecticut 

(III) 

C O N T E N T S 

Page 

Press release of May 14, 2003, announcing joint review ...................................... iv 

Opening statements ................................................................................................. 1 

WITNESSES 

Internal Revenue Service, Hon. Mark W. Everson, Commissioner ..................... 6 

Internal Revenue Service, Ms. Nina E. Olson, National Taxpayer Advocate ..... 34 

Department of the Treasury, Ms. Pamela J. Gardiner, Acting Treasury Inspector General for Tax Administration ............................................................ 43 

IRS Oversight Board, Hon. Larry R. Levitan, Member ........................................ 57 

U.S. General Accounting Office, Mr. James R. White, Director, Strategic 

Issues .................................................................................................................... 63 

SUBMISSIONS FOR THE RECORD 

Hon. Mark W. Everson, Commissioner, Internal Revenue Service, response 

to submitted questions from Senator Charles E. Grassley ............................... 107 

Hon. Mark W. Everson, Commissioner, Internal Revenue Service, response 

to submitted questions from Senator Max Baucus ........................................... 109 

Hon. Mark W. Everson, Commissioner, Internal Revenue Service, response 

to submitted questions from Senator Carl Levin .............................................. 110 

Hon. Mark W. Everson, Commissioner, Internal Revenue Service, response 

to submitted questions from Hon. Marsha Blackburn ...................................... 113 

Ms. Pamela J. Gardiner, Acting Treasury Inspector General for Tax Administration, response to submitted questions from Hon. Marsha Blackburn ........ 114 

Mr. James R. White, Director, Strategic Issues, Government Accounting Office, response to submitted questions from Hon. Marsha Blackburn .............. 118 

(IV)


Insert graphic folio 4 21115A.001
(1) 

REVIEW OF THE STRATEGIC PLANS AND 

BUDGET OF THE INTERNAL REVENUE 

SERVICE 

TUESDAY, MAY 20, 2003 

HOUSE OF REPRESENTATIVES, 

JOINT COMMITTEE ON TAXATION, 

Washington, DC. 

The Joint Committee met, pursuant to call, at 10:00 a.m., in 

Room 1100, Longworth House Office Building, Hon. Amo Houghton 

presiding. 

Present: Representatives Houghton, Tierney, Blackburn, Lewis of 

Kentucky, Pomeroy, and Portman. 

Senators Present: Senators Grassley, Bennett, and Sununu. 

Representative HOUGHTON [presiding]. Good morning, everybody. 

On behalf of Senator Grassley and myself, we are delighted to see 

you here. I am going to make an opening statement. I will pass the 

mike then to Senator Grassley, and he will make his statement, 

and then we will be off and running. 

Today’s hearing is unique in that we bring together House and 

Senate Members from six committees to review the operations of 

the Internal Revenue Service. The purpose, of course, of the joint 

review is to give coordinated oversight to the IRS and focus on 

their long-term objectives. 

This joint review, established by the IRS Restructuring and Reform Act, has been going on for 5 years. And in that time, the IRS 

has overhauled its organizational structure, which now features 

four operating divisions devoted to groups of taxpayers with similar 

needs, and has taken other steps to improve its service to taxpayers. 

For example, a new program on the IRS Web site lets taxpayers 

check the status of their refund, and more taxpayers are getting 

through to the IRS with questions by phone and in person at walkin sites. 

While the IRS has made significant progress towards reform, significant challenges clearly remain. The long-term decline in collection activity raises questions about tax compliance and fairness to 

the majority of taxpayers who pay all of their taxes. The result of 

the conflicting trends of workload increases and declining of resources over time has led to what is called a compliance gap: more 

taxpayers who do not file or report honestly and less IRS capacity 

for audit and enforcement. 

So if the gap cannot be closed, the long-term fairness of tax administration—this is our major worry—may be called into question. 

So this hearing gives us the opportunity to look at several things: 

first, back on the last 5 years of IRS reforms; and, secondly, to look 

2 

forward to challenges of the next 5 years with the new Commissioner. 

This morning we will hear from the new IRS Commissioner, 

Mark Everson; and a panel consisting of Nina Olson, National Taxpayer Advocate; Larry Levitan, former Chairman of the IRS Oversight Board; Pamela Gardiner, the Acting Treasury Inspector General for Tax Administration; and James White, Director of Tax 

Issues at the General Accounting Office. 

We look forward to their testimony, and now I would like to recognize my distinguished Senator, Senator Grassley, and any other 

Members for any opening statements they may have. 

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, U.S. 

SENATOR FROM IOWA 

Senator GRASSLEY. Mr. Chairman, I have just a few short comments. First of all, I thank you for chairing a very important committee meeting, joint committee meeting, that meets once a year, 

which is part of the Restructuring Reform Act of 1998, to bring everybody together that has some congressional jurisdiction over the 

IRS and Treasury Department to once and for all kind of bring all 

issues to a focal point in one day of hearings. 

I have longstanding interests in the effect of tax administration, 

and given my participation in crafting the Restructuring Act, I 

have a special interest in these proceedings. 

Now, having said that, I have to apologize to Mr. Everson and 

to the committee members because I am not going to be able to be 

here, for the simple reason that there are negotiations going on on 

the growth and stimulus package, with a commitment on the part 

of leadership of the House and Senate, including the Chairman of 

the Senate Finance Committee, that we would get that bill to the 

President before the end of—or the beginning of the recess. So I 

will leave after making my comments. 

I have three broad concerns. In all candor, none of these will surprise anyone who has been listening to me speaking about the IRS 

for a long period of time. First, I would again share my strong belief that the IRS must be able to balance responsibilities. IRS 

might be able to balance its enforcement activities, which include 

audit, collection and criminal investigation on the one hand, with 

taxpayers’ rights and taxpayer service on the other hand. As far as 

I am concerned, achieving that balance is crucial to maintaining 

public confidence in our tax system and the administration that 

carries it out. 

Second, I remain concerned about the timeliness and cost of business systems modernization programs at the IRS. The successful 

execution of this program is essential for the effective and efficient 

tax administration and for IRS to provide the customer service that 

taxpayers expect and deserve. And in my conversations with Mr. 

Everson, I have been very satisfied that he takes that very seriously as well. 

Third, I would like to state that I am troubled that a critical part 

of the IRS restructuring may be getting short shrift. As a result of 

the National Commission on Restructuring, of which I was a member, and the Restructuring Act, IRS is required to first redesign its 

structure, and, second, modernize its computer systems. 

3 

IRS’s structural redesign is largely in place. IRS created a customer-facing organization designed to meet the needs of its clients, 

the American taxpayers. Further, the IRS overhaul of its 1960sbased tax return processing and storage system is underway. However, in order for the modernized IRS to meet the needs of taxpayers, the agency must have the appropriate human capital in 

place. I am concerned that IRS may not have the appropriate training, recruitment, and retention programs in place. 

Without properly qualified, trained, and motivated employees, 

IRS will be unable to leverage its new computer system and organizational structure. In short, it would be unable to provide top-notch 

customer service and ensure across-the-board compliance with the 

Nation’s tax laws. And I trust that Commissioner Everson is going 

to address this, and, in fact, I have been advised that he would address—and am very satisfied of his addressing this—and I think he 

is as concerned about it as I am, to make sure that what is in place 

now is moving forward in an appropriate way. 

So, having said all of that, I look forward to continuing a working 

relationship with Commissioner Everson that he has already demonstrated that he is willing to put in place, and which would be a 

continuation of what I think Commissioner Rossetti did a very good 

job of. 

I hope at the end of your term we can look back with pride at 

a significantly improved agency, and I hope we see an IRS that is 

effective, efficient, and staffed with motivated people able to meet 

taxpayers’ expectations. 

Thank you, Mr. Chairman. 

Representative HOUGHTON. Thanks very much, Senator. Are you 

going to have to leave now? 

Senator GRASSLEY. Yes. 

Representative HOUGHTON. All right. What I would like to do is 

thank you very much for being here. We will give you a full report 

on what has happened. 

And then I would like to ask Mr. Pomeroy, you have no comment? 

Senator GRASSLEY. I would have some questions to submit in 

writing. 

Representative HOUGHTON. Fine. They will be submitted for the 

record. 

[The information follows in the submissions for the record section] 

Representative HOUGHTON. Mr. Pomeroy, do you have any? 

OPENING STATEMENT OF HON. EARL POMEROY, U.S. 

REPRESENTATIVE FROM NORTH DAKOTA 

Representative POMEROY. On behalf of Ranking Member Rangel, 

Mr. Chairman, I would simply say that I appreciate this hearing, 

this being the fifth of five hearings over the years, bringing together all of the committees of jurisdiction to take a detailed look 

at the Service. It is particularly timely now under the incoming 

new leadership of the Service, and I believe that the questions teed 

up by Chairman Grassley will be joined with others that I have relative to some internal priorities and expenditures, but we will get 

into that with questions of the Commissioner. 

4 

So that would be the end of any opening comments I would 

make, Mr. Chairman. Thank you. 

Representative HOUGHTON. Senator Sununu. 

OPENING STATEMENT OF HON. JOHN E. SUNUNU, U.S. 

SENATOR FROM NEW HAMPSHIRE 

Senator SUNUNU. I thank you, Mr. Chairman. And welcome, 

Commissioner. I would simply underscore two points that were 

made by Senator Grassley in his opening remarks. First, with respect to technology. I would be very interested to hear more about 

the opportunities that are being created through the electronic filing process. I know the growth has been strong and consistent, 

maybe not what you would like to see, but I think there is tremendous potential there. 

And I would be interested to hear what opportunities you see to 

further improve the rate of acceptance of electronic filing. And also, 

of course, the use of the Internet to deal with customers, to answer 

questions, to distribute information. I think both of these systems 

and technical systems create an opportunity not just to improve the 

cost structure and to lower the costs of delivering service of the 

IRS, but also to improve quality, because there are some factors of 

reliability and consistency that can be provided through these electronic means. 

Second, with regard to the balance of taxpayer rights with the 

need to have a strong, motivated effective collection system, I know 

that you are proposing, or the administration has proposed, some 

modifications to some of the ten rules dealing with the discipline 

of IRS employees. 

And I believe the goal there is and should be to strike a balance, 

to make sure that employees are treated fairly and justly, that you 

have a system that can be consistently applied, but also a system 

that will provide for a good motivation. We have 100,000 employees 

that are dedicated and committed to the work that they do. We obviously want to ensure that they are behaving properly with respect to taxpayer rights, that they are disciplined when they violate the rules, but we also want to make sure that those rules are 

rooted in common sense and that the punishments associated with 

them are appropriate. 

So I look forward to hearing about those changes and the way 

that you believe that they might strengthen the morale and enable 

employees to be even more effective at the work that they do in 

serving the taxpayers, but also ensuring that we collect the revenue that is owed to the United States. 

Welcome, and thank you, Mr. Chairman. 

Representative HOUGHTON. Thank you, Senator. Mrs. Blackburn. 

OPENING STATEMENT OF HON. MARSHA BLACKBURN, U.S. 

REPRESENTATIVE FROM TENNESSEE 

Representative BLACKBURN. Thank you, Mr. Chairman. I appreciate the opportunity to serve with you all on this committee today. 

And to Commissioner Everson, I look forward to having the opportunity to hear what you have to say. I am the freshman in this 

group. I am new to this body this year and new to the Government 

Reform Committee which I am representing today. 

5 

Mr. EVERSON. We should get along fine, since I am a freshman, 

too. 

Representative BLACKBURN. Well, that is true. And I will assure 

you I have read through your testimony, and I look forward to 

hearing what you have to say, specifically pointing toward the burden reduction and reducing the burden of costs on our citizens who 

are working to come into compliance and meet the rules and regulations and the pattern that is set forth by the IRS. Also, looking 

at the reduction of paperwork and reducing that burden, not only 

on our citizens but on your employees, and on the changes that 

that will make in the work environment that you have for your employees. 

I think that also looking at technology and how that is progressing; the cost, and then the true savings and efficiencies that 

should and could be realized and must be realized in a timely manner. 

I thank you all for your time today, Mr. Chairman. Thank you 

for allowing me to serve. 

Representative HOUGHTON. Thank you very much. 

Now I would like to call on Mr. Portman who has had so much 

to do with the Restructuring and Reform Act. 

OPENING STATEMENT OF HON. ROB PORTMAN, U.S. 

REPRESENTATIVE FROM OHIO 

Representative PORTMAN. Thank you, Mr. Chairman. 

I want to thank you for putting together this joint review today. 

I want to thank Senator Grassley for coming over. This is a busy 

week for him. And he was on the IRS Commission with me. Bob 

Kerrey and I chaired that Commission, but Senator Grassley was 

a valuable and constructive member of that panel. 

Senator Sununu actually took a great interest in this when he 

was in the House, and now he has a bigger megaphone. He will 

also be, I think, a key player in trying to be sure that the reforms 

that we put in place back in 1998 are actually properly implemented and that we can make even more progress. 

I am very pleased that we have had these joint reviews. I think 

they are helpful. The panel may look a little sparse up here today. 

I don’t think there are any appropriators who are here yet. But to 

my colleagues from the Ways and Means Committee, Finance Committee, who are here, and Governmental Affairs in the Senate, and 

the Government Reform Committee, I am delighted you are here. 

And you have to remember that a lot of staff work goes into this, 

both leading up to the hearing, which I think is very helpful working with your staff, Mr. Commissioner, and also the aftermath of 

these hearings is also significant staff work, including by the Joint 

Tax Committee. 

And so I think these reviews are very helpful and focus us on not 

only the particular issues that you are going to deal with day to 

day, but on the big picture. After all, the goal of the joint review 

and really the Restructuring Act, was to change the general direction of the IRS. I think again we have made a lot of progress, but 

we have a ways to go. 

Representative HOUGHTON. Thank you very much. 

Mr. Tierney. 

6 

OPENING STATEMENT OF HON. JOHN F. TIERNEY, U.S. 

REPRESENTATIVE FROM MASSACHUSETTS 

Representative TIERNEY. Well, thank you, Mr. Chairman. I too 

will be brief. I thank you for conducting this hearing this morning 

and for the ability to participate in it. 

Mr. Everson, I simply will adopt the comments of my other colleagues and add to it that I hope to hear from you a little bit about 

the targeting or the allocation of resources towards auditing and 

collection to make sure that we are, in fact, going where the money 

is or hasn’t been paid, actually, and make sure that we do that in 

a fair and equitable manner, and also maybe some comments about 

the morale of the people that work with the Internal Revenue Service and how they are being treated and how we can expect them 

to be treated in the future. 

But in addition to these comments and the others of my colleagues, I think we would like to hear from you now. So I would 

will yield back to the Chair. 

Representative HOUGHTON. Thanks so much. Senator Bennett 

has just arrived. Senator Bennett, would you like to make an opening statement? 

OPENING STATEMENT OF HON. ROBERT F. BENNETT, U.S. 

SENATOR FROM UTAH 

Senator BENNETT. Only that I am here to learn and I am grateful 

to you for allowing Members of the other body to come over here 

where all of the work is done. 

Representative HOUGHTON. Well, thank you very much. 

Okay. Mr. Lewis. 

Representative LEWIS of Kentucky. No. 

Representative HOUGHTON. All right. Good. Well, now what we 

are going to do is call on the Commissioner. Commissioner, you are 

on. 

STATEMENT OF MARK W. EVERSON, COMMISSIONER, 

INTERNAL REVENUE SERVICE 

Mr. EVERSON. Mr. Chairman and Members of the joint review, 

thank you for this opportunity to testify. It is true that I have only 

been Commissioner a relatively short time, but I would like to put 

this into perspective. I am sorry that Senator Baucus is not here, 

because at my confirmation hearing he observed that of the five 

New Yorkers who previously served as Commissioner, one, Justin 

Winkle, served just 14 days. Mr. Chairman, I am pleased to report 

this is my 15th day on the job, and I am still here. 

As I testified at my confirmation hearing and more recently before the House Appropriations Subcommittee and the Ways and 

Means Oversight Subcommittee, I expect to focus on three areas 

during my tenure as Commissioner: 

One, I will reinforce and build upon the reorganization begun by 

Commissioner Rossetti to improve customer service. 

Two, I will continue to drive the information technology modernization program. Its success is critical to establishing a more efficient and effective IRS and one which is more accessible to taxpayers. 

7 

Three, I will strengthen the integrity of our Nation’s tax system 

through enhanced enforcement activity. 

Let me expand on each of these themes. The reorganization of 

the Service based on customer segments is working. These reforms 

are sound and need not be revisited. To change now would be disruptive. In fact, I recently received a memo from the American Institute of Certified Public Accountants, asking that I not engage in 

any significant reworking of the structure as it, quote, would only 

unnecessarily confuse the taxpayers and practitioners who have 

begun to get comfortable with the new IRS. 

I agree. Indeed, I give the IRS good marks for its improvements 

in key service areas. Progress has been achieved in many areas 

such as telephone service and electronic tax administration. For example, taxpayers were met with 19.4 million busy signals in 1999. 

This filing season the number dropped to less than 250,000. 

Call abandons also fell over the same period from 8.4 million to 

1.1 million. And level of service increased from 51 to 83 percent. 

E-file has also shown impressive gains. A little more than 29 million taxpayers E-filed in 1999. Almost 52 million did this year. And 

compared to last year, E-file grew by over 12 percent, and filing 

from home computers by almost 27 percent. The service is doing a 

better job. 

But of course much remains to be done. For example, we must 

improve our accuracy rates in responding to taxpayer questions. 

Let me now turn to the second theme: information technology 

modernization. As compared to the gains in service, the results are 

mixed. As the members of the joint review are well aware, business 

systems modernization had a number of false starts. Nevertheless, 

there are a number of important accomplishments to date. The IRS 

has deployed the customer communications project that better 

routes taxpayer phone calls, and helped the Service cope with millions of additional phone calls resulting from last year’s tax rebate. 

We also expect 15 million users this fiscal year of the Internetbased Where is My Refund Application. And in the next few weeks, 

taxpayers, practitioners, and financial institutions will be able to 

apply for an employee identification number on line. 

While these programs are important, the centerpiece of the modernization effort is the replacement of the decades-old master files 

that begins this summer. In the next few months, we are scheduled 

to move 6 million 1040–EZ filers to a modern, reliable database 

called the Customer Account Data Engine, or CADE. CADE’s benefits to taxpayers are clear, such as faster refunds and daily posting 

of transactions and updating of accounts. 

The modernization effort is a major challenge. As the GAO noted 

in its January assessment, modernization remains a high-risk area. 

It stated, quote, the scope and complexity of the program are growing. The challenge for the IRS is to make sure that the pace of systems acquisitions projects does not exceed the agency’s ability to 

manage them effectively. 

Given this assessment, with which I agree, and the important 

juncture we have reached with the first important deliverable for 

CADE, I have decided to have an outside group of experts take an 

independent look at the program and report back to me by the end 

8 

of this summer. I haven’t yet identified who will conduct this study, 

but I expect to do so in the next few weeks. 

I want to stress that no work will stop while this review is underway. But this is a good time to assess progress, project risk, and 

decide whether any mid-course corrections are needed. 

Before leaving IT, I want to point out that while the IRS spends nearly $2 billion each year for information technology, the modernization program itself makes up less than one quarter of that 

total. 

Through the careful examination of our base IT activities, the remaining 1.6 billion not devoted to modernization per se, I believe 

we can both increase productivity and deliver meaningful service 

improvements to taxpayers. I will challenge the organization to do 

exactly this, and to act with a sense of urgency. 

Our third area of focus is enforcement. It is as simple as this. 

People should pay what they owe. In an important recognition of 

the need to do more in enforcement, the President’s budget requests a real increase in resources targeted towards enforcement, 

new money to expand enforcement efforts with a sharper focus on 

high-income, high-risk taxpayers and businesses. I believe this can 

and must be done without compromising taxpayer rights. The IRS 

has already launched a number of new enforcement initiatives, 

such as the Offshore Voluntary Compliance Initiative and identifying tax scams and schemes promoters in a limited issue-focused 

examination. I will be looking at each of these initiatives to see 

where we can do more. 

One thing is already clear to me. The IRS must bring the same 

focus and energy to improving enforcement’s business processes as 

we are to improving the service side of the IRS. It is unacceptable 

that a corporate audit takes 5 years on average from the date of 

filing to complete, and 2 years is too long just to get ready to 

present a criminal case to the Department of Justice. 

In order to clarify reporting relationships in the Service and to 

support these three themes—reinforcement of the reorganization to 

improve service to taxpayers, continuation of modernization efforts, 

and strengthening of enforcement—later this week I will name a 

new Deputy Commissioner for Services and Enforcement, and a 

Deputy Commissioner for Operations Support. 

The Deputy Commissioner for Services and Enforcement will supervise the four business units’ criminal investigations and the Office of Professional Responsibility. 

The Deputy Commissioner for Operations Support will supervise 

the CFO, CIO, the chief human capital officer, agency-wide shared 

services, and the Service’s IR and physical security operations. 

There are two advantages to be gained from this approach. The 

Deputy Commissioner for Services and Enforcement will continue 

to drive for better service and be able to focus on prioritization of 

multiple enforcement initiatives and reduce unnecessary delays in 

enforcement processes while continuing to respect taxpayer rights. 

The Deputy Commissioner for operations support will own the 

modernization program and drive productivity across the organization in order to improve service to taxpayers. 

Mr. Chairman, as we approach the fifth anniversary of the enactment of this landmark legislation, the transformation of the IRS is 

9 

still very much a work in progress and one that will require a great 

deal of effort if we are able to realize the full potential of RRA 98. 

I am committed, as are the men and women of the IRS, to seeing 

this through to a successful conclusion. I would be happy to answer 

your questions. 

[The statement of Mr. Everson follows:] 

PREPARED TESTIMONY OF MARK W. EVERSON COMMISSIONER, INTERNAL REVENUE

INTRODUCTION AND SUMMARY

Mr. Chairman and distinguished Members of the Joint Review, thank you for this 

opportunity to provide an update of the IRS’ progress in meeting the mandates set 

forth by the IRS Restructuring and Reform Act of 1998 (RRA 98). 

I want to express my appreciation for your continued support of the IRS’ efforts 

to carry out both the spirit and letter of RRA 98. As I begin my tenure as IRS Commissioner, I look forward to a productive relationship with you. I will certainly seek 

your counsel as to how we can improve both the management and processes that 

guide systems modernization and the critical services we provide to America’s taxpayers. 

Although I have been officially on the job as Commissioner for two weeks, I have 

some initial views about where the Agency stands today and what it must do in the 

future to succeed. 

We are rapidly approaching the fifth anniversary of the enactment of this landmark legislation. But we are nowhere near realizing the full benefits of RRA 98. 

The modernization of the IRS is still very much a work in progress—and one that 

will require a great deal of hard work if we’re to continue that progress. 

In its January 2003 Performance and Accountability Report on the IRS, the GAO 

acknowledged that the IRS made progress laying the foundation for a modern agency that can respond to taxpayer needs in a more timely, accurate and cost efficient 

manner. However, the GAO also warned that the ‘‘IRS must successfully manage several 

significant challenges that threaten continued modernization. Challenges include reversing the decline in compliance and collection programs, managing the deployment of several large business systems and implementing new performance measures and management processes.’’ 

The IRS has yet to provide the level of service that taxpayers, Congress and the 

IRS agree is necessary; however, progress was made this filing season, particularly 

in electronic tax administration. Electronic filing, while still short of the 80% RRA 

98 goal, showed impressive gains. The IRS cracked the 51 million individual taxpayer mark, thanks in part to the new, innovative Free File program which attracted 2.7 million e-filers. Filing from home computers rose by 27%. IRS web site 

hits increased by another 25 percent. Telephone service also improved, with assistor 

level of service up 20% over the previous filing season. 

The GAO also cited the collection of unpaid taxes as a major management challenge, and ‘‘because of the potential revenue losses and threat to voluntary compliance this is also a high-risk area.’’ It is no secret that the IRS poached from enforcement to improve customer service and we are paying the price today with unacceptable enforcement levels that erode taxpayer confidence, and corporate audits that 

can take on average 5 years to complete. We must dig ourselves out of a very deep 

ditch. 

As we work to improve taxpayer confidence in the fairness of our tax administration system, we must continue to respect taxpayer rights and work to improve the 

administration of RRA 98’s taxpayer rights provisions. The IRS made progress on 

the Innocent Spouse program where centralization of receipts and better administration reduced case backlogs and processing time. Other programs, such as Offers 

in Compromise, are far more difficult to administer. 

Business Systems Modernization (BSM) also presents many challenges. On the 

plus side, the IRS addressed a number of high-risk areas previously identified by 

GAO. First, it established the infrastructure systems on which future applications 

will run. Second, it began to deliver applications with tangible benefits to taxpayers, 

such as the ‘‘Where’s My Refund’’ Internet-based service. Third, progress was made 

in establishing the modernization management controls needed to effectively acquire 

and implement information technology systems. 

However, we are entering a critical phase of BSM and the program remains at 

high risk for two reasons. First, the program’s scope and complexity continue to 

grow. Second IRS’ modernization management capacity is still maturing. 

10 

Mr. Chairman, I believe the IRS is making progress implementing the letter and 

spirit of RRA 98, particularly on the customer service side. But we are certainly not 

out of the woods. There is still an enormous amount of work ahead to complete the 

job of modernization. 

To meet these challenges and fully realize the benefits of the RRA 98, we must 

focus on three key areas. 

One, we must continue the reorganization begun by Commissioner Rossotti to improve customer service. We must stay the course. Employees and managers at all 

levels of the organization must fully embrace and be engaged in the changes he 

launched. 

Two, we must continue the information technology modernization program. Its 

success is critical to establishing a more efficient and effective IRS. 

Three, we must strengthen the integrity of our Nation’s tax system through enhanced enforcement activities. The IRS must deter those who might be inclined to 

evade their legal tax obligations and appropriately pursue those who actually do. 

I want to be clear that enforcement will be a principal responsibility of the IRS and 

we must bring a laser like focus to it. 

Let me now describe in greater detail the progress IRS has made since the 2002 

Joint Review hearing and the challenges that remain in the key areas of customer 

service, burden reduction, enforcement, taxpayer rights and business systems modernization. I also want to comment on the proposed modifications to RRA 98 contained in the President’s FY 2004 budget. 

IMPROVED CUSTOMER SERVICE

Mr. Chairman, I am pleased to report that service to taxpayers continues to improve. As demonstrated by the 2003 filing season results, key customer service indicators, such as e-filing and telephone assistor level of service went up. However, 

there is still a gap between the service the IRS delivers to taxpayers and what they 

expect and deserve. Clearly, the IRS has not met RRA 98’s mandates if almost 20 

percent of callers are not getting the correct answer to their tax law questions. As 

GAO recommended, the IRS has taken steps to improve management of the customer service functions, including improved performance measures, more program 

evaluation and the establishment of explicit goals. 

I want to stress that top quality customer service also serves to improve voluntary 

compliance. In fact, the entire modernization program is premised in part on the 

principle that helping taxpayers to understand and meet their obligations under the 

law will improve compliance and result in fewer and less costly enforcement actions. 

Electronic Tax Administration (ETA) 

The President’s Management Agenda states that ‘‘E-government initiatives will 

make it simpler for citizens to receive high quality service from the federal government, while reducing the cost of delivering those services.’’ Electronic tax administration is an excellent example of this approach. E-file’s benefits are clear and compelling. Taxpayers and the IRS find it more convenient and economical and less 

time consuming to do business electronically rather than sending paper through the 

mail. Moreover, the government saves money, but the real benefits are conveyed to 

the taxpayer. They include reduced preparation time, faster refunds, accuracy of returns and acknowledgment of return receipt. 

Indeed, the American Customer Satisfaction Index shows a very high satisfaction 

rate among electronic filers. For 2002, it was 78 points (out of 100), compared with 

a mark of 53 for individual paper tax filers. 

In 2002, more than 46.7 million taxpayers (36%) filed electronically—a 16.4% rise 

over the previous year. This filing season, all individual e-file is up by 12.4% and 

e-filing online has grown by 27%. It is projected that when all is said and done for 

this filing season that e-filing will constitute approximately 41% of individual returns filed. Part of the recent surge can be attributed to the Free File program, 

which clearly has been a success story. 

As of April 18, Free File Alliance members have processed and transmitted more 

than 2.7 million tax returns. This represents approximately 22% of the total 9.2 million online e-filed returns. I do recognize some concerns about pop-up ads and we 

will work with the Alliance to address them. 

The following key 2003 filing season e-file statistics through May 2, 2003 provide 

greater detail about individual e-file components and programs. 

• Over 36 million taxpayers have e-filed their tax returns through an IRS-authorized Electronic Return Originator (ERO), a 10.4% increase over the same period last 

year. 

• More than 11.7 million taxpayers have filed their tax returns on-line via their 

home computer through a third party transmitter. Online filing is running 26.8 perVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 E:\HR\OC\C115A.XXX C115A
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cent ahead of last year and exceeds by 2.5 million the 2002 total volume of 9.4 million. • Over 32 million individual taxpayers have chosen to use the Personal Identification Numbers (PINS) in lieu of a written statement when e-filing on-line. • Over 4 million taxpayers have filed their returns over the telephone using the 

TeleFile system. • Over 42 million taxpayers have chosen direct deposit of their federal tax refund, 

an 11% increase from the year before. • Over 22 million taxpayers have chosen to file both their federal and state tax 

returns simultaneously in a single electronic transmission, up 16% from last year’s 

16.2 million. 

The popularity of e-file and its continued growth can be attributed to both its 

value to taxpayers and efforts to make it simpler, more attractive and available to 

more taxpayers. Since its modest beginnings as a pilot in 1986, more options were 

added each year, ranging from payment by credit card, direct deposit of refunds, 

self-select PINs, more forms and the joint filing of federal and state returns. 

In addition, a group of employees within the IRS identify regulatory and administrative impediments to electronic filing and then systematically work to remove 

those impediments through changes to regulations, forms, etc. 

For the 2003 filing season, new options, in addition to Free File were offered. This 

year, taxpayers were able to electronically file seven new forms related to their Individual Income Tax Returns. They also had several options for checking on the status 

of a refund, including the aforementioned ‘‘Where’s My Refund?’’ service. Taxpayers 

can get the information they need quickly, efficiently and safely. For FY 2003, we 

expect 15 million uses of ‘‘Where’s My Refund?’’ 

The IRS web site at www.irs.gov also continues to be extremely popular with taxpayers. For the week ending March 15, 2003, it was listed as Number 2 in the Lycos 

Top 50 searches. In FY 2002, it posted 3.11 billion hits with more than 437 million 

forms and publications downloaded. For FY 2003 through April 25, there were 2.55 

billion web site hits, up 25.59% over the same period last year. 

A strong ETA program may be even more important for reducing burden for businesses than for individual taxpayers. In addition to their annual income tax returns, 

businesses also have to file various employment tax returns and information returns. Businesses also make many payments to the federal government, such as 

withholding and unemployment taxes. In fact, payments are a business’s most frequent transaction with the IRS. 

We want to convert all of these transactions to fast, accurate, paper-free electronic 

methods. And the IRS is making progress on a number of fronts. During FY 2002, over 3.2 million taxpayers made $1.5 trillion in electronic tax 

payments through the Electronic Federal Tax Payment System (EFTPS), which now 

includes an online option. For 2003, IRS expects more than 4 million taxpayers to 

pay their taxes using the EFTPS System. 

In FY 2002, the IRS also received more than 2.5 million 941 e-file program returns (Employer’s Quarterly Federal Tax Return) and 855,000 returns for 941 

TeleFile and On-Line Filing Programs. In CY 2002, over 320,000 businesses used 

the 940 e-file Program (Employers Annual Federal Unemployment Tax Return), and 

more than 24,000 partnerships chose 1065 e-file (U.S. Return of Partnership Income) in FY 2002. 

In 2003, the IRS plans to better serve business’s electronic tax administration 

needs. For example, tax professionals are able to file employment taxes for business 

clients for the first time as part of a new Employment Tax e-filing System. The IRS 

also expects that coming e-file upgrades will continue to reduce the paperwork burden on small businesses. The enhanced e-file system is part of an ongoing effort to 

reduce small business burden and barriers to electronic filing. This e-file option will 

replace outdated technology that was a burden to both businesses and the IRS. Key 

benefits of the new system include: 

• More flexible filing—Forms 941 and 940 can be filed in a single transmission; 

• Faster acknowledgements—Transmissions are now processed upon receipt 

and acknowledgments are returned in near real-time; and 

• Integrated payment options—Eligible filers may submit a required payment 

along with their return, subject to limitations imposed by the Federal Tax Deposit Rules. 

Businesses will also soon be able to apply for an employer identification number 

(EIN) by using the IRS’s new on-line EIN Application at irs.gov. When a business 

applies, its EIN will display on the SS–4 for printing and record keeping and each 

applicant will receive their formal validation letter. 

Mr. Chairman, to build practitioner interest, the IRS will offer later this year a 

suite of electronic services, such as disclosure authorization, transcript delivery and 

12 

account resolution, to tax practitioners who file a certain number of returns electronically. 

E-Services are web-based products for third parties to use over the Internet. Third 

parties include electronic return originators, software developers, transmitters, reporting agents, service providers, tax practitioners, payers, and states. There are 

two releases related to e-Services. • Release 1 includes Registration, Preparer Tax Identification Number (PTIN) 

Application and Interactive Taxpayer Identification Number (TIN) Matching. 

(Scheduled to be released the last week of June 2003.) • Release 2 includes e-file Application, Disclosure Authorization, Electronic Account Resolution, Transcript Delivery System and Bulk TIN Matching. Disclosure 

Authorization, Electronic Account Resolution and Transcript Delivery System are 

incentives available for authorized e-file providers who e-filed 100 or more individual returns. (Scheduled to be released in late August 2003.) 

Telephone assistance 

The IRS continues to provide various services through its toll-free telephone lines 

and service is improving. Through April 26, 2003 approximately 83.1 % of taxpayers 

who wanted to talk to a customer service representative got through, compared to 

69.7% percent last year. The IRS set a goal of 72% for FY 2003. 

The IRS is better identifying taxpayers’ needs through tax law screening and then 

getting them to the right person to answer their question. This process has reduced 

the abandoned rate from 15.3% to 7.5%. In addition, the transfer rate was reduced 

from 22.1% to 17.2%. These two indicators illustrate that a higher percentage of taxpayers are reaching the right Customer Service Representative (CSR) without being 

transferred and/or having to call back while waiting to speak to a CSR. 

Once connected, taxpayers must get prompt, accurate and courteous answers to 

their account and tax questions. The telephone correct response rates for tax law 

and tax account questions are about even with last year—82.5% and 87.7% respectively—as compared to 83.4% and 89.4% over the same period last year. 

Taxpayer assistance centers 

Taxpayers needing face-to-face help solving individual or business tax problems 

can get it every business day at every IRS Taxpayer Assistance Center (TAC). For 

the fiscal period beginning October 01, 2002 through April 26, 2003, the IRS served 

5.92 million taxpayers at all TACs. For the 2003 filing season beginning January 

01, 2003 through April 26, 2003 we served over 4.48 million taxpayers in all TACs. 

The customer satisfaction rate is 88% satisfied and 7% dissatisfied, which is on target for the FY 2003 performance plan. 

Individual taxpayers with incomes of $35,000 or less can also receive free income 

tax return preparation and e-file help at TACs. The IRS extends this courtesy return preparation service to all taxpayers qualifying for the Earned Income Tax 

Credit, without placing the government in competition with private industry. All of 

these returns are e-filed. 

Free tax preparation and e-file are also available in many communities through 

the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly 

(TCE) programs. To better serve low-income taxpayers, the IRS’s Stakeholder Partnership, Education and Communication (SPEC) organization is establishing extensive partnerships with external groups such as local governments, non-profit organizations, private for-profit businesses, and others to create community coalitions. The 

IRS is also focusing its limited resources on providing technical expertise and training while encouraging the community partners to supply resources such as volunteers, space and computer equipment. 

The IRS wants to make its partners as self-sufficient as possible and to identify 

those organizations that could make available needed resources. This new approach 

allows the IRS to expand access to low-income taxpayers, provide greater free tax 

return preparation and filing, and sustain these services over time. 

BURDEN REDUCTION

Mr. Chairman, our goal is to create the least amount of burden for taxpayers to 

meet their responsibilities under the tax law. That is a guiding principle for the 

IRS’s Office of Taxpayer Burden Reduction, which is the lead organization for our 

efforts in this critical area. I think we have made some progress, but more remains 

to be done. 

Since last year’s hearing, the IRS made progress on a number of fronts. For example, by raising the threshold for separately reporting interest and dividend income, 

an estimated 15 million taxpayers no longer have to file a Schedule B. In addition, 

because of our Industry Issue Resolution Program, family day care providers no 

13 

longer have to keep detailed records and receipts of food purchased for use in their 

businesses. They may now choose instead to use a standardized rate to claim the 

deduction for meals provided to children in their care. These small businesses will 

save an estimated 10 million hours a year. 

In addition, over 2.7 million taxpayers enjoyed the benefits of the innovative Free 

File initiative discussed previously in my testimony. Businesses are also finding 

that they can unburden themselves of even more paper and perform more of their 

reporting and payment transactions on line. Soon, they will even be able to apply 

for an Employer Identification Number by going to www.irs.gov. The IRS is also 

simplifying forms and notices to make them clearer and more easily understood. 

And the agency is tackling the major redesign of those schedules and forms with 

a huge impact on individual and business taxpayers, such as Schedule K–1 and 

Form 941. 

Mr. Chairman, for many taxpayers, particularly business taxpayers, burden takes 

the classic form of time and money—the time and expense it takes to resolve an 

issue or problem that may affect one business or even, an entire industry. Ideally, 

we want to shift from addressing taxpayer problems well after returns are filed to 

addressing them as early as possible in the process, and in fact preventing problems 

wherever possible. To this end, the IRS created a number of programs in its operating and functional divisions to address issue management and problem resolution. 

The Industry Issue Resolution (IIR) program began more than two years ago as 

an initiative under the Large and Mid-Size Business (LMSB) Operating Division’s 

Issue Management Strategy. The IIR program provides guidance on frequently disputed or burdensome business tax issues. Benefits of the program include reduced 

costs and burden, and eliminating uncertainty regarding proper tax treatment, for 

both taxpayers and the IRS. The IRS estimates that it has provided millions of 

hours in taxpayer burden reduction. 

The pilot program was evaluated and determined to be successful. In 2002, Notice 

2002–20 was issued to announce the decision to make IIR a permanent program, 

expand the program to include SB/SE business issues, establish burden reduction 

as an issue criterion and invite issue submissions. For 2002, 38 issues were submitted from businesses, tax practitioners and associations and seven were accepted 

for the IIR program. 

Fast Track Mediation (FTM) evolved from the Modernization/Re-Engineering 

process. It is designed to help SB/SE taxpayers resolve disputes resulting from examinations and collection (offer in compromise, trust fund recovery penalty, and certain collection due process) actions. FTM reduces taxpayer burden by resolving disputes in a fair and impartial manner, as well as on a timely basis. Disputes will 

be resolved within 30 to 40 days compared to several months through the regular 

appeals process. 

FTM began as a pilot program in June 2000, in four cities. Based on the success 

of the pilot, on June 1, 2002, FTM was rolled out nationwide. A revenue procedure 

on FTM is being finalized by Chief Counsel and Treasury to expand this program. 

Publication 3605, Fast Track Mediation–A Process for Prompt Resolution of Tax 

Issues, lists cases excluded from the program. 

The LMSB Fast Track Settlement (FTS) Program has reduced taxpayer burden 

in important ways. A recent survey of taxpayers who completed the process asked 

them to identify what they expected to gain from the Fast Track process. The three 

top expectations (in order of number of responses) were: (1) quicker resolution of 

their cases, (2) lower non-tax costs, and (3) reduction in staffing demands. When 

asked if their expectations had been substantially met, the average agreement rate 

was 4.21 on a five-point scale where five is ‘‘strongly agree.’’ 

The IRS estimates that the overall case resolution cycle time is reduced by approximately 920 days for cases participating in the Fast Track process. A revenue 

procedure on FTS is being finalized by Chief Counsel and Treasury to expand this 

program. 

The LMSB Division is implementing a new streamlined examination process 

called the Limited Issue Focused Examination, or LIFE. This initiative will involve 

a formal agreement, a Memorandum of Understanding (MOU), between the IRS and 

taxpayer served by LMSB to govern key aspects of the examination. The MOU will 

contain dollar-limit thresholds, established on a case-by-case basis, below which the 

IRS will agree not to raise issues and the taxpayer will agree not to file claims. Our 

goal is to create an atmosphere where the examination process is less difficult, less 

time-consuming, less expensive and less contentious for all involved. 

Clearly, the IRS has made some progress, but clearly too, reducing unnecessary 

taxpayer burden in all its many shapes and forms is an enormous challenge, especially when seen within the context of an extremely complex and ever changing Tax 

Code. 

14 

Indeed, even as the IRS seeks to cut lines, simplify or eliminate forms altogether, 

and reduce the number of taxpayers having to file forms and schedules, it often 

must add lines to other tax forms to reflect new changes in the Tax Code that may 

benefit millions of taxpayers. For example, the IRS added three lines to the Form 

1040 for tax year 2002 to accommodate statutory tax law changes relating to retirement, deductions for educators’ supplies, and tuition and fees. 

Frequent changes to the tax code and tax law complexity are perhaps the greatest 

hurdles to overcome as the IRS works to reduce unnecessary taxpayer burden. 

There is even anecdotal evidence that tax law complexity may be a cause of noncompliance, and even non-filing. Confounded and confused by the complexity, some 

taxpayers just give up. Moreover, the IRS estimates the cost to taxpayers for complying with the Code to exceed $80 billion—8 times the cost of the IRS budget. 

In a speech delivered in March 2003 to the Federal Bar Association, Assistant 

Treasury Secretary for Tax Policy, Pam Olson, pointed to the fundamental problem 

that we as tax administrators and a nation of taxpayers face: 

A key way that companies have raised productivity is by simplifying. 

Take every process down to its constituent parts, and cut out the inefficiencies, the points of friction, the drags that prevent the most streamlined operation and the standardization of transactions. Instead of simplifying to increase productivity in tax compliance and administration, we keep adding 

complexity—more rules, more limitations, more terms, more conditions, 

more qualifiers, more provisos, more exceptions. The result is that our system gets slower and slower and more inefficient. We burn more fuel, and 

emit ever more heat and smoke, and yet with all that burning, there’s less 

and less light to show for it. 

That is a fair and correct assessment of our present situation. Our myriad efforts 

to reduce unnecessary taxpayer burden are producing tangible benefits to taxpayers, 

but we must still address tax law complexity in a meaningful way. If we fail to, we 

will have failed in our mission to reduce taxpayer burden. Most importantly, we will 

have failed America’s taxpayers. 

ENFORCEMENT

Mr. Chairman, the IRS is committed to ensuring everyone pays his or her fair 

share, including those who have the resources to move money offshore or engage 

in abusive schemes or shelters. We must focus our efforts on achieving greater corporate accountability and ensure that high-end taxpayers fulfill their responsibilities. Honest taxpayers should not bear the burden of others who skirt their responsibility. It’s as simple as this. Taxpayers should pay what they owe. 

However, the poaching of enforcement personnel to bolster customer service contributed to a steady and disturbing decline in enforcement. As I stated in my introduction, the GAO identified the collection of unpaid taxes as a major and growing 

management challenge as reflected in the ‘‘large and pervasive declines in IRS’s 

compliance and collection programs.’’ Moreover, ‘‘because of the potential revenue 

loss and the threat to voluntary compliance this is also a high-risk area.’’ 

Although there have been improvements in some enforcement numbers; they are 

modest and spotty across the broad spectrum of enforcement activities. It is unacceptable that a corporate audit still takes on average 5 years to complete. The Service must examine its enforcement priorities and reduce the cycle time in its enforcement processes, albeit without compromising taxpayer rights. We must bring the 

same commitment and focus to improving and administering our enforcement programs as the IRS has in improving customer service. 

The IRS is now working to identify and refocus its resources on the biggest areas 

of risk to the tax system. Toward the end of FY 2002, the IRS began realigning its 

resources to concentrate on key areas of non-compliance with the tax law, primarily 

among higher-income taxpayers and businesses. These include: 

• The promotion of abusive tax schemes. 

• The misuse of devices such as offshore accounts to hide or improperly reduce income. 

• The use of abusive tax avoidance transactions. 

• The underreporting of income by higher-income individuals. 

• Non-filing by higher-income individuals. 

• Earned Income Tax Credit program. 

• The National Research Program. 

Indeed, the principal focus of the President’s proposed FY 2004 budget is 

strengthening enforcement in these and related areas. We are most encouraged by 

the new money requested to help us address these difficult issues. 

15 

The IRS Small Business/Self-Employed (SB/SE) Division is leading the new civil 

enforcement effort on issues affecting individuals and businesses. However, enforcement efforts will continue in other parts of the agency, such as the abusive tax 

avoidance transaction initiative in the Large and Mid-Sized Business (LMSB) Division. IRS Criminal Investigation also continues its investigative efforts regarding 

abusive schemes and promoters. 

Key to the fight against abusive tax scams and schemes is better identifying their 

promoters; we must go the source and cut off the supply. In April 2002, SB/SE established a Lead Development Center (LDC) with the following purposes: • To centralize the receipt and development of leads on promoters of abusive 

tax schemes; • To authorize and monitor on a national level abusive tax promoter investigations (also called 6700 investigations) assigned to the field; and • To promote and effect the coordination of parallel investigations with IRS 

Criminal Investigation. 

Because of the LDC, the IRS has a better handle on the universe of the problem. 

The current receipt of new leads is averaging approximately 82 per month. As of 

May 2, 2003, 372 civil promoter investigations are being worked in the field, and 

491 are being evaluated for further action. The leads can also be broken down into 

promoter brackets or ‘‘buckets,’’ with domestic trusts, offshore transactions and frivolous constitutional arguments being the largest. 

Since October 2000, the IRS has also issued a series of summonses to a variety 

of financial and commercial businesses to obtain information on U.S. residents who 

held credit, debit, or other payment cards issued by offshore banks. 

And in January 2003, the IRS launched an initiative aimed at bringing taxpayers 

who used ‘‘offshore’’ payment cards or other offshore financial arrangements to hide 

their income back into compliance with tax law. The Offshore Voluntary Compliance 

Initiative led to more than 1,200 people stepping forward to participate. A partial 

analysis of some of the cases has already identified more than $50 million in uncollected taxes and 80 new offshore promoters. 

Mr. Chairman, critical to the agency’s efforts are new expedited procedures developed with the Justice Department to obtain timely injunctions. In the past, many 

of the scams and schemes continued to operate even when the IRS had identified 

them as being abusive. However, with these new procedures in place, the agency 

and its partners at the Justice Department are in a better position to shut these 

scams down before they can do any more harm. 

As of May 2, 2003, the IRS had 27 promoter injunctions granted, 6 promoter injunctions pending in District Court and 24 pending at the Department of Justice, 

372 civil promoter investigations in the field, and 464 ongoing criminal investigations of promoters of various tax schemes. 

The IRS also emphasized abusive shelters and transactions. The Office of Tax 

Shelter Analysis (OTSA) provides centralized data collection and analysis on all aspects of the tax shelter program, including information required to be disclosed by 

regulation, developed by field agents and obtained during the course of our disclosure and settlement initiatives. 

LMSB currently has 89 promoters under investigation; 245 summonses have been 

issued to obtain relevant information from promoters (including investor lists), of 

which 77 have been referred to the Justice Department for enforcement. IRS has 

obtained investor lists from 25 promoters covering multiple transactions. DOJ on behalf of the IRS has filed summons enforcement actions against four promoters to 

obtain information to which the IRS is entitled. 

When a transaction is determined to be abusive, IRS and Treasury publish legal 

guidance as early as possible. This process is designed to deter subsequent promotion and investment in abusive transactions and to facilitate identification of investors and promoters. It also ensures consistent treatment of such transactions by 

IRS agents in the field. The IRS and Treasury have identified 25 abusive transactions through formal guidance. 

The IRS Disclosure Initiative also brought many taxpayers into compliance and 

provided leads on promoters and emerging abusive transactions. Conducted from 

December 2001 to April 2002, it resulted in 1,664 disclosures from 1,206 taxpayers. 

Taxpayers have disclosed transactions in which they claimed deductions or losses 

amounting to billions of dollars. The IRS is analyzing the new transactions to determine whether they are abusive and warrant published guidance or other administrative response. 

Reduce inappropriate payments in the EITC Program 

The EITC program benefits millions of low-income workers. It lifts nearly 4 million people, especially single mothers, out of poverty each year. However, the curVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 E:\HR\OC\C115A.XXX C115A
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rent error rate for the EITC program is too high. In 1999, between 27 and 32 percent of EITC claims—or between $8.5 billion and $9.9 billion—were paid in error. 

Again this January, the GAO included the EITC as one of two dozen ‘‘high-risk’’ 

areas across the federal government. The GAO stated, ‘‘The IRS has to balance its 

efforts to combat non-compliance with its efforts to help ensure that qualified persons claim the credit.’’ I fully agree with GAO’s assessment. 

Some have also claimed that the audit rate for the EITC is disproportionately 

high. However, a better comparison would be to other benefits programs which 

verify a significantly higher percentage of claimants for eligibility. 

The FY 2004 Budget requests an additional $100 million to begin a new strategy 

for improving the EITC program. Mr. Chairman, the Administration’s EITC proposal became an issue during my confirmation process. I want to stress that in the 

coming weeks, I intend to closely review the proposed program. I pledge to work 

with all interested parties to ensure that any new controls put in place do not unnecessarily discourage participation in this important program. 

Use of private sector contractors for collection of taxes due 

There is a significant and growing backlog of cases involving individual taxpayers 

who are aware of their tax liabilities but are not paying them. In this regard, the 

budget contains an important legislative proposal that would authorize the IRS to 

contract with private-sector collection agencies—or PCAs—to supplement current 

tax collection efforts for a targeted category of debt. I would like to emphasize that 

this proposal is totally distinct from competitive sourcing and will not result in the 

loss of a single job at the IRS. While federal employees could do this work, as you 

know, appropriated resources are scarce. And I would like to point out that for 8 

out of the last 10 fiscal years, the IRS has actually received less than its full budget 

request. The proposed use of PCAs is a realistic approach. As the National Taxpayer 

Advocate states, ‘‘PCAs appear a limited but reasonable option.’’ 

For the purposes of this initiative, the Treasury Department and the IRS identified over $13 billion in individual tax debt designated as currently ‘‘non-collectible.’’ 

The cases the IRS would refer to PCAs are those where the taxpayer would likely 

pay the outstanding tax liability if contacted by telephone. These include situations 

where a taxpayer filed a return indicating an amount of tax due but did not also 

send in payment for that full amount. These cases also would include situations 

where the taxpayer has made three or more voluntary payments of tax that was 

assessed by the IRS. 

The IRS would not refer to PCAs cases for which there is any indication that enforcement action would be required to collect the tax liabilities. The IRS will avoid 

referring cases that would require IRS expertise or the exercise of discretion. 

I want to stress in the strongest possible terms that PCAs would be prohibited 

from threatening or intimidating taxpayers. Indeed, the PCAs would be governed by 

all of the same rules by which IRS employees are held accountable. The taxpayer 

protections woven throughout this proposal have also been thoroughly reviewed by 

the National Taxpayer Advocate who will be testifying this afternoon. 

From my previous perch as Deputy Director for Management at OMB, I am also 

acutely sensitive to the need for proper supervision of outside contractors. I want 

to assure the Subcommittee that PCAs and PCA employees will receive close supervision by the IRS to insure compliance with taxpayer protections and applicable 

policies and procedures. The National Taxpayer Advocate will continue to be involved in this process. 

Mr. Chairman, I want to make one final point. The President’s initiative builds 

on a record of success at both the state and federal level. PCAs are common across 

more than 40 states, including those represented on the Subcommittee. We will 

work to take the best from these different approaches and we will also benefit from 

their lessons learned. 

In the federal arena, I would like to point out that PCAs are being successfully 

used by both the Financial Management Service within the Treasury Department 

and the Department of Education. Under the Debt Collection Improvement Act of 

1996, nontax debts of a certain age owed to federal agencies, such as defaulted 

loans, must be referred to FMS. The collection of the debt is the responsibility of 

PCAs and this system is working very well. In addition, I have confirmed with the 

Deputy Secretary of Education that the Department’s experience with PCAs is also 

very positive. 

National Research Program 

Mr. Chairman, also key to successfully executing an enforcement program is better data. The IRS failed to detect new areas of non-compliance in part because of 

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ment Program. (TCMP was last conducted in 1988.) The agency designed and is implementing a National Research Program that will obtain the essential information 

with far less burden on the taxpayer. New scoring models are being developed using 

21st century techniques, with interim models already deployed. 

ADMINISTERING RRA 98’S TAXPAYER RIGHTS

Mr. Chairman, the IRS continues to work to administer more efficiently and effectively RRA 98’s 71 taxpayer rights provisions. We clearly made progress in the Innocent Spouse program where greater efficiencies have dramatically reduced case 

backlogs. However, the Offers in Compromise (OIC) Program and Collection Due 

Process have proved to be the two most difficult RRA 98 expanded taxpayer rights 

to administer. Nonetheless, we believe that we are now making real progress addressing these challenges. In addition, the proposed changes to RRA 98 contained 

in the President’s budget would go a long way to helping us ensure that these important programs work in the manner Congress intended. 

Innocent spouse 

The Innocent Spouse provisions implemented as part of RRA 98 were in response 

to concerns that the former law was not providing proper relief to innocent spouses. 

The new provision affords four types of relief: 

• Innocent Spouse Relief—IRC section 6015(b) 

• Separation of Liability—IRC section 6015(c) 

• Equitable Relief—IRC section 6015(f) 

• Equitable Relief for Community Property Issues—IRC section 66(c) 

Each category of relief has different requirements. IRS employees processing the 

claims initially had difficulty reaching a determination—whether to fully grant, partially grant, or fully deny the requested relief. To address these concerns, we developed training courses and a computer-based application that took employees 

through a series of questions to aid them in making an accurate determination. 

In addition, because of the legislation’s complexity, requisite administrative procedures and the enormous number of claims initially received, the IRS could not respond to the claimants in a timely manner. To be more accurate, timely, and consistent, a centralized site was established at the Cincinnati Campus to process the 

claims. As a result, inventory levels have steadily decreased from FY 2000 when 

they stood at over 40,000 to approximately 20,000 in FY 2002. 

Innocent spouse claims are determined to be ‘‘merit’’ or ‘‘non-merit.’’ A claim is 

determined to be non-merit if it does not meet the basic eligibility requirements, 

such as no return filed or the claim is not signed. To date, 35.5% of innocent spouse 

claims were determined to be non-merit. Of the merit claims, 29.3% were allowed; 

10.6% were partially allowed and 60.1% were disallowed. 

Offers in compromise 

Taxpayers who do not pay their full tax liability are subject to the IRS’ collection 

process. It begins when we send the taxpayer a bill demanding full payment. For 

those unable to pay, or when payment would create a hardship, we defer payment 

of their liability by placing the account in an ‘‘uncollectible’’ status. While these 

debts are classified as ‘‘uncollectible,’’ the debt is not written off until the statute 

of limitations expires. 

For taxpayers who are unwilling to pay, the IRS may take enforcement action, 

such as a lien, levy, or seizure of property. Taxpayers who are willing to pay may 

qualify for an installment agreement that allows for full payment to be made over 

time. The vast majority of accounts are resolved through one of these methods. 

Taxpayers who cannot afford to pay their full liability may be eligible for an offer 

in compromise. An offer in compromise is an agreement between a taxpayer and the 

IRS to settle or ‘‘compromise’’ the taxpayer’s tax liability for less than the full 

amount owed. Upon acceptance of an offer, the remainder of the debt is forgiven. 

Approximately one percent of accounts are resolved through an OIC. 

Section 7122 of the Internal Revenue Code gives the agency authority to settle 

tax debts through compromises. However, compromise authority was historically 

limited to cases where there was doubt about liability or whether the debt could be 

collected. Provisions in RRA 98 modified the OIC program so that the IRS could not 

reject an offer from a low-income taxpayer based solely on the amount offered. 

In July 2002, IRS issued final regulations adopting the temporary regulations of 

1999 with only minor changes. The final regulations established a third type of compromise—one that promotes effective tax administration. IRS can now accept the 

following types of compromises: 

• Doubt as to Liability—Doubt exists that the assessed tax is correct. 

18 

• Doubt as to Collectibility—Doubt exists that the taxpayer could ever pay the 

full amount of tax owed. 

• Effective Tax Administration—There is no doubt the tax is correct and no 

doubt that the amount owed could be collected, but an exceptional circumstance 

exists that allows the IRS to consider the taxpayer’s offer. To be eligible for a 

compromise on this basis, the taxpayer must demonstrate that collection of the 

tax would create an economic hardship or would be unfair and inequitable. 

However, the following major problems placed the OIC program at risk: • A large case inventory of about 125,000 receipts-per-year with a projected 10 

percent annual growth. 

• Processing time/delays. • High cost of the program relative to the number of taxpayers served. • Critics have also called into question the high rejection rate of offers. The National Taxpayer Advocate stated that the IRS ‘‘needs to better train its employees to make correct determinations of who is submitting a viable offer.’’ 

• External perceptions and opinions about the viability of processing offers in 

a centralized environment. Many practitioners prefer to deal with their local 

offer specialist rather than deal by telephone or correspondence with a centralized bulk processing operation. 

Case inventory levels and processing delays increased for a number of reasons. 

In a March 2002 report, GAO observed that the IRS was unable to keep pace with 

program changes even with increased staff: 

Program changes, some initiated by IRS and some mandated by the Restructuring Act, increased the demand for offers, the number of processing 

steps, and the number of staff hours needed to process a case. During the 

same period, staff hours charged to the OIC Program more than doubled, 

growing to 18 percent of total staff hours charged to all of IRS’s programs 

for collecting tax debts. Yet, the demand for offers exceeded staff’s capacity 

to process them. 

There are other reasons for the large case inventory. The proliferation of electronic media marketing by firms promising settlement of IRS taxes for ‘‘pennies on 

the dollar’’ give taxpayers unrealistic expectations about the OIC program. A large 

number of taxpayers also seek refuge in the program to circumvent imminent or ongoing collection action. Under current policy, the mere act of submitting a 

processable offer (without any supporting financial documentation) is sufficient to 

stay collection. 

Despite the fact that the latest revision (5–2001) of the Offer in Compromise package, Form 656, includes specific instructions to attach certain financial documentation when submitting an offer, we receive relatively few complete submissions. Furthermore, a large number of taxpayers lose interest when they realize that they 

must submit substantiation of their finances to enable the IRS to evaluate their offers. 

In this regard, we believe that the OIC program will benefit from some proposed 

legislative changes. In its FY 2004 Budget, the Administration offered legislative 

proposals that would: (1) address frivolous OIC filers by establishing a $5,000 penalty for a frivolous submission, and (2) remove the barriers to granting installment 

agreements for less than full payment. These legislative proposals can assist the 

IRS in reducing inappropriate OIC receipts and contribute to our overall goal of 

eliminating backlogs and meeting our processing time goals. 

The number of days to close an offer case also reached unacceptable levels, but 

we have made improvements in this area. In addition, OIC program staffing costs 

grew. On top of the sheer number of offers received, some program changes increased the complexity of the offer process, resulting in more processing steps and 

staff hours to process a case. Between FY 1997 and 2001, the number of direct collection field hours charged to the OIC program more than doubled. 

To address the growing workload issue, the IRS centralized the receipt and processing of offers into two locations—Brookhaven, New York and Memphis, Tennessee. It allowed for efficiencies of scale as well as the opportunity to better focus 

training efforts and standardize procedures. We project that about 70 percent of all 

offers can be worked to completion in the centralized sites. Only the most complex 

cases involving business taxpayers are assigned to local field offices. 

Other program enhancements enabled us to concentrate resources on those taxpayer accounts where the offer is the most appropriate collection method to resolve 

a longstanding liability. We accelerated the identification and resolution of inappropriate offers—those where the taxpayer has a clear ability to pay fully the liability, 

and/or submits an offer solely to delay the collection process. The more complex 

cases—those requiring assignment to field collection personnel—are now screened 

19 

much earlier in the process and transferred out to field specialists. We are also 

automating labor intensive procedures. 

These process changes improved productivity at the centralized sites and the field 

offices, with a corresponding positive impact on customer service. The inventory is 

becoming more current and the number of aged cases—those more than six months 

old—has decreased. The move toward centralization has allowed us to return a significant number of field employees to other collection priorities. 

While productivity gains have contributed to the declining inventory, we have also 

seen a significant increase in the number of cases that must be closed as ‘‘not 

processable’’ or ‘‘return.’’ We have begun an educational effort with taxpayers and 

tax practitioners to draw attention to the qualifications that appear in the OIC application package. The IRS Office of Performance Evaluation Research and Analysis 

will also conduct a study of offers that were closed (regardless of disposition), to 

identify areas for improvement. 

Processing time has declined from an average of 317 days during FY 2002 to an 

average of 272 days for the first 6 months of FY 2003. In addition, the average age 

of open inventory dropped from 265 days at the end of FY 2002 to 240 at the end 

of March 2003. This is due in part to the continuing maturation of the Centralized 

Offer in Compromise (COIC) sites. These numbers are still too high but we are 

heading in the right direction. 

Mr. Chairman, we continue to view the Offer in Compromise program as an effective tool to resolve tax liabilities for those taxpayers who qualify. While we have 

taken steps to reduce taxpayer burden and improve customer service through work 

process standardization and reducing the level of financial documentation required 

from taxpayers, we continue to seek the cooperation of tax practitioners and the 

general public to ensure that offers are submitted only in appropriate circumstances. 

Collection due process 

The collection due process (CDP) provisions require that taxpayers be given an 

opportunity to request a hearing with Appeals after the filing of a Notice of Federal 

Tax Lien and prior to proposed levy action. Some taxpayers use the hearing process 

to delay collection action by filing hearing requests that raise frivolous issues. 

There are approximately 17,500 CDP cases currently in inventory in Appeals. 

About 5% or 896 cases, involve frivolous issue taxpayers. The Area Appeals Office 

with the most cases has about 25% of non-filer/frivolous taxpayers. Sub-offices within that area have even more substantial percentages of taxpayers with frivolous 

claims. 

However, the actual number alone does not account for the amount of time it 

takes for such cases. Frivolous claims occupy a disproportionate share of time over 

claims from taxpayers having substantive issues. In addition, some of the representatives of these claims also file Section 1203 actions against IRS employees. These 

section 1203 actions are very rarely sustained but can be resource intensive to respond to. 

Time spent on these frivolous claims is time spent away from taxpayers who raise 

legitimate issues. Collection action is also suspended on these accounts while the 

case is pending in Appeals. The proposed legislative change which would permit the 

IRS to dismiss frivolous claims, would allow us to proceed with collection on these 

cases and enable Appeals to focus full efforts on taxpayers with legitimate claims. 

BUSINESS SYSTEMS MODERNIZATION

Critical to IRS’ success in meeting all of RRA 98’s goals is better managing our 

massive technology and Business Systems Modernization program. BSM has finally 

begun to deliver the first projects with tangible benefits to taxpayers, such as the 

new Internet Refund/Fact of Filing (IR/FoF) application that allowed them to check 

on the status of their return and refund 24 hours a day, 7 days a week. Of paramount importance, IRS implemented the first project on its new security system, 

which provides one standard for ensuring the security of all IRS data and systems. 

However, this is not the time for complacency; the stakes are too high. I want 

to bring a strong management focus and accountability to the BSM program to ensure its success. 

Chairman Houghton recently commented: ‘‘This year and next will be critical to 

determining whether the modernization effort will succeed. Many systems that have 

been under development for years—such as the new IRS database of tax records— 

are entering the final stages of development.’’ 

As previously noted, the GAO continues to characterize the BSM program as 

‘‘challenged’’ and at high risk for two reasons: 

20 

First, the scope and complexity of the program are growing. Specifically, 

the number of projects underway continues to expand and the tasks associated with those projects that are moving beyond design and into development are by their nature more complex and risky. Second, IRS’s modernization capacity is still maturing. 

Strategically, the most important objective over the next year is to increase the 

overall confidence in the modernization program by meeting most of the delivery 

goals: the initial CADE release; a new core accounting system; the first part of a 

new custodial accounting system; a new e-filing system for large business; and a 

number of electronic enhancements for third party providers. In other words, we 

must focus on meeting the commitments that we have in front of us for the next 

year. 

Once that confidence is restored, we will then be able to move ahead with the 

broader agenda, hopefully, with the increased funding level requested in the President’s FY 2004 budget and doing a better job of meeting cost and schedule targets. 

It is also critical that the entire IRS leadership team works together to ensure 

the modernization program’s success. The Business Systems Modernization Office, 

Modernization, Information Technology and Security Services (MITS) and the business units, must partner cohesively in planning, building and implementing modernized systems. As an organization, we must cooperate to reduce and eliminate internal impediments that could inhibit the success of the PRIME. I will also make 

sure that the PRIME contractor is clear on its commitments and my expectations 

for improvements in its track record to date. 

Mr. Chairman, I want to stress that modernization does not have a clear end 

point that we can call completion. At some point, modernization will no longer be 

a specialized, separately funded program. Rather, as new business processes and enabling information technology are deployed, systems modernization planning and 

implementation will become a routine IRS business practice. Indications that we 

have done most of the heavy lifting will be when: 

• The Master Files have been replaced by the Customer Accounts Data Engine 

(CADE) project; 

• New internal management systems have been deployed and all financial material weaknesses closed; 

• E-filing is pervasive for both individuals and businesses; 

• New customer service and collections capabilities are in place; and 

• Better systems are available to support compliance. 

The FY 2003 delivery plan will move the BSM Program into a wide spectrum of 

critical new areas: 

• Customer Account Data Engine (CADE) R1. In July 2003, CADE will begin 

processing single 1040EZ filers (both electronic and paper). Taxpayers covered 

under CADE will receive their refunds about 40% faster than under Master File 

processing, if they use direct deposit. More importantly, we will have taken the 

first of many steps to replace the 40–year old Master Files. 

• Custodial Accounting Project (CAP). We will continue development and testing of CAP Release 1 scheduled for deployment in the first quarter of FY 2004. 

CAP will create a repository for modernized Individual Master File data and 

will address documented financial material weaknesses. 

• Enterprise Architecture (EA) and Tax Administration Vision and Strategy 

(TAVS). TAVS focuses on creating a long-term vision of how the agency should 

work in the future. Delivery and acceptance of EA Release 2.0 was a significant 

achievement. We also conducted a planning effort called ‘‘TAVS Refresh’’ to 

identify gaps and outdated information in TAVS which we plan to address in 

FY 2003. 

• e-Services. e-Services sub-releases will provide: registration of electronic return originators, Taxpayer Identification Number (TIN) matching, initial partner relationship management capabilities, electronic account resolution, transcript delivery, secure e-mail, and bulk TIN matching. 

• Infrastructure (STIR and Infrastructure Shared Services [ISS]). This project 

provides the basic secure infrastructure necessary to support the modernization 

effort including e-Services R1, IR/FoF, Internet Employer Identification Number 

(EIN), and subsequent FY 2003 releases. 

• Integrated Tax Administration Business Solutions (ITABS). Projects to ensure we understand requirements and select COTS (commercial off-the-shelf) 

solutions that can effectively integrate business processes in IRS functions. 

• Internet EIN. This application will automate Employer Identification Number (EIN) requests over the Internet. Currently, the EIN request process is 

21 

cumbersome and people-intensive, often resulting in unacceptable delays for 

those starting new businesses. 

• Integrated Financial System (IFS). Although the first release of the new financial system will not go live until October 1, 2003 (therefore, an FY 2004 delivery project), it is likely to be our most work-intensive project during FY 2003. 

• Modernized e-file. The Modernized e-file project will be in pre-deployment 

testing for all of FY 2003, with initial deployment in early CY 2004, with Forms 

1120 and 990 e-file capabilities. 

I feel fortunate to have major deliverables in the coming months, rather than a 

year from now. This timetable affords me the opportunity to assess whether real 

progress is being made. 

MODIFICATIONS TO RRA 98

Mr. Chairman, in the FY 2004 budget submission, the Administration again proposed modifications to RRA 98. Last year, the House passed legislation that contained five of these proposals; the Senate did not act before adjourning. We commend the House for its actions and believe that these modifications preserve the intent of the Act while allowing us to administer it more efficiently and effectively. 

We urge the Congress to take similar action this year. 

There are six parts to the Administration’s proposed modifications. The first modifies infractions subject to Section 1203 of RRA 98 and permits a broader range of 

available penalties. Our ability to efficiently administer the tax code is currently 

hampered by a strong fear among our employees that they will be subject to unfounded 1203 allegations, and perhaps lose their jobs as a result. This proposal will 

reduce employee anxiety resulting from unduly harsh discipline or unfounded allegations, while still subjecting violations to appropriate sanctions that may include 

termination. 

The second part mentioned above adopts measures to curb the large number of 

frivolous submissions and filings that are made to impede or delay tax administration. 

The third, as is mentioned above, permits the IRS to enter into installment agreements with taxpayers that do not guarantee full payment of liability over the life 

of the agreement. It allows the IRS to enter agreements with taxpayers who desire 

to resolve their tax obligations but cannot make payments large enough to satisfy 

their entire liability and for whom an offer in compromise is not a viable alternative. 

The fourth allows the IRS to terminate installment agreements when taxpayers 

fail to make timely tax deposits and file tax returns on current liabilities. 

The fifth streamlines jurisdiction over collection due process cases in the Tax 

Court, thereby reducing the cycle time for certain collection due process cases. 

The sixth and last provision would eliminate the monetary threshold for IRS 

Chief Counsel reviews of offers in compromise. 

The Administration also has two proposals to improve IRS efficiency and performance from current resources. The first would modify the way that Financial Management Services (FMS) recovers its transaction fees for processing IRS levies by permitting FMS to retain a portion of the amount collected before transmitting the balance to the IRS, thereby reducing government transaction costs. The offset amount 

would be included as part of the 15-percent limit on levies against income and 

would also be credited against the taxpayer’s liability. 

The second proposal would encourage growth in electronic filing by extending 

from April 15 to April 30 the return filing and payment date for the filing of individual income tax returns, if the return is filed electronically and any balance due 

is paid electronically. 

All of the proposals discussed above, with the exception of the fourth concerning 

installment agreements, have been included in the Taxpayer Protection and IRS Accountability Act of 2003, which was reported by the Ways and Means Committee 

in April. We appreciate the Committee’s attention to these proposals. 

Let me mention two provisions that have Treasury support, but were raised too 

late to be considered in the Taxpayer Protection and IRS Accountability Act of 2003. 

The first is a proposal to modify the interest and penalty notification requirements such that the interest and penalty notification requirements would apply only 

to the first notice sent to the taxpayer. Subsequent notices would include a general 

description of how interest and penalties are computed, as well as a telephone number that taxpayers can call to obtain detailed account information. This proposal 

would appropriately balance the benefits of providing taxpayers with a full explanation of how any interest and penalties due were computed, with the burden and 

cost to the IRS of providing this information with each notice. 

22 

The second provision would permit the IRS to send a portion (up to 50 percent) 

of its notices by first class mail, instead of registered or certified mail, for a oneyear test period. This would allow the IRS to determine whether it could save 

money on its mailings while still assuring that taxpayers receive adequate notice. 

We would appreciate consideration of these proposals at some point during Congressional consideration of the Taxpayer Protection and IRS Accountability Act of 

2003. 

CONCLUSION

Mr. Chairman, in conclusion I believe that the IRS has made progress achieving 

the goals and intent of the Restructuring Act, but there is a lot more to do. One 

the service side, things are getting better, but much more must be accomplished. 

And it is not totally clear that modernization is reaching its promised results. We 

need and must vigorously pursue a renewed focus on enforcement but I expect the 

Service will make progress in all three key areas: customer service, enforcement and 

information technology. 

Representative HOUGHTON. Thank you very much. I just have 

one question. We have all been involved in the different series of 

organizations over the years. The first question I am always interested in is tell me about your people. 

In other words, you have had quite a few people recently leave 

the IRS. And how are your people? Are you going to be able to replace those people that have left? What are the quality of replacements? What are you doing about this? 

Mr. EVERSON. Mr. Chairman, I have been very impressed with 

the caliber of the leadership that I have met. The confirmation 

process was a relatively long one. I had an opportunity during that 

period to meet with and be briefed by the top two or three levels 

of leadership within the Service. In each in instance, I was tremendously impressed by the dedication they bring to the work that 

they undertake, and also by the desire to get on with the reorganization of the Service to finish the job that was begun by Commissioner Rossetti. 

That having been said, I do believe that what the RRA 98 

achieved, by the critical pay positions, was the ability of the Service to bring in outsiders to supplement these high-caliber career individuals. Critical pay is a good innovation and one on which I will 

rely. I will expect, for instance, when Deputy Commissioner 

Wenzel, who I will name to be the first Deputy Commissioner for 

Service and Support, retires later this year at the end of September—I am trying to negotiate a longer departure date but he 

is not buying it so far—we will go outside for that position. I expect 

that to happen, so we get a nice blending of the inside and the outside. But I am happy with the caliber of leadership. 

Representative HOUGHTON. Now, Senator Sununu. 

Senator SUNUNU. Thank you, Mr. Chairman. 

Commissioner, can you talk about the E-filing rate? Your testimony says that 41 percent of individuals filed electronically this 

year. It is obviously up quite a bit from last year. 

What is your performance metric for this benchmark and your 

performance goal over the next 2 to 5 years? What do you hope to 

get this level up to? And how do you propose to do it? 

Mr. EVERSON. The RRA 98 does state a statutory objective—at 

the end of the fifth filing system from now, that will be 2007, that 

the Service get to 80 percent. My understanding is that the goal 

was, I don’t want to say arbitrary, but it was very difficult at that 

23 

stage, 5 years ago, to project just how far you could or should take 

that. 

Some have asked whether that should be revisited. I think it is 

too early to consider whether that needs to be revisited. I certainly, 

as I look at the Service’s activities in this area, am pleased with 

what I have seen thus far. As you know, we added a Free File Initiative this year, that actually picked up 2.7, 2.8 million taxpayers. 

There is a little bit of hair on this, concerns on pop-ups that came 

up that some of your colleagues have raised questions about. 

We are going to look at efile, and try to make it an even better 

program. I honestly can’t tell you whether 80 percent is the right 

long-term number. My concern in this area is there are sectors of 

the taxpaying population, new-immigrant communities, others that 

are just coming into the system, it is probably unrealistic to think 

that we are going to capture 100 percent. 

Whether it should be 80 percent or 75 or 85 is a little too soon 

to tell. We are going to continue on this path, learn as we go, and 

reinforce it with better technology. 

Senator SUNUNU. Are there any specific technical barriers to improving that number, the 41 percent number, that you see? And, 

are there any particularly strong opportunities that you see that 

current initiatives may be able to exploit in the coming 1 to 2 

years? 

Mr. EVERSON. I am less concerned, frankly, Senator, on the individual taxpayer side than I am on the corporate side, which is obviously a much smaller group of taxpayers, but the opportunity of 

being able to pull in information electronically and then immediately have it available for analysis, that would be a very significant opportunity. 

As I understand it, when other countries, Canada and others 

have done this, they haven’t been entirely successful in some of 

these endeavors because of the complexity, unless it is done on a 

voluntary basis. So there are some tough issues here if you want 

to tap into the full realization of the efficiencies when you get to 

the more sophisticated taxpayers. 

Senator SUNUNU. Is there anything that Congress can do or 

should do to make it easier to increase the opportunity to bring 

more filers on electronically? 

Mr. EVERSON. I don’t know yet. I will be looking at that and 

come back to you, of course, if there are opportunities. 

Senator SUNUNU. In your opening testimony, did I hear you correctly? You said, I think, that there were 19 million busy signals 

during last year’s filing season, and that was reduced to 200,000 

this year? 

Mr. EVERSON. Well, thankfully that was in 1999. That is the impact of the reform efforts and to one of the first significant achievements of the modernization. People think of the modernization only 

as this revision of the master files. It has got many components. 

I have been down and visited Atlanta where the telephone operation is controlled. We really made a huge leap forward in routing 

calls, 1999 to this year. 

Senator SUNUNU. And the single biggest reason for that dramatic 

improvement was the call routing system? 

24 

Mr. EVERSON. I will tell you, it is the harnessing of that technology, that helps drive up the accuracy rate. If you go down to Atlanta and you see this, I really would recommend you do this if you 

get a chance, there is a whole scheme, a grid of where the experts 

are who can take the calls; then the call is routed to the right person at the right place, and—there is a sophisticated queuing system so that the person who knows about depreciation of home offices gets the call that deals with the subject. 

Senator SUNUNU. What about the total number of calls during 

that period? Has the total number of calls increased, or has it been 

steady, or has it decreased because more people are using technology? 

Mr. EVERSON. I don’t recall, Senator. I would have to check the 

data on all of that. I think in some areas you see more calls coming 

in. You get spikes, like the refunds that came in 2 years ago. People call a lot on where is my refund? Now we are addressing that 

through this new program. So there are peaks and valleys, depending on what is happening in the Code as well. 

Senator SUNUNU. I see that my time is expiring. But I did want 

to ask one more question about the 1203 violations. I mentioned it 

in my opening statement. Could you talk about the two proposed 

changes and what you hope the benefits of those changes to be? 

Mr. EVERSON. Yes. I think that your remarks and Senator Grassley’s remarks, among others, are exactly correct here. The Service 

has to have a balance in what it does. And if anything, 1203, set 

a very high standard; one I suggest that is a little too rigid because 

of the automatic termination in a number of areas. What has been 

suggested in the last year, and I concur, is there ought to be a little 

more discretion reserved to the Commissioner to make the appropriate disciplinary decision in certain situations, like an employee 

who is late filing a tax return, but in actual fact knew that they 

were due a refund. Should that person be automatically fired, 

which is the standard that is in the law right now, or should the 

Commissioner be able to have some discretion? 

I think that the Service would be very judicious with the use of 

that discretion. I would make that commitment to you. 

Senator SUNUNU. Thank you very much. Thank you, Mr. Chairman. 

Representative HOUGHTON. Mr. Pomeroy. 

Representative POMEROY. Mr. Commissioner, consultants can be 

extremely valuable in terms of trying to bring along the modernization of such an incredible complex system. On the other hand, consultants can turn into individual billing machines that drive you 

absolutely crazy with out-of-control consulting costs. I am especially concerned, in light of the efforts we make to get adequate 

funding for the Service to build its internal strong, professional, 

continuing capabilities, to see the kind of money we are spending 

with outsourcing. 

You mentioned today another new initiative, a new contract on 

taking a look at how the business modernization systems have 

come along. As I look at, over the last few years, back to 1999 

through 2002, it appears that we have spent about $760 million on 

outside consultants. And I am asking if this strikes you as high, 

and do you have, as the new leadership at IRS, a plan to get a hanVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\C115A.XXX C115A
25 

dle on those consulting costs, and to try to, whenever possible, 

build in-house capacity so that less reliance on consultants going 

forward might be obtained? 

Mr. EVERSON. I think that is a very important question, and one 

which I expect to address through the realignment of my office. 

With the appointment of a Deputy for Operations Support, that individual will own all of those entities, the CFO, the CIO, all of 

those entities within the Service that support the operations and 

that typically will generate those consulting contracts that you 

mentioned. 

I think that what has happened over the last 5 years was entirely appropriate, given the magnitude of the change that Charles 

Rossetti had to address coming off of RRA 98. He turned to outside 

consultants to help him build the entity. 

What has to happen now is that the senior and middle managers 

of the agency have to own it, and that will change the relationships 

with the vendors and the consultants. I expect that through the 

creation of this second deputy, we will get a lot more focus, we will 

get a lot more ability to drive the process. And, frankly, the individual I expect to name in that position is one of our most seasoned, knows the business processes the best, and I believe will be 

able to contain those costs, make sure that, if anything, we get a 

lot more value added out of those dollars. 

Representative POMEROY. I appreciate that answer. I do think 

this is something I am going to keep an eye on personally. I don’t 

dispute your comment that we have had to expend this money in 

light of the renovations we were making to the system, although, 

you know, three-quarters of a billion dollars is an awful lot of 

money to spend in this area. And I do think there can be a tendency for your consultants to be habit-forming, and consultants can 

be very good about finding the next project that has to be done by 

their firm. 

And so I think your fresh look at all of this is going to be very 

helpful. And I can just think of the frustration of, you know, permanent IRS staff, people that have devoted their lives to public 

service, accepted lower pay scales as a result seeing high-flying 25- 

year-old consultants come in and, you know, without a lot of background, devise new systems and this sort of thing. I am worried 

about what that might do in terms of internal morale. 

Mr. EVERSON. I am with you 100 percent. I am always disturbed 

when you turn to somebody and they say, I can’t give you that answer, I have to talk to someone outside of the organization. That 

is not the right model. We are going to make sure that our people 

are driving this vehicle. 

Representative POMEROY. That is an excellent answer. 

Finally, we have asked, we have expressed some concern to you 

about the EITC precertification process. It seems to be coming on 

very fast, without a lot of public input and review. 

Secretary Snow indicated last week that he was looking at 

precertification measures for other high-risk taxpayer areas, certainly including the more—the upper-end taxpayer with some of 

the more elaborate tax shelter schemes that have been used to inappropriately avoid taxation. 

26 

Are you considering—are you aware of this, that there is 

precertification being considered for groups other than the EITC 

group? 

Mr. EVERSON. I haven’t seen the specific remarks to which you 

refer. But, I would make two points. 

First, wherever possible, I know that the chief counsel’s office is 

very much trying to work to increase the level of published guidance that is out there, so that when people are looking at sophisticated issues they have a better road map to begin with. The start 

of compliance can be important educational efforts. 

On top of that, the Service, LMSB, has been moving toward negotiating at the beginning of these limited issue focused examinations what they are going to look at. That is a form of 

precertification, I would suggest, where you are looking at things 

up front and getting agreement on some of these areas. So I think 

that what you are suggesting is consistent with what we are trying 

to do. 

You mentioned the EITC. As you know, I am committed to taking a fresh look at that. I am glad you have raised it. I will be in 

Atlanta on Friday to spend the day going through some cases, including talking with some representatives of the Taxpayer Advocate’s Office, so that I understand all of the issues here. And as we 

develop our proposal, which we will put out for public comment in 

early June for a 30-day period of public comment, we are going to 

do everything we committed to do there. 

Representative POMEROY. Thank you. Thank you, Mr. Chairman. 

Representative HOUGHTON. Thank you. 

Senator Bennett. 

Senator BENNETT. Thank you very much, Mr. Chairman. And 

Mr. Everson, thank you for your willingness to serve. Welcome 

aboard. I hope you stay a whole lot longer than just 15 days. 

Mr. EVERSON. Thank you, sir. 

Senator BENNETT. I am impressed with the progress that has 

been made in the IRS. The incredible mess that your predecessor 

found when he went in there kind of defied logic, but also defied 

solutions. And the fact that he made all of the solutions and got 

as far as he did is an incredible testimony to his ability. And you 

have big shoes to fill. 

But I think from the things that have you said here this morning, you have an understanding of what needs to be done, and you 

are moving in the right direction to see to it that the momentum 

that was created continues here. 

Now, let me pursue two of my areas of interest, the first one having to do with cyber crime. As you have gone through this tremendous upheaval in the IRS of finally getting computers that work, 

after spending billions of dollars on computers that didn’t, have you 

addressed the question of hackers trying to get into the database 

either for identity theft or some other kind of criminal activity, 

stealing refunds, scrambling records, whatever? 

Is any of that activity going on? Do you find attacks at your database? And are you looking at whether or not your firewalls are adequate to deal with it? 

Mr. EVERSON. We do have a group, Senator, Mission Assurance 

that handles both the cyber elements of the Service’s operations as 

27 

well as the physical security. And there is an active program of 

monitoring those attempted intrusions. My understanding from my 

discussions with the leader of that organization is that we are comfortable that we are moving forward. 

Now, that having been said, there is a lot of vulnerability in this 

area, a lot more needs to be done. GAO and others have highlighted this as an area of vulnerability. So am I representing to you 

that all is as it should be? No. Am I representing to you that this 

is an area of priority? Yes, I can say that absolutely. 

I believe again, that by putting the CFO, the CIO, the shared 

services area where a lot of transaction processing takes place, the 

HR and this unit, right on the org chart, we have drawn Mission 

Assurance—that is cyber and physical security—putting that all together, I think we are going to be able to bring more, not less attention to this important issue. 

Senator BENNETT. I have stood in the room in the Pentagon 

where they monitor the attacks on the Defense Department computers in real-time, and it is kind of a surreal experience. You almost think you are in a movie, it is so weird. 

Does your CIO talk to the Defense Department CIO, and do they 

share experiences and share progress? Is there any cross-fertilization of experience, not just with the Defense Department, but with 

others in the Intelligence Community and the other parts of the 

government that are the targets of these kind of attacks? 

Mr. EVERSON. I know there are ongoing conversations that take 

place from the Treasury Department and outwards. I can’t tell you 

how regular those communications are. In my previous position as 

deputy director at OMB on the management side, I was a big believer in the sharing of—across government—of experiences and 

best practices. 

I will certainly encourage my people to communicate with other 

agencies. I will also look into this specifically to make sure that we 

are reaching out as much as we can. 

Senator BENNETT. One last question on an unrelated topic. As 

you go through this description of all of the streamlining that has 

occurred, do you have any sense of the financial impact on the 

economy as a whole, in the area of the cost of compliance with the 

IRS Code? 

We hear numbers that suggest that the mere process of preparing returns and complying with the Code is in the hundreds of 

billions of dollars every year. And that is one of the arguments in 

favor of revising the Code, moving towards a flat tax for individuals or some other form of dramatic simplification, because they 

are saying the kick for the economy, in terms of cutting down the 

costs of compliance would be greater than the amount of money 

that we are talking about in the President’s growth package by several times. 

Do you have any sense as to how much the cost of compliance 

has come down as these reforms that you have described to us here 

this morning have taken place, and any prospects as to how much 

more it might come down as you continue to be successful, or is 

that a number that people are really just pulling out of the air? 

Mr. EVERSON. I am skeptical about the number. I have seen an 

overall number somewhere around $80 billion that has been cited 

28 

from time to time as the cost of compliance. I am not sure adequate 

attention and the proper methodologies are always placed on developing each and every number that goes into that kind of a calculation. I do believe that there have been these interventions, if you 

will, where we made progress. It comes to the question of burden 

reduction. But those are isolated areas. 

At the same time, as you know, each time you add a new section 

of the Code, you add and you take away at the same time, so it 

is a complicated subject. I don’t think that I would argue that there 

has been significant change in that overall figure in recent years. 

What we have done is made isolated areas of progress through 

the call centers and other areas. 

Senator BENNETT. Thank you very much. 

Representative HOUGHTON. Thank you, Senator. Mr. Portman. 

Representative PORTMAN. Thank you, Mr. Chairman. And Commissioner Everson, welcome for the second time in this committee 

room, and to your first joint review. And we are delighted that you 

have lasted 2 weeks, and we look forward to you serving out your 

term. 

As you know, thanks to the Restructuring and Reform Act, we 

now have a term of office to encourage continuity. And you have 

gotten a good start. And your management expertise that you have 

developed over the years in the private sector and in the public sector, most recently as deputy of OMB, is exactly what we need. And 

this has been one of the consensus opinions coming out of the Commission’s work in 1996 and 1997, and then with the Restructuring 

and Reform Act, that the focus is not so much on tax policy but 

on administering one of the largest agencies in government, second 

really only to DOD in terms of size. With such an enormous responsibility, it is the single most important leadership characteristic. 

So we are delighted with your focus on management, and you 

have demonstrated today that you are going to be continually focused on that which is very important to us. 

You named three areas: customer service, technology modernization, and enhanced enforcement. I would just make a couple of 

comments. One is that we get a lot of good information from the 

Joint Committee on Taxation, from the taxpayer advocates, from 

the Government Accounting Office, and also from the Oversight 

Board. 

And I would encourage you to continue to work with those 

groups and pay heed to their concerns and their recommendations, 

because they have been at this a long time. And although they 

don’t always come out of the same place, they have a lot of good 

input. 

With regard to your second area of technology modernization, 

you did talk about the establishment of a new advisory group, to 

consult on the modernization program. I don’t think that is a bad 

idea. But for Mr. Pomeroy’s comments, I do think it is important 

that you talk to some of these other stakeholders as well as the private sector to be sure that there is buy-in into the group, so that 

its work and its recommendation to you have more credibility. 

And I do think there are a lot of people, including staff here on 

the oversight committees, that can help you with that because this 

29 

has been an ongoing concern. Really it was the start of the Commission itself, the technology concern, the $3 billion dollars that 

was mostly unaccounted for. 

With regard to customer service, I agree with you that reforms 

are sound. There is no need to change them. But that doesn’t mean 

that we don’t have to continue to work very hard at pushing those 

reforms. My view is as soon as you stop pushing them, the pendulum is going to swing back. 

I look at some of the data that we have got; 83 percent telephone 

service—now 83 percent of taxpayers are getting through to a customer rep. That was 69 percent as recently as last year. And the 

number was far lower back in 1997 and 1998 when we started. So 

we have seen, as you say, some improvement in some of the basic 

ways in which people interact with the Agency, the telephone being 

primary still, and now, with your Website and through electronic 

means. 

I will also say, though, that if we don’t keep pushing, we are not 

going to be able to even maintain the progress that we have. That 

is my strong view; 250,000 busy signals are still too many. So we 

still don’t have the acceptable levels of service we would like to see. 

With regard to your third one, enhanced enforcement, the goal 

that people should pay what they owe, is absolutely the right mission for the IRS. I do think that your focus on enforcement and collections is very appropriate right now for a couple of reasons. One, 

we obviously have some issues with regard to audit rates, although 

audit rates are up this year, I note, from last year. So we are moving in the right direction. But second is just the credibility of the 

tax system and those 85 percent of taxpayers who like to comply 

and want to comply on a voluntary basis. We need to be sure there 

is a sense that everybody else is doing it too. 

With regard to your new position as Deputy Commissioner for 

Services Enforcement, I’m glad that you are willing to take that 

task, at least at the outset. And for operations and really owning 

the modernization, I think it is a good reform. I know that you 

have consulted with your upper management and others with regard to that decision, and I commend you for it. I think to the extent we can find more accountability in those two areas, that will 

be very helpful. 

Overall, again, I just want to say that I think this process of having a joint review is very valuable. This is our fifth year, and under 

the statute, it expires this year, I would hope that we could, as a 

Congress, continue this process. 

Again, we don’t necessarily get all the members showing up here 

from the seven different committees that are involved with the IRS 

Oversight, but we do force our staffs to work together in ways they 

never did prior to 1998, and we also have, as I said, a good relationship with some of these other groups, the Joint Tax Committee, 

Taxpayer Advocate, GAO and the Oversight Board. And it is very 

important to bring everybody together at least once a year. So I 

would hope we could continue this process, and I would be happy 

to work with you and with the chairman and others to provide a 

legislative initiative to do that; or if that is not necessary, perhaps 

we could just have an agreement to continue the joint review. 

30 

The final comment is about the Oversight Board. You didn’t mention it in your testimony. The Oversight Board took a few years to 

get up and going, because the prior Administration really wasn’t all 

that enthusiastic about it. I continue to believe that the Oversight 

Board can play an extremely important role in providing you some 

counsel, expertise from the outside world, particularly on modernization, but also on change management, generally, and organizational management challenges you are facing. 

Second is it provides continuity, and by this staggered five-year 

terms on the Oversight Board, you have expertise you can draw on 

now from that Oversight Board that otherwise would not be there. 

And I know the previous chairman is going to testify this morning, 

and, you know, he has been through it all and has a lot of expertise 

and continuity to provide for it. 

Finally, there is accountability. We want to have a group out 

there that we could also look to from Congress and say, why aren’t 

things going as they could from a big picture perspective? So I hope 

you will utilize that Board, and I hope the Board will continue to 

be progressive in providing us direct information on what it thinks 

the right direction is on some of these tough issues we face. 

With that, Mr. Chairman, thank you for holding this hearing and 

for your continued personal interest in this issue. 

Mr. HOUGHTON. Thanks, Mr. Portman. 

Mr. Tierney. 

Mr. TIERNEY. Thank you, Mr. Chairman. Mr. Everson, you were 

kind enough to make some comments in your opening remarks 

about the points I raised earlier on. With respect to the EITC and 

the high rate of erroneous payments that you mentioned, can you 

tell me approximately what the amount would be if we corrected 

that situation, how much would be recaptured? 

Mr. EVERSON. It is hard to know until we go through a pilot 

project. What we are looking at doing is starting with some 45,000 

applications for precertification. Right now, EITC does have the 

highest error rate in government. It is an error rate of somewhere 

around 30 percent, which equates to almost $10 billion a year. If 

you contrast to that—— 

Mr. TIERNEY. $10 billion? 

Mr. EVERSON. $10 billion, yes. If you contrast that, something 

like the Food Stamp Program where there is a seven or eight percent error rate, you just have a very different performance level. 

The issue here—and we had a good discussion on this two weeks 

ago when we were talking about this and, again, last week, is that 

it is really a benefits program that is embedded in the tax code and 

embedded in the tax administration system of the IRS. We are a 

hundred percent committed to not deterring people from using that 

program, but we have got to have a balance here so we can bring 

the error rate down significantly. 

Mr. TIERNEY. Well, I know that you are hiring another 650 employees to work on that and asking for another hundred million 

dollars. 

Mr. EVERSON. That is correct. 

Mr. TIERNEY. So the question that I really want to ask, if I were 

to look at each of the other areas of interest, the tax shelter promotion, the abuse of trust in offshore accounts, the abuse of corVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\C115A.XXX C115A
31 

porate tax shelters, the underpaying by high-income individuals 

and the accumulation and failure to pay larger amounts of employment taxes by some employers, what is the approximate amount 

that we could expect to recapture if we had total enforcement in 

all those areas? 

Mr. EVERSON. I don’t have a dollar figure for you, sir. 

Mr. TIERNEY. If you give it to me in relation to the EITC, it 

would be substantially—— 

Mr. EVERSON. I think those relationships are at least as favorable as the EITC numbers would be, my recollection is you collect 

at a minimum three or four dollars for every dollar you spend. 

What we are doing in some of these other areas you mentioned, 

where we will be adding a couple thousand employees, we are 

building back the infrastructure—— 

Mr. TIERNEY. Building back some employees—— 

Mr. EVERSON. Yeah. What happened in this area is Commissioner Rossotti has very clearly documented, the Service has to 

poach from the enforcement side over a period of time as it built 

up the service side. So the first thing we are doing is adding some 

of the revenue agents and and officers who hadn’t been hired in recent years, and we are going to devote them to things like the taxshelter schemes, getting up the audit rates on the high-income people. There is some additional hiring in the terrorism area, because 

the criminal investigations people are working these areas, even 

within TEGE, the group that works with charities, because, as you 

know, there are vulnerabilities in terms of some of the—— 

Mr. TIERNEY. I think my point being, is there is at least as much, 

and I expect far more, to be recaptured in those areas collectively, 

and I’m glad to see you are putting resources there, not just on the 

EITC side. 

Mr. EVERSON. And I would say to you, sir, that I am committed 

to looking at not just what we are doing this year in the President’s 

Budget Request, but to look at the overall enforcement posture, 

and this is—it is the top line of the government. There is the issue 

of confidence of the taxpayer, willingness to comply voluntarily. We 

are going to get to—if we need more, we’ll come back for more. 

Mr. TIERNEY. I took Mr. Portman’s comments on, this is a voluntary system and the fact that it has to be, in all fairness—because as I hear far more people complaining about what they think 

of the abuses by tax shelters and by large taxpayers who are not 

paying than I do about people who worry about people avoiding the 

EITC payment. And so I wanted to make sure that we had the 

right focus on each of those. 

Let me just ask you briefly about the private collection agency 

concept. What studies have been done or what evidence do you 

have that hiring people or hiring on those firms and training those 

people with respect to all the requirements that we have for taxpayer protections and everything else is going to be, in fact, more 

efficient and more successful than just having employees of the Internal Revenue Service do that work? 

Mr. EVERSON. I don’t have any evidence that it will be more efficient than having employees. That is not the premise of the proposal. The proposal is based on the success of private collection 

agencies in 42 States around the country and on the success of the 

32 

private collection agencies at the Department of Education that collects student loans and the success at the Department of Treasury 

where all debts referred to the Financial Management Service are 

collected by private collection agencies. 

The issue here is to supplement IRS resources. Appropriated resources are limited. This is an additional tool that will help us get 

to some of these targeted simpler areas. We are convinced that in 

working with the Taxpayer Advocate that we can structure this 

with full taxpayer rights protections and that it can be done in a 

responsible way to help people clear up those outstanding debts. 

Mr. TIERNEY. And a net result of more money to the government 

than if we kept it in-house? 

Mr. EVERSON. Right now, unfortunately, sorry to say this, but there is $13 billion that is clearly due the government that is just 

not being pursued by us at all right now. These organizations 

would go after those monies and bring in a pretty good chunk of 

change. 

Mr. TIERNEY. And is it not being pursued because we don’t have 

the manpower? 

Mr. EVERSON. That is correct. 

Mr. TIERNEY. I don’t want to monopolize time, but it brings me 

back full cycle to the question, why not put up more manpower as 

opposed to go outside, and how do we know which is going to be 

more effective on that? 

Mr. EVERSON. We are going to look at all of it. We are bringing 

up some more manpower, but we are asking for this tool to get to 

this specific targeted area. 

Mr. TIERNEY. Thank you. 

Mr. EVERSON. Thank you. 

Mr. HOUGHTON. Thanks very much. 

Ms. Blackburn. 

Mrs. BLACKBURN. Thank you, Mr. Chairman, and thank you, 

Commissioner Everson, for your remarks. 

Mr. HOUGHTON. Do you want to put the mike on? 

Mrs. BLACKBURN. I’ve got it on. Let me just move a little closer 

to it. How is that? All righty. That is great. 

Continuing along that line of questioning, we had the opportunity to hear from Commissioner Rossotti in the Government Reform Committee, and it sounds like he has done a commendable job 

with moving mountains and moving everything into having a technology officer and being able to centralize some of your operations. 

With that said, over the past few years and looking at the business system’s modernization, why do you think the IRS has not 

been able to realize enough savings and efficiencies so that human 

capital could be moved to some of your high-priority areas, and 

what do you plan to do to address that? I mean, do you have any 

quick steps that you are going to move along that course? 

Mr. EVERSON. I guess there are two points. First, this is a huge 

endeavor, because you’ve got an awful lot of data here and unfortunately, it is not as simple as putting a new computer system in 

your 50 or 100 retail stores around the country, where you are just 

worried about future sales. You’ve got to be able to access this data 

that is in these old systems that go back four or five decades. So 

the new program will be able to provide new methodologies, but it 

33 

will link back into those old master files. This is a complex endeavor, given the complexity of the code and all of the different kinds 

of forms and different kinds of data that is collected. 

So this is a big challenge. What I think we can do here is get 

more business ownership of the process. A lot of what Charles did 

was very centralized, and it was necessarily so because of the magnitude of the change that he was attempting to effect, but we are 

now at a different stage where the organization has to own the 

change, and I’m going to be looking to the business managers to 

be more actively engaged in piloting these projects so that they 

own it, going back to Mr. Pomeroy’s point, and not the consultants. 

The Service has to own these changes. If we can get our arms 

wrapped around that concept, that will force the pacing and that 

will bring the savings that you are talking about. 

The second point is—goes back to the remark I made in my open- ing statement. We spend $1.6 billion a year in base IT activities 

that don’t have anything to do with modernization of the master 

files. We are looking at those areas. For example, I was in Cincinnati last week and saw some image-scanning technologies where 

you can scan in an application for an employee plan determination, 

and then instead of having to go find it someplace, you can be in 

Denver or in Newark and you can pull it up and read it. There are 

lots of things like this that the Service can tap into that is in that 

base funding. Hopefully we can free up some of it by getting more 

of the economies and efficiencies you are talking about. 

Mrs. BLACKBURN. In the Inspector General’s remarks that we 

will hear later, she mentions that Release 1 for the CADE system 

has experienced significant delays and significant cost overruns, 

and I think is about 20 months off schedule, if I’m correct there. 

And you have an outside contractor, PRIME, that is being paid for 

that delivery. Is that correct? And how long do you think that it 

is going to take to get that up, to get it operational, to be workable, 

and how much do you think it is going to end up costing? 

Mr. EVERSON. You are entirely correct in your understanding. 

This CADE project has been delayed several times, and the costs 

have escalated. The scheduled rollout of this first piece that I referred to, where we’ll have the 1040EZ filers, a simple application, 

will test this concept. It is a very real moment of truth for the modernization effort. 

Frankly, I am hopeful that this is happening so early on my 

watch, this August, so that we’ll be able to see, if we have we 

turned the corner, has the Service done a good job, has the PRIME 

done a good job? Commissioner Rossotti renegotiated the relationship with the PRIME as to the delivery of this one application, but 

we still don’t know a hundred percent yet. We’ll see this summer. 

I will ask for another view of CADE to make sure that if there is 

anything else out there along the lines that you are talking about, 

that we get on it now. 

Mrs. BLACKBURN. Okay. Thank you. 

Mr. Chairman, I have one other question. Do you mind? 

Mr. HOUGHTON. Go ahead, please. 

Mrs. BLACKBURN. Okay. Thank you. In talk about moving so 

many of the filers to the Internet and having them do the e-file and 

using your CADE system as your basis for moving those filers into 

34 

doing that, one of the things that I had a question about—I know 

the Tax Code is incredibly complex, and that going through all this 

testimony, you realize the complexity does hinder the compliance 

efforts many times. Now, you have about an 85 percent correct answer rate over the telephone. With those who are asking questions 

over your Website, what is your correct answer rate, and what kind 

of response are you getting from the filers as they are asking questions over the Internet? 

Mr. EVERSON. I’m sorry. I don’t have the data on that. I’ll have 

to get that back to you. 

Mrs. BLACKBURN. If you don’t mind, I would appreciate having 

that and knowing that. I think that as we are looking at moving 

millions of Americans to the e-file process, having a site that is easily navigated is incredibly important, and when you go to your site 

and you read through the list of forms and start looking for the 

form that you want to pull down, and then go over to your sidebar 

to look at where you can ask questions, I think that we need to 

look at that and think that through, so that we are certain that, 

hopefully, we have a greater accuracy rate over the Internet than 

we have had with our telephone. 

Mr. EVERSON. I agree with you, and we’ll follow up. 

Mrs. BLACKBURN. Thank you. 

Mr. HOUGHTON. All right. 

Mr. POMEROY. Mr. Chairman. 

Mr. HOUGHTON. Yes. 

Mr. POMEROY. Senator Max Baucus as ranking member of the 

Finance Committee would normally have participated in this hearing. He has informed me that he is not available in light of the circumstances regarding the Senate at the moment, and he has submitted questions for the Commissioner. I would like to make these 

questions part of the record and, as well, get copies to the Commissioner for answering. 

Mr. HOUGHTON. Thank you. Certainly. Well now, thank you very 

much, Commissioner. Great to have you with us. We’ll be in touch 

with you. 

[The information follows in the submissions for the record section] 

Mr. HOUGHTON. And now, I would like to ask the next panel to 

come on. Ms. Nina Olson, National Taxpayer Advocate; Ms. Pamela 

Gardiner, Acting Treasury Inspector General for Tax Administration; the Honorable Larry Levitan, Member of the IRS Oversight 

Board; and Mr. James White, Director of Tax Issues, U.S. general 

Accounting Office. 

All right. Well, thank you very much for being with us. 

Ms. Olson. 

STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER 

ADVOCATE, INTERNAL REVENUE SERVICE 

Ms. OLSON. Mr. Chairman, thank you for inviting me here today. 

Five years after its enactment, RRA 98 still ranks as one of the 

most important pieces of legislation protecting taxpayers within the 

federal tax system. The act enhanced the independence of the Office of the Taxpayer Advocate. It established funding for low-income taxpayer clinics on the premise that access to tax education 

35 

and representation for these taxpayers would improve the fairness 

of the tax system for all taxpayers. 

Before the 98 Act, it seemed that the IRS expected taxpayers to 

be noncompliant. Today the Service’s culture is beginning to 

change. It is acknowledging that the vast majority of taxpayers are 

compliant or sincerely trying to resolve their tax problems. With 

that acknowledgment as a starting point, the Service can vigorously seek out those taxpayers who are deliberately not in compliance with their tax obligations. 

An effective tax administration system requires a balance between enforcement, taxpayer rights and customer service. These 

aspects of tax administration are not mutually exclusive, although 

they may generate tension at different times. Even when the taxpayer is out of compliance with his or her tax obligations, he or she 

should be treated courteously and professionally. Compliance personnel should place themselves in the taxpayer’s shoes and acknowledge how powerful and intimidating the IRS can be. This acknowledgment does not diminish the Service’s tax assessment or 

collection authority. In fact, for many taxpayers, this acknowledgment is the basis for true customer service, for it creates an opportunity for the taxpayer to enter into the system in compliance. 

IRS employee performance is now evaluated by balanced measures—employee satisfaction, customer satisfaction and business results—a balance that may be tested by the Service’s increased 

focus on compliance activities. We can learn something about how 

to achieve that balance by looking at two RRA 98 programs which 

to date have eluded success: the offer in compromise and collection 

due process hearings. 

The IRS projects 130,000 offers in fiscal year 2003 and will use 

about 1,200 full-time equivalents on this program. Despite these resources, both taxpayers and practitioners are dissatisfied with the 

program. The source of the dissatisfaction may be twofold. First, 

the IRS is still not successfully implementing the policy statement 

on offers that it adopted in 1992. Second, taxpayers and practitioners often have unrealistic expectations of what they can achieve 

through an offer. The offer program is not an amnesty. It is a viable collection alternative. 

To achieve success in the offer program, the IRS need not start 

all over again. Indeed, it needs to review all of its current processes, guidance, training and quality measures as well as data 

tracking, looking at it from the point of view of the taxpayer’s 

needs and expectations as well as IRS processing requirements. 

We need to encourage our employees to use national and local allowances as Congress directed in 1998, as true guidelines, not rigid 

requirements. We need to let our employees talk with the taxpayer, 

and we need to know exactly what kind of collections we achieve 

on accounts after offers are rejected. 

The Collection Due Process procedure is another important program, one of the act’s most significant improvements in collection 

procedures. An independent appeals officer review of these cases 

provides a much-needed safety valve in the collection process, as 

does the Court’s jurisdiction over collection matters. 

To date, the IRS has approached CDP as an inventory problem, 

not as a vitally important taxpayer protection. It has structured 

36 

1Pub. L. No. 105–206 (1998). 

the program to deal with the influx of cases from taxpayers raising 

frivolous arguments or from taxpayers who have ignored the IRS 

until we issued a notice. Currently, the IRS collection function 

holds on to the case after the CDP hearing request is filed for up 

to 90 days before sending the case to appeals. Taxpayers must continue to work with the revenue officer and, later, his or her manager. Taxpayers who have been working with the IRS all along are 

disadvantaged by this procedure. They have nothing more to negotiate with collections; yet, their appeals hearing is delayed. This is 

a pre-98 approach to program design. 

A post-98 customer oriented approach to this program would recognize that CDP is important and essential work for an independent appeals function and that appeals jurisdiction over the 

case is paramount. Thus, immediately upon the receipt of a CDP 

hearing request, the case should be transferred to appeals and a 

hearing date set. If the taxpayer is not yet attempting to resolve 

the case with the collection function, the case can be temporarily 

transferred back to collection to see if it can be resolved before the 

hearing. This procedure is similar to the treatment of cases docketed in the United States Tax Court. 

These two programs demonstrate how far the IRS has come since 

1998, and yet how much further it must go to achieve true customer service. IRS employees are among the most dedicated and 

professional in the federal government today, and I have no doubt 

that with the proper tools, training and support, they will rise to 

the challenge of providing excellent customer service, respecting 

and protecting taxpayer rights and enforcing the Federal tax laws. 

Thank you for the opportunity to address you today. 

Mr. HOUGHTON. Thank you very much, Ms. Olson. 

[The statement of Ms. Olson follows:] 

PREPARED STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, INTERNAL REVENUE SERVICE

Mr. Chairman, a little over five years ago I testified before the House Ways and 

Means Subcommittee on Oversight and the Senate Finance Committee, in my capacity as a tax attorney representing low- and middle-income taxpayers, on the subject 

of taxpayer rights and the provisions in bills that were later enacted as the Internal 

Revenue Service Restructuring and Reform Act of 1998 (RRA 98).1 For many of us 

who worked in the area of tax controversy, this landmark legislation was a formal 

acknowledgement of what we had known for a long time—that the IRS had become 

inflexible and moribund in its approach to many taxpayer problems, and that creative problem-solving was not only not encouraged, but actively discouraged within 

the IRS. Despite the accusatory nature of many of the proceedings surrounding RRA 

98, we felt that positive changes would emerge. In my testimony today, I will discuss how far the IRS has come since RRA 98 and what challenges we still must 

meet. 

IRS REORGANIZATION AND MODERNIZATION

Looking at where we are today, I do not think that our hopes for improvement 

were misplaced. However, we did expect change to occur faster than it could. There 

is a danger, today, in wanting to revert to the old way of doing things, when we 

have not given the new approach half of a chance. From my vantage point of having 

worked most of my professional life outside of the IRS, in an adversarial position, 

and having served the past two years inside the IRS in a central position, I can honestly say that we have only begun to change the organization’s culture. True change 

takes time, and there will be (and should be) many alterations in course as unforeseen issues arise. 

37 

2See S. Rep. No. 105–174, Sec. 1001. 3 A recent Taxpayer Advocate Service case involving a non-filer is instructive. The taxpayer 

wanted to file six years of returns, for four of which the IRS had filed substitute-for-returns 

(SFRs) under IRC § 6020(b). Three returns had to be filed with the campus that processes corrective SFR returns for individual taxpayers; one had to be filed in a different campus that processes corrective SFR returns for sole proprietor taxpayers; and two, for which no SFR returns 

were prepared, had to be filed at an entirely different campus. The returns were shipped back 

and forth between campuses several times, leading to processing delays and a delay in making 

payment arrangements for the overall liability. 4See Fiscal Year 2002 National Taxpayer Advocate Annual Report to Congress, at 7, for a 

more detailed discussion of ‘‘Navigating the IRS.’’ 

The concept of organizing the Internal Revenue Service around categories of taxpayers is fundamentally sound. Individual, small business, large and midsize business, and tax-exempt and governmental entity taxpayers each have distinct characteristics and tax issues. Yet there are many areas of tax administration in which 

two or more of these taxpayer categories share common issues. Moreover, from one 

year to the next, many taxpayers migrate from one taxpayer category into another, 

and then back again. The IRS reorganization has not yet proved itself adept at handling these ‘‘cross-functional’’ issues. 

The IRS reorganization has been justified on the ground that under the previous 

national-regional-district structure, continuity and accountability were impeded.2

Taxpayer accounts moved from one district to another when a taxpayer relocated, 

and taxpayers were often required to deal with both a local district office and a service center in order to resolve one issue, or several related issues. 

It is hard to see how things have improved since 1998 in this regard. A self-employed taxpayer may have to deal with one ‘‘campus’’ (formerly known as a service 

center) regarding his income tax return, another campus regarding his federal employment tax return, and either another campus or a local IRS office regarding his 

offer-in-compromise.3 While this division of work may be perfectly justified from the 

point of view of IRS work processes under a business case analysis, the ‘‘business 

case’’ is meaningless for the taxpayer who is trying to find his way through the IRS 

to speak to someone about his account.4

As programs move to campuses and are addressed from a nation-wide perspective, 

the IRS will face a significant challenge in becoming flexible enough to understand 

and take into consideration regional and local circumstances. The Service’s leadership recognizes that we are also beginning to see stove-pipes of command re-emerging, albeit now along the lines of type of taxpayer rather than geography. The Service is taking steps to address this problem in several areas. For example, the Service 

is now developing a Service-wide examination plan to ensure that the separate operating divisions are (i) operating with a coordinated strategy where that is appropriate and (ii) not duplicating efforts or working at cross-purposes. Similarly, the 

Service is coordinating a national as well as divisional non-filer strategy. The Service’s Strategic Planning and Budget process affords the leadership of each functional 

division the opportunity to justify its strategies, operational priorities, and proposed 

improvement projects to the rest of the senior leadership team. These sessions can 

involve probing questions and disagreements, but they invariably improve IRS operations and taxpayer service. 

The Service, as with many large organizations, is still struggling with inspiring 

its employees to exercise common sense, good judgment, and creative problem-solving while requiring them to follow specific guidelines and procedures. The sheer size 

of the IRS workforce, and the enormity and complexity of the task of administering 

the tax system, create pressure on management and the workforce to conform and 

adopt a narrow approach to resolving disputes: ‘‘If I can solve my little piece of the 

puzzle, I don’t have to worry about the rest of the problem.’’ 

Thus the IRS must continue with its reorganization efforts, by retaining the ‘‘flattened’’ management structure so that good ideas are not stifled by too many managerial reviews; by providing its employees with ongoing training, not just about each 

employee’s specific work but also about how that employee’s work fits into the larger 

scheme of tax enforcement; and by encouraging innovation as well as consistency. 

The IRS reorganization is just beginning. 

ENFORCEMENT, TAXPAYER RIGHTS, AND CUSTOMER SERVICE

An effective tax administration system requires a balance between enforcement, 

taxpayer rights, and customer service. These aspects of tax administration are not 

mutually exclusive, although they may generate tension at different times. Even 

when the taxpayer is out of compliance with his or her tax obligations, he or she 

should be treated courteously and professionally. Compliance personnel should place 

38 

5The Finance Committee report stated: ‘‘The Committee believes that a key reason for taxpayer frustration with the IRS is the lack of appropriate attention to taxpayer needs. . . . For 

example, taxpayer inquiries should be answered promptly and accurately; taxpayers should be 

able to obtain timely resolutions of problems and information regarding activity on their accounts; and taxpayers should be treated fairly and courteously at all times.’’ S. Rep. No. 105– 

174, Sec. 1001. 6The RRA conferees explicitly envisioned an expansion of the offer program. 

‘‘[T]he conferees expect that the present regulations will be expanded so as to permit the IRS, 

in certain circumstances, to consider additional factors . . . in determining whether to compromise the income tax liabilities of individual taxpayers. . . . [T]he conferees believe that the 

IRS should be flexible in finding ways to work with taxpayers who are sincerely trying to meet 

their obligations and remain in the tax system. Accordingly, the conferees believe that the IRS 

should make it easier for taxpayers to enter into offer-in-compromise agreements, and should 

do more to educate the taxpaying public about the availability of such agreements.’’ H.R. Conf. 

Rep. No. 105–599, Sec. 3462. 7Policy Statement P–5–100 (1992) provides: 

‘‘The Service will accept an offer in compromise when it is unlikely that the tax liability can 

be collected in full and the amount offered reasonably reflects collection potential. An offer in 

compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible 

at the earliest possible time and at the least cost to the Government. In cases where an offer 

in compromise appears to be a viable solution to a tax delinquency, the Service employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, 

assist in preparing the required forms. The taxpayer will be responsible for initiating the first 

specific proposal for compromise. The success of the compromise program will be assured only 

if taxpayers make adequate compromise proposals consistent with their ability to pay and the 

Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable 

documentation to verify their ability to pay. The ultimate goal is a compromise which is in the 

best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with 

all future filing and payment requirements.’’ 8 IRC § 7122(c); RRA 98 § 3462(a). 

themselves in the taxpayer’s shoes and acknowledge how powerful and intimidating 

the IRS can be. This acknowledgement does not diminish the Service’s tax assessment or collection authority. In fact, for many taxpayers, this acknowledgement is 

the basis for true customer service, for it creates an opportunity for the taxpayer 

to enter into compliance.5

The IRS Restructuring and Reform Act of 1998 required the IRS to realign its 

method of measuring its employees’ performance so that an even-handed approach 

to tax administration is encouraged and achieved. Thus, IRS employee performance 

is now evaluated by ‘‘balanced measures’’—employee satisfaction, customer satisfaction, and business results. This balance between customer service, taxpayer rights, 

and enforcement will be tested with the Service’s increased focus on compliance activities. We can learn something about how to achieve that balance by looking at 

two RRA 98 programs which to date have eluded success. 

Offer-in-Compromise. The offer-in-compromise program is still problematical after 

many IRS efforts to make the program work. Although the offer inventory is declining and cases are moving, which the Service views as a success, many practitioners 

and taxpayers express frustration and dissatisfaction with this program.6 One reason for this difference in perception is that the IRS has never fully embraced its 

policy statement on offers that it issued in 1992.7

There is a natural tension between the requirement to determine and collect the 

correct amount of tax, and the opportunity to compromise that amount. The IRS Restructuring and Reform Act of 1998 attempted to make clear that the offer program 

is a viable collection alternative—an alternative that certainly should not be abused, 

but one that is perfectly valid, nonetheless. 

The Service projects that it will receive approximately 130,000 offers and will expend approximately 1,200 full time equivalents on the offer program in fiscal year 

2003. Yet complaints come in from all over the nation. If offers are legitimately 

being returned or rejected, with proper customer service, taxpayers might not like 

the answer but at least they would understand the reason. The consistent customer 

dissatisfaction with this program indicates that there is a disconnect between what 

taxpayers and practitioners expect and what the Service delivers. I suspect that the 

proper design for an offer program lies somewhere in between these two positions. 

For example, RRA 98 directed the Service to establish guidelines for national and 

local allowances for use in determining whether the taxpayer has an ‘‘adequate 

means to provide for basic living expenses.’’ 8 The statute further directs that these 

guidelines shall provide that IRS employees must determine, under a ‘‘facts and circumstances’’ test, whether the use of such schedules is appropriate and shall not 

39 

9 Id. The Finance Committee report stated: 

The IRS also will be required to consider the facts and circumstances of a particular taxpayer’s case in determining whether the national and local schedules are adequate for that particular taxpayer. If the facts indicate that use of scheduled allowances would be inadequate 

under the circumstances, the taxpayer would not be limited by the national or local allowances.’’ 

S. Rep. No. 105–174, Sec. 3462. 10 At the end of February, 2003, Appeals had 6,133 assigned offer-in-compromise receipts. Two 

months later, on April 30, 2003, Appeals had 9,096 assigned offer receipts, almost a 50 percent 

increase. One must wonder whether these new cases involve issues that could not be resolved 

by offer examiners in the collection function if they had appropriate guidance, training and encouragement in accordance with the approach described in RRA 98 and Policy Statement P–5– 

100. 11 H.R. Conf. Rep. No. 105–599, Sec. 3462. 12Treas. Reg. 301.7122–1. 

use such schedules where their use would result in the taxpayer’s not having adequate means to provide for basic living expenses.9

With respect to both offers and installment agreements, however, IRS employees 

do not believe that they can deviate from these schedules. While some taxpayers 

may make unreasonable requests, other taxpayers, whose facts and circumstances 

warrant deviation from the schedules, are denied relief. Many IRS employees, from 

Automated Collection System to Appeals, apply the schedules as fixed rules. In 

these areas, the IRS has not successfully implemented the directives of RRA 98. 

To achieve success in the offer program, the IRS does not need to start all over 

again. Instead, it needs to take its current offer processes—in the campus and in 

the field—and review all of its guidance, training and quality measures as well as 

data tracking, looking at it from the point of view of taxpayer need and expectations 

as well as IRS processing requirements. Do we know what happens to offers that 

we reject? How old are the debts that taxpayers are attempting to compromise? Are 

they in year one of the statutory collection period, or year nine? Will the IRS likely 

collect another dollar on this debt? Was the account in ‘‘inactive status’’ before the 

taxpayer submitted an offer? 

How is the IRS measuring the quality of work done on offer cases? Are these quality measures encouraging employees to speak with taxpayers and to determine 

whether the use of national or local schedules is appropriate, given the facts and 

circumstances of that particular taxpayer’s situation? Or is the IRS only looking at 

the completion of mechanical or procedural steps? Are cases involving ‘‘grey’’ issues 

being successfully resolved at the first point of contact, or are these cases rejected 

and passed on to Appeals? Is Appeals treating these cases in accordance with the 

changes made by RRA 98? 10

Congress also directed the Secretary to accept offers for the purpose of promoting 

effective tax administration (ETA) on the basis of hardship, equity, and public policy.11 The Service has struggled to develop guidance and processes that respond to 

Congress’ and taxpayers’ concerns as well as the Service’s own processing and resource considerations. At the request of my office, the Service is establishing a group 

of revenue officers who will handle all non-hardship ETA offers—those involving equitable and public policy concerns. In turn, the work of this group will be reviewed 

by a cross-functional team to ensure consistency and appropriateness of the decisions and to develop future guidance for IRS employees and taxpayers. 

Last year, Treasury issued a final regulation that set forth a simple construct for 

a viable non-hardship ETA offer.12 First, the taxpayer cannot qualify for an offer 

on any other ground—doubt as to collectibility, doubt as to liability, or hardship. 

Second, the taxpayer must adequately explain to the IRS what is so special about 

the taxpayer’s circumstances that the taxpayer should have its taxes reduced when 

all other taxpayers are assumed to pay their taxes in full. In essence, the taxpayer 

must be able to look his or her next-door neighbor in the eye and say, ‘‘You have 

to pay your taxes in full, but I should be cut a break.’’ 

This approach is consistent with the policy statement’s requirement that taxpayers must bring in reasonable offers. The IRS, while recognizing that nonhardship 

ETA offers will be granted only in exceptional circumstances, is committed to considering those offers that come in and to learning from those that taxpayers submit. 

The flexibility and fundamental fairness built into this new non-hardship ETA procedure aligns with the approach Congress described in RRA 98 as well as with the 

IRS policy statement. We have not yet achieved this flexibility and fairness with regard to other offer processing. 

Collection due process hearings 

As a practitioner in controversy practice, including collections, I thought that the 

right to a Collection Due Process (CDP) hearing was one of RRA 98’s most signifiVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 E:\HR\OC\C115A.XXX C115A
40 

13Statement of Felice Izen, Supervisory Program Analyst, Office of Appeals, before the American Bar Association Low Income Taxpayers Committee, May 10, 2003. 14IRC § 6330(e)(1). 15The legislative history to RRA 98 clearly demonstrates the importance Congress placed on 

the independent hearing. 

The Congress believed that the IRS should afford taxpayers adequate notice of collection activity and a meaningful hearing before the IRS deprives them of their property. . . . The determination of the appeals officer is to address whether the proposed collection action balances the 

need for the efficient collection of taxes with the legitimate concern of the taxpayer that the 

collection actions be no more intrusive than necessary.’’ Joint Committee on Taxation, General 

Explanation of Tax Legislation Enacted in 1998 at 81, 83 (JCS–6–98). 

‘‘A proposed collection action should not be approved solely because the IRS shows that it has 

followed appropriate procedures.’’ S. Rep. No. 105–174, Sec. 3401. 16The IRS had 19,199 CDP receipts in FY01, 26,666 CDP receipts in FY02, and 13,073 CDP 

receipts through March 2003. 

cant improvements to IRS collection procedures. Prior to the existence of CDP hearings, there were just too many cases where I couldn’t obtain a consideration of the 

underlying liability, which would have eliminated the collection problem. Or I 

couldn’t get the revenue officer to listen to my points about collection alternatives. 

The opportunity to have an independent Appeals Officer review these cases provides 

a much-needed safety valve in the collection process, as does the courts’ review of 

the aftermath of tax determinations and assessments. 

It should be no surprise to anyone that many of the first CDP cases in the IRS 

and the courts involved constitutional challenges to the Internal Revenue Code and 

arguments that can best be classified as ‘‘frivolous.’’ Many practitioners have cases 

that never made it to court because they used the system appropriately, actually 

trying to resolve the collection issues. Even the cases advancing frivolous theories 

raised significant procedural issues. 

It is true that many taxpayers do not respond to IRS collection letters. The CDP 

notice, arriving by certified mail, often is the first contact that gets the taxpayer’s 

undivided attention. In these instances, the taxpayer may not have discussed any 

issues with a revenue officer or Automated Collection System (ACS) employee. Thus, 

in some cases, it may be appropriate to provide the taxpayer with a brief period to 

discuss collection alternatives with collection personnel before transferring the file 

to Appeals. 

However, the Service recently directed its revenue officers to continue to work a 

collection case after the CDP hearing request is filed. If the revenue officer and the 

taxpayer cannot resolve the issue, then the group manager will contact the taxpayer 

and attempt to resolve the collection matter. Only if the group manager and the taxpayer cannot agree, will the case be referred to Appeals for the independent review 

that is required by RRA 98. Appeals has acknowledged that in many instances it 

takes up to 90 days for a case to be sent to Appeals.13 During this retention period, 

the statutory collection period is tolled; had the negotiations occurred before the 

issuance of a CDP notice (which is solely at the discretion of the IRS), the statutory 

collection period would continue to run.14

In many cases the taxpayer has already attempted to resolve the collection matter 

with collection personnel, and the CDP notice is issued because the matter is not 

being resolved to the Service’s satisfaction. In this context, the retention of the case 

by collection personnel for further ‘‘negotiations’’ can constitute undue pressure on 

the taxpayer, who has elected to have an independent party—an Appeals Officer— 

look at the case and consider all collection alternatives offered by the taxpayer, not 

just the ones the collection employee is willing to accept. In fact, this independent 

review was the underlying premise for the statute’s enactment. The Appeals Officer 

should bring something more to the discussion than just providing the ‘‘opportunity’’ 

for the taxpayer to have more dealings with the collection employee, who is the very 

person who filed the lien or is proposing the collection action that triggered the right 

to a CDP hearing. 15

I recognize that since the enactment of RRA 98, the Office of Appeals has been 

struggling with an inventory problem attributable to the large number of CDP cases 

filed.16 The Office of Appeals has hired new offer specialists to address the inventory 

of cases. However, there are many issues that should be explored to determine why 

this inventory exists. Are revenue officers or ACS employees filing liens at appropriate times, which triggers a CDP notice? Are they making premature determinations to levy? Where a taxpayer raises a challenge to the underlying liability in the 

context of a collection action, is the collection employee directing the taxpayer to the 

appropriate IRS personnel (including Taxpayer Advocate Service employees) for resolution of that matter at the earliest opportunity, rather than passing that issue on 

to Appeals? Once a case gets to Appeals, are Appeals Officers taking a formulaic 

41 

17See RRA 98 § 1102(a), amending IRC § 7803(c); RRA 98 § 1102(c), amending IRC § 7811(a). 18S. Rep. No. 105–174, Sec. 1102. 

approach to these cases, or looking for the easiest out (for example, placing the taxpayer in ‘‘currently not collectible’’ status and encouraging the taxpayer to withdraw 

the CDP hearing request)? 

The IRS touches more U.S. taxpayers through its collection activities than any activity other than the filing requirement. Tax collection is the second most important 

activity of the IRS, particularly from the taxpayers’—our customers’—perspective. 

Thus, the Collection Due Process hearing is extremely important and essential work 

for an independent Appeals function and should be treated as such. The program 

should be treated as an important taxpayer right and not as an inventory problem. 

LOW INCOME TAXPAYER CLINICS

The IRS Restructuring and Reform Act of 1998 ushered in a new era for low income taxpayers—one in which Congress recognized the importance of representation, education and outreach to low income taxpayers and taxpayers who speak 

English as a second language (ESL). In 1998, there were 14 academic and one nonprofit low income taxpayer clinics nationwide. Today, as a result of the matching 

grant program under IRC section 7526, there are 136 clinics—one in all but two 

states and Puerto Rico. By next year, there should be clinics in these sites. 

Effective May 1st of this year, the clinic program was moved into the Office of 

the Taxpayer Advocate. Over the next year my office will be working with the clinics 

to develop standards of operation and best practices. We will be making site assistance visits to various clinics and identifying areas of success as well as improvement 

goals. 

My office is committed to integrating the clinics into many more IRS activities 

and programs. For example, we developed a publication listing each clinic grantee. 

This publication is posted on the irs.gov internet site and is included in each audit 

notice for each face-to-face exam in the National Research Program (NRP). Thus, 

low income taxpayers who are being audited as part of this program will have access to representation. 

The clinics provide the IRS and Congress with much needed insight into the problems of low income and ESL taxpayers. Many clinics are participating in community-based coalitions whose numbers provide free tax preparation, financial literacy 

education, and access to low-cost bank accounts in addition to tax representation, 

education and outreach. These activities increase the fairness of the tax system for 

all taxpayers and enable low income taxpayers to comply with their tax obligations. 

OFFICE OF TAXPAYER ADVOCATE

In 1998, the independence, impartiality and confidentiality of the Office of the 

Taxpayer Advocate (OTA) were substantially enhanced.17 There is a basic tension 

between the OTA’s role as an agent for change inside the IRS and maintaining the 

office’s independence within the IRS. The statutory revisions increased the effectiveness of the National Taxpayer Advocate and her office in helping taxpayers resolve 

their specific problems with the IRS while being a strong voice for systemic improvement and change within the IRS. 

However, as I have noted in my 2002 Annual Report to Congress, there are several areas in which the Office of the Taxpayer Advocate’s independence should be 

strengthened and its effectiveness increased. In the Report, I discussed revisions to 

the confidentiality provisions of IRC § 7803(c)(4)(A)(iv), the definition of ‘‘significant 

hardship’’ under IRC § 7811, and the codification of the Taxpayer Assistance Directive. 

The Senate version of RRA 98 provided for an independent counsel to the National Taxpayer Advocate.18 The IRS Restructuring and Reform Act of 1998 ultimately did not include that provision. The National Taxpayer Advocate currently receives legal advice from the Counsel to the National Taxpayer Advocate, who reports directly to the Chief Counsel of the IRS. 

The National Taxpayer Advocate, who by design and by statute brings a unique 

perspective to the issues and problems facing taxpayers and the IRS, must have 

independent counsel in order to accomplish her statutory mission successfully. This 

counsel should report directly to the National Taxpayer Advocate (NTA) in order to 

avoid any conflict of interest where the Counsel’s advice might differ from the position advocated by the Office of Chief Counsel. The independent counsel to the NTA 

should advise the Advocate on matters pertaining to the authority, jurisdiction, and 

operation of the Office of the Taxpayer Advocate, as well as issues relating to taxpayer rights. The counsel should also participate in discussions and development of 

42 

19The National Commission on Restructuring the IRS recommended that all preparers be 

made subject to the standards of conduct set forth in Circular 230. See Commission Report— 

A Vision for a New IRS—at G–5. 20The fee for taking the enrolled agent exam is $55. See IRS Form 2587. The fee for applying 

for enrolled agent status is $80. See IRS Form 23. 

guidance, to the same extent that the current Counsel to the NTA participates 

today. 

REGULATION OF UNENROLLED RETURN PREPARERS

The IRS Restructuring and Reform Act of 1998 did not directly address one particular aspect of tax administration that I believe would provide considerable benefits to taxpayers—the regulation of unenrolled return preparers.19 Today, more than 

50 percent of all returns are prepared by paid tax return preparers. Thus, for a majority of taxpayers, the tax return preparer is the gateway to the federal tax system. 

Returns prepared by unqualified or unscrupulous preparers have a negative impact 

on taxpayers and the IRS. For taxpayers, inaccurate returns mean overclaims as 

well as underclaims—either they pay more taxes than they should or their returns 

may be examined. For the IRS, these returns consume valuable resources, in terms 

of processing, examination, and collection. 

Clearly, the federal government has an interest in protecting the integrity of the 

tax administration system and ensuring that products and services offered in conjunction with the taxpayer’s filing, reporting and payment obligations do not operate 

in such a way as to undermine the taxpayer’s faith and participation in the system. 

Moreover, taxpayers have the right to expect that the tax administrator of a complex tax code will take the appropriate and necessary steps to ensure that commercial return preparers possess the requisite skills and ethics. 

We propose that unenrolled preparers—preparers who are not attorneys, CPAs, 

or enrolled agents—who prepare more than five returns per year for a fee be required to register with the IRS, take an initial examination about return preparation and an annual refresher examination, and display a current certification card 

indicating their certified status. Our proposal is described in greater detail in my 

2002 Annual Report to Congress. 

The lynchpin of this proposal is a consumer education campaign, which utilizes 

paid advertising, outreach, and partnering with other organizations, to deliver two 

simple messages to tax consumers who will enforce the program through their market behavior: 

• If you pay for tax preparation, ask to see the preparer’s certification. 

• If you pay for tax preparation, don’t pay until you see the preparer’s name, 

address, and certification on the tax return and on your copy. 

We believe our proposal is administrable and efficient. While it will require resources to collect and input data, develop and update examinations, and maintain 

the preparer database, a portion, if not all, of these costs can be offset by user fees 

on the regulated population.20 Ultimately, more accurate returns will reduce the resources the IRS must devote to examining incorrect returns and collecting the resulting tax. 

The requirement that return preparers demonstrate minimum competency levels 

will restore the connection between tax preparers, tax expertise, and tax filing. 

Under our plan, preparers who are providing tax preparation and filing primarily 

because it brings in consumers of unrelated products or financial products such as 

check-cashing will have to demonstrate knowledge of return preparation. This approach will benefit the taxpayer both as a taxpayer and as a consumer, and it will 

benefit the tax system. 

CONCLUSION

The IRS has come a long way from where it was in 1998. It is much more taxpayer focused, it evaluates its employees based on balanced measures, and it has 

embraced a strategic planning and budgeting process that emphasizes cross-functional planning. In key aspects of its operations, however, namely those involving 

flexibility and the exercise of discretion, the IRS is struggling. For the IRS to continue to improve, Congress must not only continue its oversight but must also provide the IRS with appropriate resources to accomplish its continually expanding 

tasks. 

Mr. HOUGHTON. Ms. Gardiner. 

43 

STATEMENT OF PAMELA J. GARDINER, ACTING TREASURY 

INSPECTOR GENERAL FOR TAX ADMINISTRATION 

Ms. GARDINER. Mr. Chairman and members of the committees, 

I appreciate the opportunity to appear before you today to discuss 

significant challenges the Internal Revenue Service continues to 

face in improving the overall effectiveness of tax administration. 

Over the past few years, the IRS has been in the midst of a significant business restructuring. Key business systems modernization initiatives are underway to redesign IRS’s outdated computer 

systems, and management is improving the organization’s customer 

service operations to better serve and communicate with taxpayers. 

While the IRS has revamped some of its business processes and 

practices, much more needs to be accomplished to provide top quality service to taxpayers. 

With the appointment of a new IRS Commissioner and the expected departures of key executives, the IRS is also encountering 

tremendous leadership changes. The Commissioner is challenged 

with continuing the IRS’ reinvention efforts in modernizing its computer systems, protecting taxpayer rights and privacy, ensuring tax 

law compliance and providing improved customer service. 

To achieve the IRS mission of providing top quality service to 

taxpayers, the IRS must modernize its outdated computer systems. 

The IRS has made progress in modernizing its information technology systems and some benefits have been delivered. For example, the IRS upgraded its toll-free telephone system to route taxpayers’ calls to the appropriate IRS employee, and deployed an 

Internet application that allows taxpayers to check the status of 

their refunds. However, the most significant and complex projects 

have yet to be delivered. Most modernization projects have experienced costs and schedule overruns. Project delays can be attributed 

to underestimating the complexity of the overall modernization effort and difficulties in identifying and managing the project requirements. These setbacks are magnified by the fact that so many 

other reforms are dependent on modernizing IRS computer systems. 

The IRS has developed adequate computer security policies and 

procedures but has not implemented them effectively. As a result, 

sensitive information remains vulnerable to attack by hackers, terrorists and disgruntled employees and contractors. While recognizing that total security can never be achieved and that there are 

necessary trade-offs between security and operational needs, 

TIGTA continues to identify significant weaknesses in infrastructure and applications security. TIGTA attributes many of IRS’s security problems to misplaced accountability. The IRS needs to enhance the security awareness of its managers and employees, and 

provide better training to those employees with key security responsibilities. 

Another challenge to IRS management is to establish a tax compliance program that identifies those citizens who do not meet their 

tax obligations, either by not paying the correct amount of tax or 

not filing proper tax returns. While the decline in enforcement actions has been dramatic since fiscal year 1996, there are recent indications that the decline in some categories of enforcement actions 

44 

and results have stabilized and, in some cases, shown improvement. 

The IRS Restructuring and Reform Act of 1998 (RRA 98) also 

mandated that the IRS be more responsive to customer needs. The 

IRS has made progress in enhancing its customer service activities. 

For example, taxpayers have several options from which to choose 

when they need assistance from the IRS in answering tax law 

questions. Two of these options, walk-in service at nationwide Taxpayer Assistance Centers and toll-free telephone assistance, have 

shown improvement in terms of accuracy over the past year. Overall, the IRS has made improvements in providing service to the 

taxpaying public. 

The tax return filing season impacts every American taxpayer 

and is, therefore, always a highly critical program for the IRS. In 

addition to providing customer service to taxpayers, the IRS must 

coordinate tax law changes, programs, activities, and resources to 

effectively plan and manage each filing season. Overall, the 2003 

filing season has gone well. Based on TIGTA’s review, it appears 

that the IRS should complete its processing of individual returns 

and issue all tax refunds on time. 

The IRS has accomplished a great deal since the passage of RRA 

98, though much more remains to be done. TIGTA resources are 

devoted to providing useful, balanced information to IRS management and other decision-makers. TIGTA’s audit and investigative 

coverage will continue to focus on the management and performance challenges facing the IRS as part of our overall effort to promote economy, efficiency, and effectiveness in the Nation’s tax administration system. 

This concludes my statement. 

Mr. HOUGHTON. Thank you very much. 

[The statement of Ms. Gardiner follows:] 

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Mr. HOUGHTON. Mr. Levitan, nice to have you back. 

STATEMENT OF HON. LARRY LEVITAN, MEMBER, IRS 

OVERSIGHT BOARD 

Mr. LEVITAN. Thank you, sir. Mr. Chairman, thank you for the 

opportunity to testify before the annual joint review. 

The IRS has made progress over the past 5 years to achieve RRA 

98’s goals, but the next few years will be difficult and challenging. 

While much has been accomplished to make the IRS a more effective organization, modernization of the IRS remains a work in 

progress. 

The IRS, the Administration and Congress must work together 

to close the compliance gap. The IRS must engage its entire workforce in its transformation, and it must begin to show real progress 

and benefits from its Business Systems Modernization Program. 

Mr. Chairman, despite some recent signs of a turnaround, compliance activities have declined dramatically since 1998. The American public senses that the IRS is more bark than bite. True or not, 

this perception can undermine confidence in the tax system. Commissioner Everson clearly sees this threat and rightly intends to 

enhance enforcement activities. 

Yet, the Board believes that a more robust enforcement program 

is only part of the equation. We believe that making it easier, faster and more efficient for Americans to meet their tax obligations 

will also pay off in better compliance. I believe we are in agreement 

that both compliance and customer service must improve if we are 

to meet RRA 98’s vision for a new IRS. 

In our annual report released earlier this month, the Board 

states that the IRS is both understaffed and outmanned. In the 

past decade, the number of full-time employees has dropped 16 percent. The number of field-compliance personnel has decreased 28 

percent. 

At the same time, the IRS workload continues to grow steadily. 

To boost enforcement, the IRS is focusing its very limited resources 

on key areas of noncompliance, particularly on high-income, highrisk taxpayers. The Board applauds these initiatives, and it is also 

pleased with the Administration’s request for additional funding in 

fiscal year 2004 for enforcement. 

The Board believes, however, that better compliance begins with 

quality customer service. We must ensure that the IRS is able to 

do a better job serving the vast majority of honest taxpayers who 

face an increasingly complex tax code. That means providing the 

information and support needed so taxpayers are able to do the 

right thing at tax time. 

During fiscal year 2002, only seven out of ten taxpayers got the 

help they sought over the IRS toll-free phone lines. Although we 

do understand that this improved during the recently completed 

tax season, solving a problem quickly with the IRS is still the exception, not the rule. It takes on average 220 days, that is seven 

months, for an individual to complete an audit at an IRS Tax Assistance Center. Account information is rarely current. It still takes 

days to post changes due to their outdated computer systems. 

Customer service must improve. At the same time IRS must 

have the enforcement capabilities to pursue those that ignore their 

58 

tax obligations by underreporting, by participating in abusive tax 

schemes or by simply failing to report or pay their taxes. To meet 

these challenges, the Board calls for additional funding to improve 

both customer service and compliance. 

In addition to recommending an additional $44 million to the Administration’s $133 million to expand enforcement, the Board also 

recommends an additional $172 million to bolster customer service. 

The Board believes that its budget recommendations would result 

in very specific and very quantifiable improvements in both service 

and enforcement. 

Mr. Chairman, I must also emphasize the importance of staying 

the course in modernizing the IRS computer systems. Until its 

processes and supporting information systems are modernized, the 

IRS cannot become a modern financial services institution. The 

Board supports full funding of the Business Systems Modernization 

Program in fiscal year 2004, and that would include $71 million 

more than the President’s budget request. 

While results to date for this critical program have been mixed, 

the Board believes that the IRS has improved its management of 

this program and expects to see significant progress this year. 

Mr. Chairman, the Board is also very pleased to welcome Mark 

Everson as the new Commissioner of the IRS. We know he will do 

an exceptional job in this very difficult position, and we look forward to developing a close working relationship with him. We have 

already discussed the organizational changes that Commissioner 

Everson announced during his testimony and support these initiatives. 

Mr. Chairman, thank you, and I would be happy to answer your 

questions. 

Mr. HOUGHTON. Thanks very much. 

[The statement of Mr. Levitan follows:] 

STATEMENT OF THE HONORABLE LARRY LEVITAN, MEMBER, IRS OVERSIGHT BOARD

Mr. Chairman, and members of the Joint Committee, thank you for holding this 

hearing and inviting me to testify. It is an honor for me to appear before your committee today on behalf of the Internal Revenue Service (IRS) Oversight Board and 

to discuss the IRS’ performance and the importance of the IRS Restructuring and 

Reform Act of 1998 (RRA 98). 

On July 22nd we will mark the fifth anniversary of the IRS Restructuring and 

Reform Act of 1998. At this five-year point, the Board believes it is important to 

check the true progress of the IRS. Where is the IRS in the transformation process? 

Is the IRS on track? What are the greatest challenges the IRS faces, and how can 

they be overcome? 

PROGRESS MADE SINCE RRA 98

The American tax system is at a crossroads. Following the enactment of the IRS 

Restructuring and Reform Act of 1998, the IRS embarked on a ten year modernization program and is now at its mid-point. During the past five years, the IRS made 

enormous progress in setting the stage to provide better service and ensure fair 

treatment under the law for taxpayers. The agency has refocused, redefined, and rebuilt itself, with dramatic changes in its mission, organization, management processes, and governance. In the past five years, the IRS: 

• Adopted a new mission statement to ‘‘Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and 

by applying the tax law with integrity and fairness to all.’’ 

• Emphasized the specific needs of different taxpayer segments by implementing a modern organizational structure with four major customer-focused 

operating divisions. 

59 

• Held senior executives and organizations accountable for performance by 

developing and implementing a balanced measures program. • Integrated a performance and budget plan based upon a sound strategic assessment and planning process. • Began to transform the IRS into a modern financial services institution 

with redefined business processes and information technology by designing and 

implementing a vision and new architecture. • Implemented modern call routing, so taxpayers get to the right person to 

answer their questions quickly. • Promoted electronic tax filing, which continues to grow; so much so that one 

paper processing pipeline was closed. • Weaved many services into the internet, so taxpayers can check the status 

of their refunds, download forms, and get information easily over www.irs.gov. • Hired executives with private sector backgrounds to bring new business 

knowledge and practices, while setting processes to ensure the effectiveness of 

its streamlined critical pay authority. • Implemented a number of new and/or expanded taxpayer rights, such as 

the Innocent Spouse program. • Strengthened advocacy for taxpayer rights through the Taxpayer Advocate 

Service, which is handling a case load far larger than originally anticipated. • Began to gather and analyze valuable taxpayer information through the 

National Research Program. The program’s data will help the IRS allocate resources more effectively and fairly, resulting in better compliance. 

STRATEGIC CHALLENGES

However, in its 2003 Annual Report to Congress, the Oversight Board reported 

that the American tax system is still plagued with two long-term conflicting trends: 

a steady increased demand on tax administration services, and a steady decline in 

IRS resources due to budget constraints. In the past decade, the IRS workload has 

increased steadily. The number of tax returns filed continues to grow; particularly 

complex returns, such as those filed by individuals earning more than $100,000 each 

year and small corporations. The tax revenue stream is now dominated by sources 

that provide greater opportunities for manipulation and for error. 

At the same time, the number of IRS employees continues to shrink, due to budget constraints. From 1992 to 2002, IRS workload increased by 16 percent, while at 

the same time, the number of full time equivalent employees (FTEs) decreased 16 

percent from 115,205 in FY1992 to 96,714 in FY2002. As more resources were needed for the IRS to provide essential services, such as processing returns and answering correspondence, resources were shifted from discretionary operations, such as 

compliance activities. These trends are creating a huge gap between what taxpayers 

need and what the IRS can do. 

Before he left office, the Board asked Commissioner Charles O. Rossotti to assess 

the state of the IRS and of the tax system. He reported that the effect of these conflicting trends created a huge gap between the number of taxpayers who are not 

filing, not reporting, or not paying what they owe, and the IRS’ capacity to require 

them to comply. In addition, the tax revenue stream is now dominated by sources 

that provide greater opportunities for manipulation by those who wish to take advantage of the decline in IRS compliance resources. According to his report: 

• 60 percent of identified tax debts are not pursued 

• 75 percent of taxpayers who do not file a tax return are not pursued 

• 79 percent of identified taxpayers who use abusive devices (e.g., offshore accounts and abusive tax shelters) to evade tax are not pursued 

• 56 percent of identified taxpayers with incomes of $100,000 or more and 

underreported tax are not pursued 

• 78 percent of partnerships and similar document matching are not pursued. 

IRS PERFORMANCE IN FY2002

These long-term trends impact the IRS’ ability to meet taxpayers’ needs. In reviewing the IRS’ performance for FY2002, the IRS Oversight Board found that: 

• Customer service showed some improvement, but not enough. The number 

of returns filed electronically by individuals rose 16 percent. The IRS also improved its accuracy in correctly answering questions regarding tax law and taxpayer accounts on its toll-free telephone lines. Yet only seven out of ten callers 

to the IRS toll-free phone line were assisted. This is an improvement from the 

year before, and may indicate a trend, but this level is not acceptable to the 

Board. Voluntary compliance is at the heart of the nation’s tax system, and the 

easier it is for taxpayers to meet their tax obligations, the more likely they will 

60 

be to comply with the law. More resources are needed for the IRS to provide 

the services taxpayers need. 

• Compliance activities increased, but not enough to close the gap. In 

FY2002, collection activities generated $371 million more than the year before— 

a laudable improvement, but not nearly enough to address the growing compliance gap. The number of levies issued increased nearly 50 percent over the previous year, while the number of liens filed increased by nearly 15 percent. Audits of high-income taxpayers—those earning $100,000 and up—increased by 22 

percent from the previous year. The IRS launched a number of initiatives aimed 

to clamp down on abusive tax shelters and offshore accounts. However, other 

compliance related measures declined. The gap between new delinquent accounts received and the number closed grew again. The exam coverage rate for 

large businesses over $10 million declined from 25 percent to 15.5 percent. In 

areas of high growth in returns filed, such as partnerships and mid-sized businesses filing 1120S returns, coverage rates have also declined dramatically. 

While the improvements in both areas are welcome, the Board remains concerned 

with the overall state of customer service and the IRS’ ability to ensure that the 

tax law is enforced. The National Taxpayer Advocate’s 2002 report cited access to 

the IRS as fundamental to the achievement of universal taxpayer rights. The Board 

agrees that taxpayer accessibility to the IRS is imperative. The vast majority of taxpayers want to do the right thing in an increasingly complex tax system. They must 

be able to get help from the IRS, whether it is over the phone, in person, or over 

the internet. Resources must be made available so the IRS can provide the level of 

service expected by the public. 

ACTIONS REQUIRED FOR SUCCESS

The IRS Oversight Board’s role is to provide long-term guidance and direction to 

the IRS. Given the IRS’ present situation, we believe that the agency, with the support of the Administration and Congress, must take the following actions if it is to 

succeed: 

• Close the compliance gap: The IRS Oversight Board believes that modernizing 

the IRS and a three percent annual productivity gain alone will not close the 

compliance gap. In his end-of-term report to the Board, Commissioner Charles 

O. Rossotti recommended an annual two percent per year staff growth through 

2010. The Board fully endorses this approach. 

• Boost customer service: Millions of taxpayers are filing electronically. Hundreds of millions of forms and publications are downloaded from the IRS web 

site. Yet the demand for customer service—over the phone, at walk-in centers, 

and through the mail—grows each year. So too does the complexity of the tax 

code. Only seven out of ten taxpayers can get help over the phone at tax time 

given the IRS resource constraints. The IRS has direct contact with more Americans than any other federal agency; the Board believes its customer service 

must continue to improve to a long-term level agreed upon by Congress and the 

Administration, and backed up with the resources needed to meet that level. 

• Commit to modernization: Until both its processes and supporting information systems are modernized, the IRS cannot become a modern financial services institution. The Board is deeply concerned with the progress of this program. Results have been delayed and both the PRIME contractor and the IRS 

need to continue to improve their management’s ability to handle a program of 

this scope. Despite this, the Board remains committed to the modernization program, and believes it should be accomplished as quickly as possible consistent 

with the IRS’ ability to manage and implement it. 

• Focus on people resources: As the IRS modernizes, it must recruit, retain and 

develop employees who have the knowledge and skills needed to do their jobs. 

The IRS will also face a dramatic loss of institutional knowledge in the next 

five years when waves of federal employees retire. In the past five years, the 

IRS has concentrated on business processes and information technology. Now 

is the time for the IRS to make the most of its people resources by developing 

a comprehensive, agency-wide strategic human resources initiative. 

• Measure long-term goals: The IRS made strides in measuring its progress in 

the past five years with the implementation of an agency-wide balanced measures approach to performance management. The agency and decision-makers 

now have a much better sense of the IRS’ performance. Yet there is no universal consensus on what constitutes the appropriate level of performance in 

the long-term, for both compliance and customer service. Two efforts are underway to address this. First, at the Board’s recommendation, the IRS Executive 

Steering Committee will propose and seek consensus among key executive 

61 

branch agencies, Congress, stakeholders, and the public in determining appropriate levels and strategic goals for IRS long-term performance objectives. The 

second is the work underway by the National Research Program, which will 

provide data on taxpayer compliance levels. The Board believes it is necessary 

for the IRS to set its long-term goals so it can evaluate its progress effectively. 

To accomplish all of these things, the IRS needs stable, additional funding. The 

IRS cannot close the gap or implement a successful modernization effort unless it 

receives additional and sustained funding over a long period of time. The Board is 

well aware of the challenges now facing our nation, but believes that short-term solutions to reduce spending will result in larger challenges in tax administration in 

the future and endanger the source of revenue collection. 

FY2004 IRS BUDGET RECOMMENDATIONS

The IRS Restructuring and Reform Act (RRA 98) gives the Oversight Board specific responsibilities to review and approve the budget request of the IRS prepared 

by the Commissioner, and submit this request to the Treasury Department. RRA 

98 also provides that the President shall submit the Oversight Board’s budget recommendation to the Congress, without revision, together with his own budget request, and gives the Oversight Board the responsibility to ensure that the budget 

request supports the annual and long-range strategic plans. 

In developing its recommendations, the Oversight Board is evaluating first and 

foremost the needs of taxpayers. The Board wants to ensure that taxpayers get the 

help they need at both ends of the tax administration spectrum. Up front, do taxpayers receive the education and service they need to understand and meet their 

tax obligations? Post-filing, do taxpayers believe the tax laws are being enforced 

fairly so that all taxpayers pay their fair share? 

The Oversight Board is cognizant that the present war on terrorism and the budget deficit increase the need to ensure that all federal spending be thoroughly justified and deliver value to taxpayers. Nonetheless, the Oversight Board has statutory 

responsibilities for IRS governance and must ensure that it makes an honest and 

independent assessment of the performance levels the IRS must deliver and the 

budgetary implications of achieving that performance. The Oversight Board worked 

closely with the IRS, as well as with Treasury and the Office of Management and 

Budget (OMB) in producing its budget recommendation. The Oversight Board believes that its budget recommendation supports the annual and long-range strategic 

plans of the IRS, as required by RRA 98. 

Moreover, especially in this difficult budgetary time, the Oversight Board believes 

that there is great value in having the government collect the revenue it is due by 

ensuring that all taxpayers pay what they honestly owe. Taxpayers expect that this 

be done, and fairness dictates it. 

Table 1 shows the Oversight Board’s FY2004 budget recommendations for each 

account compared to the FY2003 IRS budget and the Administration’s budget request. 

TABLE 1.—COMPARISON OF IRS’ FY2003 BUDGET WITH ADMINISTRATION REQUEST AND 

OVERSIGHT BOARD RECOMMENDATIONS FOR FY2004 

[All $ in 000s] 

Account FY2003 IRS 

Appropriation 1

Administration 

FY2004 Budget Request 

Oversight 

Board FY2004 

Budget Recommendation 

Difference between Administration and 

Oversight 

PAM ................................................................................................ $3,930 $4,075 $4,247 $172 

TLE .................................................................................................. 3,705 3,976 4,021 44 

IS .................................................................................................... 1,621 1,670 1,670 ....................

BSM ................................................................................................ 2 364 429 500 71 

EITC ................................................................................................ 145 251 251 ....................

HCTC .............................................................................................. 70 35 35 ....................

Total .................................................................................. 9,835 10,437 10,724 287 

1 FY2003 actual appropriation. Administration FY2003 request was $9,916 million. 

2 The original FY2003 budget request was $450 million, which was subsequently reduced to $380 million. 

The Board’s recommended budget provides for two percent growth in IRS resources. The Oversight Board recommends an additional 2,120 FTEs over FY2003 

levels compared with the Administration request of 238 additional FTEs. An additional 650 FTEs are proposed for the EITC Reform Initiative, which was proposed 

by the Administration and added by the Board to its budget recommendation. 

62 

The Oversight Board has recommended this budget for several reasons. First, and 

most importantly, it provides the IRS with resources to address the five strategic 

actions I described earlier. The proposed budget is also consistent with the Oversight Board’s goal of achieving two percent in real growth for a five year period, 

which it believes is necessary. 

Secondly, it provides for additional investment in the BSM program, which the 

Oversight Board believes is essential to the transformation of the IRS. Unfortunately, the Oversight Board believes the Administration request will result in the 

delay of delivery of important benefits to taxpayers. 

Third, it restores resources for customer service and enforcement that have been 

lost in recent years to unexpected costs. Each year, the IRS must cover unexpected 

costs. These costs reduce the IRS’ ability to hire the number of employees (full-time 

equivalents, or FTEs) planned by both the Administration and the Board in their 

recommended budgets. Examples of unexpected costs that caused this reduction include: 

• $43 million to cover the unfunded increase in the FY2002 annual pay raise 

from the President’s request of 3.6 percent to the enacted 4.6 percent raise; 

• $68 million of unfunded increase in the FY2003 annual pay raise from the 

President’s request of 2.6 percent to the enacted 4.1 percent raise. 

• $23 million when legislation was not enacted that would have allowed for savings on postage and the Financial Management System payment levy; 

• $22 million in postage costs that increased above initial budget projections; 

and 

• $20 million of unfunded increases in security costs after September 11. 

In FY2002 and FY2003, unfunded costs resulted in decreases in the number of 

FTEs requested in the Administration’s budget as shown below: 

Fiscal Year 

Administration 

FTE request 

(less EITC) 

FTEs Achieved 

by the IRS 

(less EITC) 

Difference 

2002 ........................................................................................................................ 99,116 96,714 ¥2,402 

2003 ........................................................................................................................ 98,727 96,802 ¥1,925 

The stage has already been set for this to happen again, resulting in a lower number of FTEs in FY2004. In the FY2004 budget, the Administration proposed a two 

percent pay raise for civil service employees and a 4.1 percent raise for military personnel. Pay parity between civilian and military personnel was provided in 15 of the 

last 17 Treasury Appropriation bills. Furthermore, both the House and Senate 

versions of the FY2004 budget resolution contain a ‘‘sense of the Congress’’ provision 

supporting military-civilian pay parity for federal employees. If past years are any 

indication, Congress will again provide pay parity to military and civilian personnel. 

The Board’s FY2004 budget proposal, as does the Administration’s, assumes a two 

percent pay increase. The Board urges that Congress provide the necessary funds 

for any pay raise it may pass in the coming year. Otherwise, as in previous years, 

the IRS will be forced to freeze future hiring initiatives and cut any discretionary 

spending such as employee training programs to absorb the impact of an unfunded 

pay raise. 

CONCLUSION

Chairman Thomas, before I conclude I would like to add a personal note. Two 

years ago, on May 8, 2001, GAO, TIGTA, and I testified before you at a Joint Tax 

Committee hearing on the same subject. You challenged the three organizations to 

share information and develop common perspectives on the strategic challenges facing the IRS. I’m pleased to say that since that hearing we have responded to your 

challenge and meet periodically to do just that. The result has been a fruitful and 

rewarding exchange for all three organizations. I’m confident my fellow panelists 

would agree. 

The Board believes that the IRS has accomplished much, but must do more. We 

have a tough five years ahead of us. Up to this point, the agency focused on planning and developing major programs. Those programs are now being implemented. 

The Board intends to work closely with the IRS and its new leadership to provide 

guidance to improve the implementation process. The Board also will work with the 

Administration and Congress to do all it can to ensure that the IRS gets the resources needed to succeed. 

The future is now. It is time for the IRS to begin to produce the tangible benefits 

for taxpayers envisioned five years ago. 

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Mr. HOUGHTON. Mr. White. 

STATEMENT OF JAMES R. WHITE, DIRECTOR, STRATEGIC 

ISSUES, U.S. GENERAL ACCOUNTING OFFICE 

Mr. WHITE. Mr. Chairman and members of the committees, we 

are pleased to be here at this Joint IRS Oversight hearing. 

Five years ago Congress passed the IRS Restructuring and Reform Act in response to frustration with IRS’s performance. Now, 

halfway through the ten years that the then commissioner projected modernization would take, is a good time to take stock, to 

look back on what has been accomplished to date and to list the 

challenges the new commissioner will face. 

Both can be understood in terms of the graphic on the easel, also 

on the bottom of the first page of my statement. The right side 

shows IRS’s goals, to improve service to taxpayers while ensuring 

compliance with the tax laws. The left side shows four key means 

to achieve these goals. While still far from realizing the goals on 

the right, IRS’s modernization progress gives it more of the means 

it needs for reaching the goals. 

IRS has increased its capacity to manage. Looking at the arrows, 

IRS has put in place many, but not yet all, of the controls needed 

to effectively acquire new information systems. IRS has established, but not yet implemented, a substantial set of policy standards and guidelines for computer systems security that would protect taxpayer data from many threats. IRS put in place a new organizational structure focused on taxpayers, not geography, put in 

place a new management process for setting strategic priorities and 

allocating resources, put in place new organizational employee performance measures, and has issued reliable annual financial statements. 

These modernization accomplishments on the left side of the 

graphic are beginning to affect the goal of improving service. Taxpayers are more likely to get through to IRS’s centers when they 

call and now use the Internet to download hundreds of millions of 

tax forms and check the status of their returns. Nevertheless, the 

IRS is still not where taxpayers and Congress expect it to be. 

Perhaps IRS’s most significant challenge is its compliance goal. 

IRS does not have a reliable measure, the extent to which taxpayers are currently complying with the tax laws. This is risky, because many, but not all of IRS’s compliance and collection programs, such as audits, have experienced large and pervasive declines in recent years. The declines show up in staffing, cases deferred and the inventory of uncollected tax debts with some collection potential, which is now at $112 billion. 

The declines have caused concern that taxpayers may have less 

confidence that their friends, neighbors and business competitors 

are paying their fair share and thus less incentive to fully report 

and pay their own taxes. 

In addition, IRS still faces challenges improving service. For example, despite progress, callers get either busy signals or a hangup before receiving service too often. Modernization is the means 

for achieving IRS’s goals, but there are challenges in each of the 

areas on the left side of the graphic. The scope and complexity of 

64 

business systems modernization projects continue to increase, while 

IRS’s systems management capacity is still maturing. 

IRS will be challenged to ensure that the pace of acquiring systems does not exceed the agency’s ability to manage such acquisitions. The policies and guidelines for computer systems security are 

not fully implemented. In managing and judging its performance, 

IRS needs to have objective measures that are comparable across 

time, set goals so the progress can be judged against the goals, conduct more program evaluations to learn what worked and why and 

better link budget requests with program results. 

Despite clean opinions on its financial statements, the information is available only after the year’s end. Managers need current 

financial information for day-to-day decision making. 

IRS needs to employ a strategic approach for managing human 

capital that includes identifying staffing and training needs. Finally, IRS has been challenged to increase staff in priority areas, 

especially compliance, as called for in recent budget requests. The 

number of staff who conduct audits and collect delinquent taxes is 

lower in 2002 than in 2000. Reasons for this include unbudgeted 

costs and an inability to fully realize internal savings intended to 

allow staff reallocations. 

Also, the growth in electronic filing is slowing. Based on current 

growth rates, IRS will not achieve its goal of having 80 percent of 

returns electronically filed by 2007. Slower growth in electronic 

files will reduce IRS’s ability to shift resources out of paper return 

processing. 

In conclusion, IRS has come a long way from where it was in the 

mid–1990s. Taxpayers and Congress are beginning to see some 

payoff from the oversight and money invested in IRS. However, the 

challenges facing the new Commissioner are significant. The same 

focus on management fundamentals, the means to the end that 

proved successful over the past 5 years should help deal with those 

challenges. 

Mr. Chairman, this concludes my statement. I would be happy 

to answer any questions. 

Mr. HOUGHTON. Thanks very much. 

[The statement of Mr. White follows:] 

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Mr. HOUGHTON. I just really have a general question on compliance, and anybody who wants to sort of chime in, I would appreciate it. 

We have had the commissioner here, and we have talked about 

compliance, and we know there’s a problem, and we have got to do 

something about it, but, you know, I look, Mr. White, at those key 

modernization challenges as you spell out in your testimony. First 

is delivering modernized business systems. Second is ensuring computer systems security. The third is improving performance, financial and so on and so forth. And way down at the end is compliance. It always seems that compliance comes at the end. We have 

given the IRS quite a bit of money over the years, but we haven’t 

really touched the compliance area now. So now, Mr. Levitan, I 

think that you’ve mentioned something like—I haven’t got it right 

here in front of me—$172 million more for the compliance issue. Is 

that it? Why will that go into compliance? Why won’t it go into the 

business systems or the computer systems? Why is it always get 

short thrift here? 

Mr. LEVITAN. Mr. Chairman, our budget recommendation includes additional money over and above the President’s recommendation for both service, compliance and business systems 

modernization. We think each of these areas deserve additional 

funding, and we can get specific payback in each of these areas. We 

are very concerned about compliance. 

We have seen some very positive steps, in that the IRS is trying 

to use the resources it has more efficiently and more effectively 

than they have in the past. We applaud that. They should continue 

to do that. 

The President has recommended increased resources for compliance, and we recommend additional resources over and above that. 

We think that that will pay back well above the investment made. 

Mr. HOUGHTON. Well, I can’t disagree with you at all, but we 

have heard this before. I’m not trying to pick on you, but we have 

heard this before, and we know there has been a steady deterioration in number of the compliance people. And trying to pick it up 

from the bottom now is going to take a human task. 

But my question is, with all these other objectives out here 

whether the money is ever going to filter down to the compliance 

area. Maybe others would have a comment here. 

Mr. WHITE. Mr. Chairman, the four key modernization challenges there are all meant to improve management in IRS and improve the efficiency with which it uses resources, and in that sense, 

they all—they would all contribute to achieving IRS’s goals, both 

the service goal and the compliance goal. 

I would also note that IRS has been challenged in the last several budgets when they have requested additional compliance resources. Those budgets were generally fully funded, but they’ve 

been unable to actually realize the increased resources. 

Unbudgeted costs and so on have eaten up the resources that were 

intended to go into compliance. 

Mr. HOUGHTON. Why won’t that happen again? 

Mr. WHITE. That is a real concern. 

Ms. OLSON. Mr. Chairman, I can only say that in our internal 

conversations among the senior leadership of the Internal Revenue 

98 

Service, that daily and weekly we discuss that very issue, and it 

is our commitment—and I can say even as the National Taxpayer 

Advocate, it is my commitment—that funding for compliance is 

used for compliance, and we are all taking a hard look at our individual entities and organizations’ priorities to make sure that we 

are protecting the compliance monies. 

I think we all feel that it is a fundamental need for the IRS to 

be out there with a presence. Some of the modernization is keyed 

tightly to better enforcement activity. The ability to select appropriate cases for audit or the appropriate cases for collection and the 

right kind of collection effort, whether it is a letter or a human contact or a phone contact or a face-to-face contact—all of that depends on modernization. 

Mr. HOUGHTON. Well, unless the Lord thinks otherwise, we’ll all 

be here next year, and we’ll remember your words. 

Have you got any comments, Ms. Gardiner? 

Ms. GARDINER. Well, actually, in my testimony I also alluded to 

the fact that modernization—one of the reasons that it is so key is 

because it impacts almost every other aspect of the IRS, and that 

would be customer service as well as compliance. And I will say, 

though, that it does appear that things are getting a little better 

than they were in ’96. All of the things—like leins, levies, seizures, 

those numbers are going up. The compliance activities have improved. It is accounts receivable and nonfiled returns that seem to 

be the one thing that really hasn’t turned around as quickly as 

folks would like to see that change. 

Mr. LEVITAN. Mr. Chairman, we can’t hide from the fact that 

over the past ten years the head count at the IRS is down 16 percent. The workload is up dramatically. Those are facts. We have to 

process the tax returns. We have to answer the telephone. Something is going to get squeezed out. 

Ms. GARDINER. If I may add also, the National Research Program 

is—you don’t want to use your compliance resources ineffectively, 

obviously, so getting more to do the same thing isn’t a great solution either. The National Research Program, hopefully, will provide 

information that will allow them to use their resources in the best 

possible way to not look at people and do examinations on taxpayers where there is no change. So they don’t go through all the 

effort and burden without any outcome. 

Mr. HOUGHTON. Well, just a final—and going back to Mr. 

Levitan’s comments, something is going to get squeezed out, but it 

has always gotten squeezed out, and it has all been in terms of 

compliance. And there are always going to be dollar pressures here. 

I guess the thing that we have all worried about is the whole concept of the trust that people have in the IRS system. That is the 

thing we can’t erode any further. 

Mr. Pomeroy. 

Mr. POMEROY. Thank you, Mr. Chairman. Continuing on in your 

theme, I’m going to direct my comments to the testimony of Mr. 

Levitan. And I do think it is striking, from 1992 to 2002, IRS workload increased by 16 percent, while at the same time the number 

of full-time equivalent employees decreased 16 percent. As more resources were needed for IRS to provide essential services such as 

99 

processing returns and answering correspondence, resources were 

shifted from discretionary operations such as compliance activities. 

Now, North Dakota, where I come from, we would call that eating your seed corn. You diminish compliance, you diminish revenue 

collected, and, indeed, you can get to the point where the integrity 

of enforcement itself is broadly called into question or worse yet, 

disrepute. 

Mr. Levitan, as long as I’m working with your testimony here, 

you indicate a number of actions that you recommend as part of 

the Oversight Board. Close the compliance gap, focus on people resources. You talk about a pending crisis with departure of seasoned 

personnel that have put their career at the IRS, retiring in large 

numbers in the next 5 years, don’t see people come along in the 

pipeline to do it? In your opinion, is developing this professional capacity within the Service one of its greatest imperatives at this 

time? 

Mr. LEVITAN. I think that this is one of the greatest challenges 

that the IRS has now. It is not that dissimilar from many government agencies today. We have an aging workforce. We have much 

of that workforce either at or approaching retirement age. It is 

going to be a real challenge to rebuild that workforce. 

In addition to that, if you look at the history over the past decade, the IRS has been out of the recruiting market. They have not 

been recruiting new people for the past ten years. So that makes 

the problem even more serious. We have recommended to the IRS 

that they take a very hard and strategic look at their entire human 

resources programs and make sure that there is a program in place 

to handle this as this eventuality comes to play. 

Mr. POMEROY. I think that is something we’ll want to keep a 

very close eye on, whether or not they are getting plans in place 

to build that professional capacity. I see something quite different. 

I see a reliance on outside consultants. You know, three quarters 

of a billion dollars spent so far on the business systems modernization and the Inspector General’s office telling us the heavy lifting 

is still to come. 

Ms. Gardiner, do you have any evaluation at all in terms of the 

reasonableness of these costs and whether or not we are becoming 

too dependent on consultants versus in-house—— 

Ms. GARDINER. Well, if I comment only on modernization. I think 

IRS, because of the prior problems with modernization and the fact 

that they spent $3 billion and didn’t get much, recognized that they 

really didn’t have the expertise in-house. And I think it was very 

legitimate for them to turn to consultants to help them, but that 

has been, probably, the biggest problem, that they recognize. IRS 

didn’t even know the right questions to ask in many cases, and 

they thought that the PRIME would provide that kind of expertise. 

You know, think about doing it this way or do it that way, or here 

is the latest technology. And that really hasn’t come to bear as 

much as one had hoped, and that has caused some of the problems, 

that they don’t understand the IRS processes as well as they 

should, and sometimes they aren’t asking the right questions. It 

really has required IRS to ask the questions of themselves, and 

they knew that they really weren’t that good at that. 

100 

Mr. POMEROY. I am struck by the fact under the law the Oversight Committee prepares a budget and Congress gets to see the 

budget, even though the Administration recommends a different 

figure, and that the difference between what the Oversight Committee believes a service needs, and what has been recommended, 

is $287 million, with a big bite of it coming out of the processing, 

administration and management function and another out of tax 

law enforcement and business systems modernization. 

These I think are very seriously disturbing developments which 

raise a question in terms of whether we are on track to build back 

this in-house capacity. 

Ms. Olson, I think for a taxpayer, what does this mean to them, 

do you have an evaluation in terms of what is in the taxpayers’ interest, a strong professionally-staffed IRS versus an understaffed 

IRS, dependent upon outside consultants here, private bill collectors there, and this kind of jerry-rigged system we seem to be 

launching into? 

Ms. OLSON. Well, I have a concern about the use of outside consultants, particularly, as Ms. Gardiner addressed, with regard to 

the work processes of the IRS. And what I have witnessed coming 

into the IRS the last two years is some of the most knowledgeable 

employees of the IRS deferring to outside consultants on process 

issues, on structural issues, on redesign issues. I’ve not had as 

much experience with the actual information technology side, and 

I have expressed my concern about that. We actually had an experience of having the benefit of some consultants in reviewing the 

vision of the Taxpayer Advocate Service, where it should be in 5 

years. It was an interesting education, I think, for the consultants, 

because you had an informed business owner who was saying, excuse us, we’ll tell you where we are going to be in 5 years, and you 

will help us design what that is going to—you know, how we are 

going to get there, but we have our vision, thank you very much. 

I think that arrangement was very successful, but I do not see 

that being reproduced in the rest of the IRS. So weaning us off consultants would be a very good thing. 

And once you wean them you have to have a trained workforce, 

and the IRS really is trying but is very much behind in training 

its employees and putting its resources into training. If you don’t 

train your employees, they don’t feel professional, they don’t feel on 

top of the job, and in customer service jobs, they feel threatened 

by the taxpayer who may know more than they do. It is a very difficult situation, and a serious one. 

Mr. POMEROY. I used to run an agency, an insurance department, 

and I think the concerns you have go to just general management 

issues, public or private sector. We have got to give our people the 

training they need to feel professional, and they can professionally 

and competently perform their responsibilities. 

I thank the panel for their response to my questions. 

Thank you very much, Mr. Chairman. 

Mr. HOUGHTON. Thank you very much. 

Mr. Portman. 

Mr. PORTMAN. Thank you, Mr. Chairman, and I thank the panelists for not just being here today, but for what they are doing as 

they are stakeholders in this system along with the taxpayers in 

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being watchdogs and making sure that the IRS continues to try to 

meet—as Commissioner Everson said, the promise of the 1998 reforms which are not fully realized. 

I’m glad to see some IRS folks are still here to listen to this testimony, and I am sure they will be reviewing what you are saying. 

Five years out and we have made progress, but we haven’t 

achieved what we had hoped to. I would say, although this is dangerous to apply a grade to it, being a father of three children who 

get report cards on a quarterly basis, I guess I have some basis, 

but I would say about a B minus. You can’t ignore the fact that 

we have made progress in almost every category, and that includes 

electronic filing which was about 16 percent when we started this 

enterprise, now it’s about 41 percent. That is a huge advantage to 

the IRS and to the taxpayer, because about half of the 22 percent 

error is caused by the IRS, which then comes back to the taxpayer 

and all the hassles downstream. 

So the 16 percent reduction in employment doesn’t worry me as 

much as we have these sorts of things happening. Modernization 

will require fewer people to do the same job better. 

The opinion surveys conclude the American customer satisfaction 

index survey shows that we are doing better. The IRS was at the 

bottom of the pile. Now, they are partway up in terms of the way 

people view the Service. So customer satisfaction or taxpayer satisfaction has increased. Still it is not what it should be, but it has 

increased. Phone service is now better. We talked earlier about the 

fact that we have gone from millions of busy signals to 250,000 

busy signals. Eighty-four percent of taxpayers got through instead 

of 69 percent just last year, so we are doing better. Still not where 

we should be in terms of modern service institutions around the 

country providing better and better service, and the IRS hasn’t 

caught up, but we are doing better. The walk-in centers are working well. The assistance is better according to GAO, Mr. White. The 

Oversight Board makes the point continually, which it should, that 

Congress keeps complicating the tax code. We talk about simplification, and we are constantly changing the law. Even if it is 

not making it more complicated, just a change sometimes causes 

enormous disruption at the IRS. So that is an additional burden 

you have on you. 

The 16 percent, again, increase in workload is not too troubling 

to me over the last decade. I think—I’m surprised it is not higher. 

I guess it depends what you consider to be workload. But it is that 

change in the tax code and the continual challenge to keep up with 

that and be able to provide information to taxpayers that I find interesting. 

I think it was GAO that studied whether people were getting the 

correct answer or not. I think that is now up to 70 to 80 percent 

where people are getting the correct answer when they ask the IRS 

a question based on your listening in on phone calls, and that is 

a vast improvement from when we started this process, where I believe it was under 50 percent. But I wonder how your people know 

it is the right answer. If you put eight accountants in a room, they 

will give you eight different answers to some of these complicated 

questions, and the IRS will give you a ninth and tenth answer. I 

don’t know much about your methodology, but the point is it is betVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00107 Fmt 6633 Sfmt 6602 E:\HR\OC\C115A.XXX C115A
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ter, but we still have some challenges, some of which you state 

right here. I think there are two challenges you all have identified 

that are obvious ones, and otherwise the grade would be even higher, and one is that even though we have made the point continually, and I to ask the panel whether they agree with it still, that 

better service is not inconsistent with more and better and more 

efficient enforcement compliance. Certainly the private sector has 

found that, whether it is a credit card company or an airline or 

anybody else in the service business. As they improve their service 

to the customer, they actually improve their compliance, and that 

was the goal with regard to the Commission and the reform legislation. 

I would just ask that general question, do you all still believe 

that? Were we wrong? Have we improved service, and yet compliance has gone down? The notion was to improve service and compliance would increase. I guess without prejudging your answers to 

that, one issue obviously is that modernization has not caught up 

yet to where we want it to be, and, modernization meaning just 

better service through better technology, will help on compliance 

once we turn the corner, which, hopefully, will start happening 

here in the next 12 months as we begin to get our systems even 

further in place. 

And second is the question of, I guess, the natural thing here in 

Washington, which is the pendulum tends to swing when you focus 

on customer service in terms of the fiscal side. In other words, the 

budget gets increased there, you have less resources on the other 

side. But do you all still think that by focusing on service, we can 

improve compliance? Maybe Mr. White could begin, then Mr. 

Levitan, Ms. Gardiner. 

Mr. WHITE. Mr. Portman, you are right that there needs to be 

a balance. There’s no doubt that better service will help compliance 

to some extent. There are also a group of taxpayers, however, that 

will not comply because of better service. So you need both enforcement efforts and service. 

One of the fundamental problems here is the lack of basic management information, because IRS does not have a current measure 

of the—of voluntary compliance. It is difficult to know what the impact of service is on compliance right now. 

Mr. PORTMAN. Do we expect to have that with the new compliance program? While the national research program, if they implement it as planned, should provide them much better management 

information than they have now about voluntary compliance, and 

should help them better make decisions about the most effective 

way to increase compliance. 

Not just measure it, but be able to target it more efficiently? 

Mr. WHITE. Yes. 

Mr. PORTMAN. Good point. 

Larry. 

Mr. LEVITAN. The Board absolutely believes that customer service, that is service to taxpayer, and compliance enforcement are two 

absolutely necessary roles and responsibilities of the IRS. 

They cannot be separated. You should not have a pendulum 

swinging back and forth, although clearly what we have seen is, 

from a noise level, that pendulum has swung. 

103 

Back in the time of the restructuring commission, there was a 

tremendous concern about service. Now, there is a much greater 

concern about enforcement. But we need to have a steady course. 

One of the major recommendations that the board has made is that 

the IRS establish long-term goals in both of these areas: Where do 

we want to be in service in the long-term? We talk about improvement from 50 percent to 70 percent. But is that enough? We need 

to have a long-term goal that all of our programs are focused on 

in both the enforcement and compliance area as well as the service 

area. 

We did establish a long-term goal for electronic filing. That has 

been a useful tool because the entire—the programs have been focused on trying to attain these goals. So we would hope to see that 

the IRS would, working with Congress and with the administration, establish those kinds of goals. 

Representative PORTMAN. It is extremely important. I know the 

goal of 80 percent electronic filing by 2007 was criticized a little 

earlier this morning, and I understand that may be unrealistic. We 

won’t know, as the Commissioner said, until a couple of years, because we are seeing some improvements in the technology side, 

particularly with regard to outreach. 

And he did mention that the more complicated returns and business returns is where we ought to focus, not just on a percentage. 

But I think that is very helpful to have that goal out there. To go 

from 16 to 41 percent in electronic filing only happened because we 

put a lot of pressure on the system. 

Ms. Gardiner. 

Ms. GARDINER. Yes, I certainly believe that the customer service 

improvements help compliance. The examples in our testimony 

were toll-free and walk-in. It actually was my office that did the 

monitoring of the telephone calls. We monitored them with an IRS 

employee, and we worked with them to ensure that we both agreed 

that it is correct or incorrect. So we are somewhat relying on their 

opinion as well as ours. 

For customer service in terms of walk-in, at one point in time it 

literally was a flip of the coin. If a taxpayer came in and asked a 

question it was, like as you had indicated, about 50 percent. I think 

it was actually 52 percent. But now, it is a little closer to 70 percent. 

But another feature that is very important to us that has improved dramatically over the past year is that about a year ago 

when we sent our auditors in anonymously and they posed questions, basic tax law questions to IRS employees, in many cases the 

IRS employees said, Oh, it is in this publication, and just handed 

to it our folks. We didn’t consider that customer service. And yet 

the IRS considered that a correct answer if the publication had an 

answer in it. 

That has changed dramatically. They now will either not refer to 

the publication and just give the answer, which is, of course, the 

best scenario. But in other cases, they will turn to the page in the 

publication, explain where it is. So those kinds of things help people comply with the tax law, obviously. 

Representative PORTMAN. Ms. Olson. 

104 

Ms. OLSON. I do not think that you can have enforcement without customer service. I am concerned about the day-to-day experiences of taxpayers, and our employees not feeling like they have 

permission to treat taxpayers in the appropriate way, or the tools 

to treat them. That is one of the reasons why I covered CDP in my 

testimony, because what you see there are the day-to-day experiences of IRS employees viewing these taxpayer protections as 

nuisances because they can’t get their job done, which is enforcement. 

The quality measures, the way that you measure IRS employees 

and what you measure them on, is vitally important to getting the 

message across that customer service counts as much as the business results. And if you just measure them on did they hand them 

the Publication 1, and you don’t measure them on did you discuss 

what were the issues that are covered by Publication 1, then you 

are going to get results that are just lip service to customer service 

and not meaningful. 

I think it has to start at the top. And I don’t think it has entirely 

filtered down in our management processes that these are equal 

measures. I am concerned about that. 

Representative PORTMAN. Well, Mr. Chairman, my time is way 

over, and I appreciate your indulgence. Can I just throw one other 

out there? 

I said that there were two issues where there seems to be some 

consensus that we have existing challenges in order to get that 

grade a little higher. 

One is obviously the whole issue we have talked about of compliance enforcement. The other is personnel generally. And, Larry, 

you have talked a lot about this over the years in terms of the concern in government generally about retirements and not having the 

workforce. 

The other is morale. And I think morale at the IRS is much higher than it was in 1998; certainly it is. But still we have issues. The 

‘‘deadly sins’’ are something that this Congress is trying to legislate 

on, working with the IRS to try to come up with more reasonable 

ways in which to deal with the issue you raised, Nina, which is 

what tools do they have; what can IRS employees on the line do 

or not do? 

And the other is just implementing these changes in a cultural 

way through a huge institution. And you talked about, I think 

early on, this notion of measuring someone’s progress as an employee at the IRS, not based on how much money they get out of 

the taxpayer, but how professional they are in terms of providing 

good service. And that includes training, courtesy, the right answer, and so on. That is a cultural shift that, moving from the enforcement mentality more to the service mentality, that probably is 

going to take a while longer. 

Thank you, Mr. Chairman. 

Representative HOUGHTON. Thank you. Mrs. Blackburn. 

Representative BLACKBURN. Thank you, Mr. Chairman. 

I have a constituent who likes to say that he thinks the two most 

frustrating acronyms in the English language are the HMO and 

the IRS. 

105 

And listening to all of you all today, I think that probably you 

find our very complex Tax Code very frustrating, not only for yourself and your employees but also for the taxpayers. 

I do have a couple of questions. Mrs. Olson, going back to your 

testimony, and addressing the complexity of the Tax Code and 

doing taxpayer clinics, would you please speak briefly to what you 

plan to do for our electronic filers as we are moving these through 

the process and to the E-file? 

Ms. OLSON. I think particularly for low-income taxpayers who 

may not have computers with which to file, or may not be computer 

literate, some of the things the IRS is doing that we are certainly 

working with the IRS about are building coalitions with community 

groups where taxpayers can come in and receive free access to electronic filing—they may be able to do it themselves, they may have 

someone else do it—and move them away from going to those sites 

that I have a lot of concerns about: check cashing places, pawn 

shops, gun stores; you know, folks who are offering electronic filing 

in order to get access to the refunds. 

Representative BLACKBURN. A follow-up to that, then. If you are 

going to do this—and in someone’s testimony I read about doing 

some training—you were looking at implementing a program for 

training some of those who would be tax preparers, and maybe 

even a certification process. Would you involve these individuals in 

that process? 

Ms. OLSON. Absolutely. Those would actually—the unenrolled 

preparers are definitely the target, in fact, of those requirements, 

to make sure that taxpayers know when they go to get their returns prepared, and they are paying a fee for it, that the folks who 

are doing it are competent in tax, not just opening a storefront. 

Representative BLACKBURN. Excellent. Thank you. 

Mr. White, going to your testimony, the top paragraph on page 

8 says: In 2000 the IRS implemented a new strategic planning and 

budgeting process that provides the framework for developing 

goals, objectives, and measures at the operating division level, although we have not evaluated the effect of the process on IRS performance, the operating divisions, or identifying strategic goals. 

Now, we have talked a lot, going back to the Chairman’s first 

question, we have talked about morale, human capital, process and 

priorities, and the importance of that, and how there is, you know, 

it is kind of like the big elusive ‘‘they’’ that is out there. 

We are talking all around it but not talking about setting down 

some solid priorities, some solid benchmarks, the goals, how they 

will be met. Why have you all chosen not to evaluate the strategic 

planning and budgeting process? 

Mr. WHITE. That is a good question. And the Restructuring Act, 

I think, did a very good job of setting some very high-level strategic 

goals for IRS to improve customer service while ensuring compliance. 

IRS has put in place this process for trying to set priorities internally. And I think the fundamental answer to your question is the 

lack of management information inside IRS; that without better 

data about compliance, for example, it is very difficult to evaluate 

the impact this new process has had. 

106 

IRS managers get together with the Commissioner to allocate resources internally, to decide whether to put more resources into upfront education programs, for example, or more resources into compliance efforts. 

All of those programs are intended to have an impact on compliance. But without a measure of compliance, IRS and outside observers are unable to determine the effectiveness of it. And so it 

shows the importance of investing and collecting better information 

about compliance. 

So you have got this kind of fundamental management information. And the NRP program that we have discussed a couple of 

times here is intended to do that. They have started implementing 

that. It is going to be a couple of more years, though, before they 

have the data available for that, so they have got a more databased basis for making these kinds of decisions. 

Mr. LEVITAN. Mrs. Blackburn, if you don’t mind, we have—while 

I absolutely agree with what Mr. White is saying about the need 

for better data, particularly about enforcement and compliance, one 

of the areas that I think the IRS has done quite a good job on is 

strategic planning and laying out a plan, objectives, setting goals, 

where they do have good data for their organizational units, and 

then integrating that planning process into their budgeting process. 

We have been intimately involved in reviewing that and discussing that with IRS, and think that they do quite a good job of 

that. We think the primary challenge that they have is not so 

much the planning and defining what they need to do, but the executing of that and making it happen. 

Representative BLACKBURN. Thank you. I see my time has expired. 

Representative HOUGHTON. Thank you very much. 

Well, Ms. Olson, Ms. Gardiner, Mr. Levitan, Mr. White, thank 

you very much for being with us today. 

There being no further business before the joint review, the hearing is adjourned. 

[Whereupon, at 12:10 p.m., the committee was adjourned.] 

107 

QUESTIONS FOR THE RECORD ADDRESSED TO IRS COMMISSIONER EVERSON BY

SENATOR CHARLES E. GRASSLEY

1. You testified that you plan to bring in a contractor to review Business Systems 

Modernization, in an effort to determine progress to date, risks facing the program, 

and any potential midcourse corrections. I would like to know who will be undertaking this study for you, how long you expect it to take, and how much it will cost. 

I would also like to know whether you would be able to brief my staff on the results 

of this study and on the actions you decide to take because of it. 

Answer. At this time, we have not yet identified who will be conducting this 

‘‘health check’’ of the Business Systems Modernization effort. We are evaluating several independent firms, and hope to have an announcement within the next few 

weeks. We do expect that any review will last between four and six weeks, and cost 

the IRS about $200,000. We will be happy to brief you when we have the results 

of this work. 

2. RRA ’98 authorizes the Commissioner of Internal Revenue to hire 40 ‘‘critical 

pay’’ staff. These people are executive level employees who are hired, outside of the 

conventional Senior Executive Service Parameters, for a fixed term. A number of 

these slots are vacant and a number of the filled slots are, quite candidly, devoted 

to positions that RRA ’98 writers did not envision. Former Commissioner Rossotti 

indicated to me at the end of his term that he simply could not keep the IRS on 

the right path (i.e., organizational redesign and technology modernization) without 

these critical people. I would like to know how you plan to use your critical pay authority. Specifically, do you see yourself focusing critical pay employees in a particular area of the organization? Do you plan to retain all of the positions that you 

inherited? 

Answer. The streamlined critical pay authority has been a highly flexible, indispensable tool to the IRS and has proven enormously beneficial as we plan, direct, 

and implement our extensive reorganization and modernization efforts. As I have 

previously testified, there are three areas on which I intend to focus during my tenure as Commissioner: (1) continue to build upon the reorganization begun by Commissioner Rossotti; (2) continue to drive the information technology modernization 

program, and (3) strengthen the integrity of our nation’s tax system through enhanced enforcement activities. 

I believe the model of matching experienced IRS executives with business executives from outside the Service has been very effective in bringing other perspectives 

and new ideas to tax administration. With that in mind, I intend to continue to use 

the critical pay authority to recruit and retain exceptionally well qualified business 

executives from outside the Service to fill positions that are critical to the Service’s 

successful accomplishment of its mission, and that require expertise of an extremely 

high level with significant experience outside the IRS. 

I will continue to establish streamlined critical pay positions based on the needs 

of the organization. Although I anticipate our strongest needs for outside expertise 

will fall mostly in the areas of information technology, enforcement, and customer 

service, I do not plan to focus on a particular area of the organization. Rather, I 

will strive to maintain a balance across the organization of leaders from both inside 

and outside the Service. All positions established to date have made significant contributions to the Service; however, positions will not automatically be backfilled as 

they become vacant. In each case, we will reassess the need for the position, as well 

as the need for outside expertise and the continued use of critical pay authority. 

3. As I indicated in my opening statement, I am quite concerned about human 

capital issues at the IRS. The agency’s senior human resources position is vacant. 

Many of the agency’s employees are eligible for retirement, or will be eligible within 

the next five years. Steve Nickles, who recently left the IRS Oversight Board, tells 

me of his concern that the agency does not effectively manage its training dollars 

either a) in the sense of having a rational medium-to-long term training plan for 

individual employees or b) in the sense of being able to track training expenditures 

to individual employees). I suspect that you are in a position in which, if you manage human capital issues, you will be able to make a significant difference in the 

satisfaction of the agency’s employees and in the medium and long term performance of the entire agency. How do you plan to ensure that human capitol issues are 

aggressively managed? What near term goals do you have? How will those who 

oversee IRS be able to tell that the agency is moving in the right direction, at an 

acceptable speed and cost? 

Answer. I agree with the observation that IRS needs to do more to increase the 

effectiveness of its training programs. In this regard, we are replacing our legacy 

training management system with a new Learning Management System (LMS) that 

will greatly improve the amount of information available to IRS managers about 

108 

employees regarding organizational training needs. The LMS will allow the Service 

to more closely link training to competencies and to employees’ career plans by allowing them to electronically create and monitor individual development plans. Our 

managers will use competency-based skills assessments and ‘‘gap’’ analyses to design customized training plans to meet their organizational and employee needs. 

This new capability should contribute to increased employee satisfaction and improved individual and organizational performance. In addition, we have developed 

an evaluation approach that measures how much time it takes to build a critical 

mass of skills in key occupations. This methodology will give our business units the 

much-needed ability to gauge how quickly their key human capital talent needs are 

being addressed. 

We have also made significant progress in assessing and improving the quality, 

quantity, and effectiveness of leadership training and development within the IRS. 

We continually monitor a comprehensive set of performance indicators relating to 

front-line manager, senior manager, and executive leadership development activities 

to ensure their on-going effectiveness and continuous improvement. Some of the factors taken into account in the assessment include instructor effectiveness, cost, curriculum usefulness, timeliness, student satisfaction, and enhanced job proficiency. 

As a next step, we are developing more rigorous performance measures for evaluating our development efforts to provide a more systematic, in-depth assessment of 

organizational impact. Finally, we are making a determined effort to improve the 

financial data available to our senior leaders by integrating, where possible, our 

training and development activities with our corporate financial systems to improve 

the tracking of expenditures in the core training curricula. 

As we all have learned, changing times demand new thinking and new approaches to the way we manage our people. Designing, implementing, and maintaining effective human capital strategies are critical to me. I intend to be actively engaged in assessing and improving human capital management practices as part of 

my effort to bring more accountable, results-oriented management to the IRS. Very 

shortly, I will appoint a Chief Human Capital Officer who will be charged with 

leveraging the Service’s human capital policies, programs, and practices to more 

fully integrate and align them with the IRS’ overall planning and decision-making 

processes. The ‘‘bottom line’’ is that I want the IRS’ human capital program to be 

strategically focused and demonstrate how and where it adds value to our core mission and strategic priorities. Specific initiatives we will undertake include: • Continuing the effort to streamline, modernize, and automate recruitment, 

marketing, hiring, and succession planning systems to bring quality people on 

the job more quickly. • Continuing the effort to develop an enterprise e-learning strategy to shift 

from a classroom-based to a technology-enabled learning environment by 

partnering with OPM to leverage the use of the Go Learn initiative to increase 

the efficiency and effectiveness of our training activities. 

• Continuing the refinement of our employee performance management system to strengthen the correlation of individual accomplishments to business results. IRS managers are currently evaluated and rewarded on their individual 

contribution to specific business results and I would like to provide this opportunity to all employees. 

• Expanding broadband pay-for-performance systems to all IRS supervisors 

and managers with consideration given to applying it to the general workforce. 

From a business standpoint, pay-for-performance is critical since it provides 

higher pay for higher performance and gives IRS managers flexibility similar 

to what exists in private sector knowledge-based professional services organizations. 

• Reorganizing the Office of Strategic Human Resources to better position 

this function to where it can best support the core mission and move that office 

to a more focused, streamlined, integrated, and results-oriented organization. 

This effort will also include a broader examination of IRS’ three-part human 

capital organizational structure/mission (a strategic component, embedded expertise, and shared services) to ensure that it is best suited to efficiently and 

effectively lead the transformation of IRS to a true human capital organization. 

The President’s Management Agenda initiative for the Strategic Management of 

Human Capital requires the IRS to rigorously assess its human capital policies and 

practices to ensure they are moving in the right direction at an acceptable speed 

and cost. With this impetus, we are currently developing a hierarchy of new strategic human capital metrics that will provide a more systematic, data-driven assessment of our progress towards achieving our human capital aims and assist us in 

analyzing root causes of problems and issues—thereby improving our ability to 

maximize the value of our human capital investments while managing the related 

109 

risks. When implemented, the data will be made available to those who oversee the 

IRS. 

QUESTIONS FOR THE RECORD ADDRESSED TO IRS COMMISSIONER EVERSON BY

SENATOR MAX BAUCUS

Background: Congress created the earned income tax credit in 1975 as a bipartisan effort to reduce the tax burden on low income Americans, while giving a powerful incentive to work. President Reagan hailed the expansion of the EITC in 1986, 

as the ‘‘best anti-poverty, the best pro-family, the best job creation measure to come 

out of Congress.’’ It is estimated that nearly 4.8 million people, including 2.6 million 

children, are lifted out of poverty every year because of the earned income tax credit. 

Questions. 

1. There is some confusion regarding IRS’s plans with regard to its proposed EITC 

‘‘precertification’’ program, especially with regard to whether there will be a public 

comment period for the new forms that selected families will be required to submit. 

Will there be a public comment period on the forms and documentation requirements? If not, why not? If there will be a public comment period, when will it be 

announced? Will the comments be reviewed and considered before the forms are 

mailed to the first 45,000 families this summer? 

Answer. We are working closely with affected stakeholders, and have incorporated 

many of their concerns and comments into the draft form. In addition, on June 13th, 

we issued an announcement (Announcement 2003–40) requesting public comment 

on the EITC residency certification pilot. We welcome all comments and suggestions 

on how taxpayers can establish that they are entitled to the credit because a qualifying child resided with them for more than half the year. Concerns expressed by 

stakeholders prior to and in response to this Announcement will be carefully considered by the IRS and Treasury Department in developing the certification pilot and 

will be considered before contacting the initial 45,000 participants in the pilot 

project. During the comment period, we will continue to work with Congress and 

other interested stakeholders to ensure the best possible program. 

2. Since becoming IRS Commissioner, have you had a chance to thoroughly evaluate the proposed pre-certification program? Did your evaluation examine not only 

the impact of the program on compliance, but also its impact on participation? To 

what extent will the pre-certification initiative deter or block families who are truly 

eligible from receiving the credit? How does the IRS intend to remedy the potential 

adverse impact on eligible recipients of the EITC? 

Answer. I have evaluated both the current administration of the EITC and the 

administrative proposals (which include the certification initiative). The EITC participation rate is very high, and we will make every effort to ensure that any 

changes in the administration of the program do not deter participation by eligible 

claimants. As a result of my review, the IRS has announced a 5–point EITC initiative to (1) reduce the backlog of pending EITC examinations to ensure that eligible 

claimants receive the refunds quickly, (2) minimize the burden and enhance the 

quality of communications with taxpayers by improving the existing audit process, 

(3) encourage eligible taxpayers to claim the EITC by increasing outreach efforts 

and making the requirements for claiming the credit easier to understand, (4) ensure fairness by refocusing compliance efforts on taxpayers who claim the credit but 

are ineligible because their income is too high, and (5) pilot a certification effort to 

substantiate qualifying child residency eligibility for claimants whose returns are 

associated with a high risk of error. 

The IRS will evaluate the effects of the certification pilot on participation, and 

will use this information to further refine the certification process. 

3. We understand that the IRS plans to expand these new requirements to two 

million filers starting next summer without waiting for the full evaluation results, 

and in particular, without waiting for results on the impact of the initiative beyond 

roughly the 45,000 level before the evaluation has been completed and the answers 

to these questions are known? If so, please explain the rational for proceeding without conducting an appropriate evaluation? 

Answer. We will not expand the qualifying child certification proposal arbitrarily. 

The IRS intends to evaluate the qualifying child certification pilot during pre-filing, 

filing and post-filing stages. A decision to expand the certification program will only 

be made after consideration of claimant response to, and IRS operational experience 

with, the pilot. 

4. The latest draft of the new pre-certification forms and requirements available 

from the IRS would require tax filers to produce documents that will be impossible 

for significant numbers of eligible tax filers to secure despite their best efforts. SpeVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00115 Fmt 6633 Sfmt 6621 E:\HR\OC\C115A.XXX C115A
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cifically, it appears that if eligible filers cannot find a third party to fill out the affidavit who fits one of the IRS’ categories, the filers could be denied the EITC. What 

is the IRS doing to address this problem so that eligible filers are not denied the 

EITC because they cannot produce documents that are impossible for them to secure? 

Answer. Under the certification pilot, taxpayers will only be asked to submit documentation showing that the claimed child lived with them for more than half the 

year and will not be asked to submit relationship documentation. Affected taxpayers 

will be given multiple ways and multiple sources to demonstrate that they meet the 

EITC residency requirement. The IRS is continuing to seek outside stakeholder 

feedback, through Announcement 2003–40 and through taxpayer and practitioner 

focus groups, on suggestions for other credible sources of documentation. In addition, claimants who cannot obtain the suggested documentation can seek help at an 

IRS Taxpayer Assistance Center or through a special toll-free number to speak with 

IRS personnel specializing in the EITC qualifying child certification process. The 

IRS will evaluate the effects of the certification pilot on compliance, participation, 

and taxpayer burden, and will use this information to further refine the certification 

process. 

5. The pre-certification initiative would require a group of hard-working, low-income families to submit forms to IRS and go through a procedure required of no 

other group of tax filers. Treasury Secretary Snow was recently asked about the 

EITC pre-certification program during a luncheon speech he gave at the University 

Club. Secretary Snow indicated that the IRS also would be doing something to ‘‘precertify the rich.’’ Could you explain how the IRS intends to ‘‘pre-certify the rich?’’ 

How would this program work? What taxpayers would be targeted? When will it be 

initiated? 

Answer. We already collect information about many sources of income and some 

deductions and credits. For example, mortgage interest is reported to taxpayers and 

to the IRS by mortgage companies on Form 1098. Divorced, noncustodial parents 

must attach a waiver from the custodial parent to their tax return in order to claim 

a dependent exemption. Employers must obtain state certification that an employee 

is a targeted group employee before claiming the Work Opportunity Tax Credit. In 

other situations, the IRS requires taxpayers to provide additional information about 

claimed tax benefits. For example, we recently issued regulations requiring the disclosure of tax shelters that may be abusive. In addition, we are developing a process 

for the Health Coverage Tax Credit (HCTC) that would require certain taxpayers 

applying for the advance payment of the HCTC to provide documentation (the 

COBRA election form) to the IRS before payments are made to the insurer on their 

behalf. We continually try to balance the need to collect information for tax law enforcement with the need to minimize taxpayer burden. 

QUESTIONS FOR THE RECORD ADDRESSED TO IRS COMMISSIONER EVERSON BY

SENATOR CARL LEVIN

Questions from Senator Carl Levin: 

1. Please describe the new EITC rule to be proposed by the IRS, including a detailed description of any heightened certification, verification or documentation requirements that would be placed on EITC claimants; identify precedents and requirements that would be placed on EITC claimants; identify precedents and equivalent existing requirements for taxpayers claiming similar tax credits; and indicate 

whether these requirements would apply only to EITC claimants or also to other 

groups of taxpayers claiming federal tax benefits. 

Answer. The pre-certification pilot will require certain taxpayers to demonstrate 

that they meet the residency requirement with respect to a child before their EIC 

claims are accepted. The taxpayers required to demonstrate residency will be those 

who, based on IRS research, are more likely to claim children who do not satisfy 

the residency requirement (such as caregivers other than the child’s parents and fathers who do not file joint returns.) 

Under the pre-certification pilot, a taxpayer will be encouraged to fill out a form 

and provide certain documentation that establishes that the taxpayer meets the 

residency requirement with respect to a child in advance of the filing season. To establish residency, taxpayers can use records, letters on official letterhead, or affidavits from third parties, such as clergy, health care providers, community based organizations, and social services agencies, that have information about the residency 

of the claimant and child—either through their records or personal experience. 

Claimants who cannot obtain the suggested documentation can seek help at an IRS 

Taxpayer Assistance Center or through a special toll-free number to speak with IRS 

personnel specializing in the EITC qualifying child certification process. AdditionVerDate Aug 04 2004 05:16 May 14, 2005 Jkt 021115 PO 00000 Frm 00116 Fmt 6633 Sfmt 6621 E:\HR\OC\C115A.XXX C115A
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ally, we will assign these claimants a qualifying child specialist who will handle his 

or her qualifying child issues from start to finish. 

If the chosen taxpayers choose not to pre-certify, they will be required to send in 

the same forms and documentation with their tax returns. Taxpayers who pre-certify will receive their EIC refunds faster than taxpayers who send information with 

their tax returns. Taxpayers who do not pre-certify or send in the required information with their tax returns will be given an additional opportunity to certify residency, after which time, they will be denied the EIC with respect to a claimed child, 

subject to normal appeals rights and the ability to contest the denial in Tax Court. 

We are currently developing a process to register taxpayers for the advance payment of the Health Coverage Tax Credit, which will be similar to a ‘‘pre-certification 

program.’’ As discussed in our response to question 2 below, there are other circumstances in which we request taxpayers to provide documentation prior to receiving a tax benefit. 

2. Does the IRS plan to ask taxpayers, in some circumstances, to submit an affidavit to support an EITC claim? If so, please identify precedents for requiring taxpayer affidavits in similar circumstances. 

Answer. If a taxpayer uses an affidavit to prove residency, then it must be filled 

out by someone other than the taxpayer or the taxpayer’s spouse. As stated above 

in response to question 1, an affidavit from third parties is one way to prove residency. We also require taxpayers to obtain verification before claiming certain other 

tax benefits. For example, employers must obtain state certification that an employee is a targeted group employee before claiming the Work Opportunity Tax 

Credit (WOTC). Although certification for the WOTC does not require affidavits, it 

does require certain forms to be completed by the employer. 

3. Please indicate whether the IRS intends to issue the EITC rule in a form that 

will require taxpayers immediately to comply with new documentation requirements 

to obtain the credit, and, if so, why the IRS is failing to solicit or consider any public 

comment or analysis prior to these requirements taking effect? 

Answer. The 45,000 taxpayers selected for the pilot will be contacted in the latter 

half of August. These taxpayers will have until December 31, 2003 to submit documentation before the filing season. Taxpayers who respond by December 31, will 

avoid any delay in receiving their EITC refund. A taxpayer who fails to submit documentation before the filing season does not have his or her claim denied at that 

time. Rather, the taxpayer can still submit the required documentation with the tax 

return. There will be a minor delay in the receipt of the EITC-portion of the refund, 

while the documentation is processed. If a taxpayer has not pre-certified and has 

not submitted the required documentation with the tax return, the EITC-portion of 

the refund will be frozen and the IRS will contact the taxpayer to request the documentation. If the taxpayer fails to submit the documentation, the claim will be denied (just as it is currently denied in the correspondence examination context) and 

the taxpayer will be afforded all rights to Appeals and judicial determination of his 

or her claim. 

The IRS has been briefing stakeholder groups and receiving their input since 

March. The Stakeholder Partnerships, Education and Communication (SPEC) organization within the Wage and Investment (W&I) Division of IRS provides comprehensive EITC services through education, outreach and assistance to low-income 

taxpayers. 

The following SPEC national partners attended a briefing and roundtable discussion on the EITC task force proposals on March 25, 2003: U.S. Department of 

Health & Human Services (HHS) (national); National Credit Union Administration 

(NCUA) (national); Federal Deposit Insurance Corporation (FDIC) (national); Center 

on Budget & Policy Priorities (national); Community Action Agency (national); National League of Cities (national); and Armed Forces Tax Council (national). 

The following SPEC local partners and/or community based coalitions that also 

participated in discussions of the EITC task force proposals, in roughly the same 

March 25th time period: Boston EITC Coalition (Boston, MA); Family Economic Success Services (Denver, CO); Indianapolis Asset Building Coalition; Milwaukee Asset 

Building Coalition; Central City Asset Building Coalition (New Orleans, LA); Technical Vocational Institute (Albuquerque, NM); City of Tempe Coalition (Tempe, AR); 

Central Region Coalition for Building Family Wealth (San Diego, CA); and San Antonio EITC Coalition. 

The National Taxpayer Advocate also holds regular roundtable discussions. The 

following groups were invited to participate in an NTA roundtable discussion about 

the EITC task force proposals: American University, Washington College of Law 

LITC; Annie E. Casey Foundation; Brooklyn Legal Service Corporation LITC; Center for Economic Progress LITC; Center on Budget and Policy Priorities; Community 

Action Project of Tulsa County LITC; Community Food Resource Center; Council on 

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La Raza; DNA-People’s Legal Services, Inc. LITC; Georgia State College of Law 

LITC; H&R Block; Legal Aid Society of Middle Tennessee and the Cumberlands 

LITC; Los Angeles Legal Aid Society; Military Armed Forces Counsel; National 

Women’s Law Center; Pine Tree Legal Services LITC; Quinnipiac College School of 

Law LITC; Taxpayer Advocacy Panel, EITC Issue Committee; The Community Tax 

Law Project LITC; The Legal Aid Society of Cleveland; University of Connecticut 

School of Law LITC; University of Washington School of Law LITC; University of 

Wisconsin, Milwaukee School of Business Administration LITC; and Villanova University School of Law LITC. 

The IRS National Public Liaison also coordinates regular meetings between the 

IRS and various stakeholder groups. The following groups were briefed on approximately March 18, 2003: IRS Advisory Council (IRSAC) W&I subgroup; American Institute of Certified Public Accountants (AICPA); National Society of Accountants 

(NSA); National Association of Tax Professionals (NATP); National Association of 

Enrolled Agents (NAEA); American Society of CPAs (AAA–CPA); National Conference of CPA Practitioners (NCCPAP); AARP Foundation; HR Block; and Jackson 

Hewitt. 

In addition, on June 13, 2003, we issued an announcement seeking public comments on aspects of the pre-certification pilot. Throughout the pre-filing and filing 

season, we will evaluate all aspects of the verification process, including claimant 

response. We will use this feedback to determine our next steps. If we decide to 

move forward, we will use the results of the pilot to refine the process and to determine how to maximize participation and minimize burden for legitimate claimants. 

4. A May 2002 report published by the Brookings Institution concluded that, in 

1999, ‘‘an estimated $1.75 billion in EITC refunds was diverted toward paying for 

tax preparation, electronic filing and high-cost refund loans.’’ Please explain how the 

proposed EITC rule would address the issue of substantial EITC funds being diverted away from low-income taxpayers to tax preparation professionals. 

Answer. At this time we do not know whether there will be any change in the 

amount of EITC funds spent on tax preparation services. However, the IRS has programs and services to provide low-income taxpayers with free tax preparation assistance. For example, Free File is an Internet-based tax preparation and electronic 

filing program that is cost-free for eligible taxpayers. Generally eligibility is based 

on factors such as age, eligibility to file for the EITC, adjusted gross income, state 

residency, or military status. Each participating software company sets its own eligibility requirements and these may differ company to company. Because individuals 

who file their return electronically receive their refunds fairly quickly, electronic filing could reduce the demand for refund anticipation loans. Other free services including tax preparation are offered through the Volunteer Income Tax Assistance 

(VITA) program, the Tax Counseling for the Elderly (TCE) program, the American 

Association of Retired Person’s Tax-Aide program, and our Taxpayer Assistance 

Centers. 

IRS will send to taxpayers a question and answer brochure and a listing of low 

cost/free taxpayer assistance clinics along with the Form 8836. The accompanying 

letter (which will be printed in English and Spanish) and the Form 8836 instructions will include a phone number that’s dedicated to helping taxpayers with precertification problems. We have also included the phone number for the Taxpayer 

Advocate office in the instructions. 

5. One 2003 press report asserted that those applying for the EITC have a one 

in 47 chance of being audited, while those making more than $100,000 a year have 

one in 208 chance of being audited. For the most recently available tax year, please 

provide IRS statistics showing: 

• the total number of EITC claimants; 

• the total number of EITC claimants audited by the IRS; 

• the total amount of additional revenues resulting from the EITC claimant 

audits; 

• the total number of individual taxpayer returns with gross income in excess 

of $100,000; 

• the total amount of additional revenues resulting from the audits of individual taxpayer returns with gross income in excess of $100,000. 

Answers. For examinations, we define the audit rate as the number of examinations closed in a given fiscal year (e.g., FY 2002) divided by the number of returns 

filed in preceding calendar year (e.g., CY 2001). Presenting the data by tax year 

would only permit me to give you accurate data up to tax year 1999 because of the 

time involved in completing some audits. I have taken the liberty of using the preceding format in order to give you an accurate picture with more recent data. 

• The total number of EITC returns: CY 2001—19.1 million. 

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• the total number of EITC claimants audited by the IRS: FY 2002—377,758 

audits closed. 

• The total amount of additional revenues resulting from the EITC claimant 

audits: TY 2001—$965,169,000 (revenue assessed). 

• The total number of individual taxpayer returns with gross income in excess of $100,000: CY 2001—13,020,100. 

• The total number of individual taxpayer returns with gross income in excess of $100,000 audited by the IRS: FY 2002—109,242. 

• The total amount of additional revenue resulting from the audit of individual taxpayer returns with gross income in excess of $100,000: FY 2002— 

$1,497,943,000 (revenue assessed). 

The above data indicates that EITC claimants are more heavily audited than 

those individuals with gross income in excess of $100,000. We note, however, that 

97% of EITC audits are correspondence audits that are used when there are only 

1 or 2 relatively simple issues on a return. In contrast, 51% of audits of taxpayers 

with gross incomes in excess of $100,000 required face-to-face contact with the taxpayer. Face-to-face audits are used for more complex returns with numerous issues 

and are believed to be more daunting to the taxpayer than a correspondence audit. 

When looking at audit coverage rates by traditional audit classes (i.e., comparing 

audit coverage of high income taxpayers to the audit coverage of all low income taxpayers and not merely EITC recipients), the IRS has higher coverage rates in the 

higher income classes than the lower income classes. For cases closed in FY 2002, 

only 1 in 130 taxpayers with income less than $25K were audited (0.78% coverage) 

versus 1 in 120 for those with income over $100K (0.86% coverage). After removing 

the EITC cases, only 1 in 580 taxpayers with income less than $25K were audited 

in FY 2002 (0.17% coverage). 

QUESTIONS FOR THE RECORD ADDRESSED TO IRS COMMISSIONER EVERSON BY

HONORABLE MARSHA BLACKBURN

Questions from Representative Marsha Blackburn: 

1. Why has the IRS been unable to realize internal savings sufficient to shift staff 

to high priority areas? 

Answer. We have mined our internal resources to generate efficiencies that could 

be applied to high priority areas. In the FY 2003 Budget Request, the IRS generated 

$158 million internally that were intended to meet increased enforcement, enhanced 

customer service and increased return workload. However, a number of unfunded 

and unanticipated costs arose that reduced the funding available for hiring these 

additional staff. Since the IRS Operating budget consists of over 70% for salaries 

and benefits, any unanticipated costs that must be paid requires the reduction of 

labor costs (i.e., FTE). 

For example, the FY 2002 annual pay raise of 4.6% cost an additional $43 million 

from the 3.6% budgeted amount. The IRS had also expected savings resulting from 

legislative proposals for postage and the FMS levy that were not passed that required us to fund an additional $23 million. The postage increase that was unfunded 

increased our postage costs by $22 million. Moreover, an unfunded increase in security costs resulting from 9/11 cost the agency an additional $20 million. These 

changes and others amounting to $170 million that were unexpected, unfunded and 

were mandatory to meet our mission consumed the internally generated resources. 

2. The Inspector General testified that the Customer Account Data Engine 

(CADE) has experienced significant delays and increased costs and that Release 1 

will be 20 months behind its delivery date. How long will this take to implement 

and what is the total expected cost? 

Answer. The Customer Account Data Engine project (CADE) Release 1 is running 

about five or six months behind the plan to deploy in production this summer as 

indicated in the FY2003 Expenditure Plan. This delay is disappointing given that 

the target date of this summer already reflected a six-month schedule slip from the 

target date of January 2003 set last summer. We are currently re-planning the initial production operation of CADE R1 for the 2004 filing season. 

While we have incurred some costs for capacity increases for CADE and for the 

costs of contractors to support testing, we have not paid any additional monies to 

the PRIME contractor during FY2003 for CADE R1, as it is a fixed price engagement. The costs to date for CADE since 1999 are $69.2 million. A finer breakout 

of these costs follows: 

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Lifecycle Phase PRIME ($MM) Non-PRIME 

($MM) 

Planning (6/99–8/00) ...................................................................................................................... 2.2 ....................

Design (9/00–6/01) ......................................................................................................................... 18.4 ....................

Development (7/01–6/03) ................................................................................................................ 37.2 10.5 

Filing season changes ..................................................................................................................... 0.9 ....................

Total ................................................................................................................................... 58.7 10.5 

Filing season changes are new requirements that we implement as new tax laws 

are enacted or other changes are made to the current IRS systems with which 

CADE interfaces. Additional costs are being incurred for filing season changes not 

yet implemented. Non-PRIME costs include hardware capacity increases and contract support for IRS product assurance testing. 

There are several reasons for this delay and for the difficulty in predicting exactly 

when CADE would be in production. CADE is inherently complex insofar as its integration with the current processing environment and the instability of that environment as it changes to adapt to the many new tax actions throughout the year. Second, the PRIME mis-estimated the complexity of the balancing and control feature 

and has struggled to design and code those parts of the application. The final code 

was only delivered last April and the PRIME has experienced difficulty in getting 

that code to operate smoothly and in conjunction with the other CADE software. As 

a measure of the impact, the overall size of CADE nearly doubled due to the impact 

of the balance and control features. 

Third, we believe that the IRS and PRIME underestimated the degree of business 

change required. While few users are directly affected by the start of CADE, the 

complexities of going from a weekly operation of the IMF to a mixed daily/weekly 

operation is far more complex from a business process and operations perspective 

than initially estimated. 

QUESTIONS FOR THE RECORD ADDRESSED TO PAMELA GARDINER BY HONORABLE

MARSHA BLACKBURN

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QUESTIONS FOR THE RECORD ADDRESSED TO JAMES R. WHITE BY HONORABLE

MARSHA BLACKBURN

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